Banks, Financial Liberalisation and Financial Crises in Emerging Markets

In 1991, Argentina, Brazil, Paraguay and Uruguay decided to establish a Mercado Comun del Sur (MERCOSUR). The new regional agreement developed quickly during the first half of the 90s and after a series of progressive tariff (and non‐tariff) reductions it became an (incomplete) customs union in 1995. During the second half of the 90s the completion of the customs union ran into increasing trouble and progress in the formation of a common market could not be realised. In this paper, two basic explanations of the poor performance of Mercosur are discussed. The first one claims that the adverse international situation (Asian crisis) is the main reason for the recent crisis. Consequently, a normalisation of the international environment is expected to be sufficient to revitalise the integration process. The second proposition emphasises more fundamental deficiencies of the concept of ‘open regionalism’. It is argued, that ‘open regionalism’ is inherently instable because, over time, it facilitates a more efficient articulation of vested interests working against ‘openness’. Proceeding from a simple free trade agreement (or a customs union) towards a common market tends to aggravate these problems. The conclusion of the paper is that the main obstacles to further regional integration in the Southern Cone are endogenous rather than exogenous. Therefore, the normalisation of the international economic environment may not be a sufficient condition for the revitalisation of the integration process.