Failure of industrial programs and impact on the institution

To further understand CAF’s limitations during this decade and how it would shape CAF’s

future, it is necessary to explore the failure of the Andean Region’s industrial programs. These programs were a key aspect of the integration goals and agenda. CAF’s original task was to

provide capital for investment projects designed to have regional impact. Otherwise, it was felt CAF would merely duplicate efforts of existing development banks. CAF was assigned a role in the regional creation of manufacturing or service companies and in the expansion, modernization or conversion of existing ones. By the very nature of the economic policies of member countries, it was implicit that there would be a preference for public enterprises in this role.

At the time, the private sector had little involvement in the development of so-called strategic sectors, which were those that should benefit according to sub-regional agreements (Sorensen, 1994). CAF began operating within this framework, which limited its scope of activity to finance operations. It began to finance investment projects directly linked to

integration programs established by the Cartagena Agreement, particularly those arising from the industrial programs. In fact, the efforts of CAF’s early years were largely dependent on the pace of the Andean integration process, which began with a lot of momentum but was deadlocked by the mid-1970s. In later decades, CAF’s management would continue to closely monitor

integration processes, but would focus on building its own agenda separate from the pace of regional initiatives.

It was hoped then that CAF would primarily pay attention to assisting the sectoral programs’ schemes (SPIDs) that would improve the woefully inadequate intraregional

transportation and communications systems (Fontaine, 1977). The establishment of the SPIDs was an initiative taken by the Andean Pact to spread industrial growth throughout the Andean region (Fontaine, 1977). It was distributional in nature in that specific Andean nations would be assigned the rights to certain industries that could then export to the others behind a common external tariff, giving them a large enough market for successful ISI. It has been described as the “most ambitious attempt at central direction ever attempted by any transnational

community”(Fontaine, 1977, p. 16). The SPIDs focused on four main industries: the light

engineering program, the petrochemical program, the automobile program, and the iron and steel program. The automobile and iron and steel programs were agreed upon later, but never fully materialized in action. Nevertheless, defenders of the prevailing integration scheme could argue that all was not lost, since the petrochemical program had been approved in April 1975.

However, numerous and substantial reforms had been introduced into the original proposal, completely subverting the principle of specialization, and the program approved left every member country much as it had been before, with the option of developing an integrated petrochemical industry if it so desired (Puyana, 1982). Among the problems the Pact faced were the diverse and often contrasting economic policies of its members. This problem has been a constant throughout integration efforts in the region. For example, Colombia, Peru, and

Venezuela already had well-established state-owned petrochemical industries (Fontaine, 1977). These countries were not comfortable with allowing other states access to technology without themselves also possessing that technology. In addition, Fontaine (1977, p.17) notes: “Delays also provided an incentive for member countries to rush into plant construction and thus create faits accomplis, or slipshod industrial development”.

Fontaine (1977) highlights two reasons for the apparent lack of success in financing the sectoral programs. First, only two SPIDs had been approved by then. Second, and of greater importance, the disagreements within the Andean Group over fear of losing one’s fair share made acceptable projects difficult to find and politically dangerous to promote (Fontaine, 1977). There were also technical aspects that complicated the preparation, negotiation and execution of the SPIDs. The negotiation could have been more successful if all or a large part of the programs were negotiated together, according to some observers (Salgado, 2009). Since more SPIDs were discussed individually, that meant that in each negotiation members had to come to an

agreement. Finally, this industrial planning effort coincided with a turbulent period in the global economy. When the energy crisis took place in 1973, the preparation and negotiation of certain SPIDs such as petrochemical and automotive were immediately affected. In short, for many

political (national viewpoints) and technical reasons, the industrial program aspects of the Cartagena Agreement did not work properly and eventually were reduced to impotence.

In this context, it became difficult for CAF authorities to promote SPIDs since the institution was still very dependent on national contributions for much of its working capital (in later decades the insertion in global capital markets would provide more discretion to the entity). As such, the two main instruments of integration, the common external tariff and regional

industrialization programs often conflicted with national development plans. By 1977, CAF had not done much in relation to assisting SPIDs, allocating a total of US$ 4.7 million to them. In contrast, US$ 18 million had been committed to strictly national projects and regional

transportation improvement as well (Fontaine, 1977). Therefore, since its creation, CAF has run up often against the tensions between its mandate to promote and finance regional integration and the desires of individual member governments.

During CAF’s first decade, countries had difficulty agreeing on the rules of the

integration process. For example, Chile’s and Venezuela’s needs for foreign investments were

very different and each country looked for different regulations. In fact, during the 1970-1975 period, Chile experienced a profound political and economic crisis, while in that same period Venezuela was enjoying the economic advantages of being an oil exporting country. In this context, it was difficult to outline and promote projects with integrationist content. By 1979, as previously mentioned, CAF changed its credit policy to give priority to development projects that were national priorities for its shareholder countries (CAF, 2010a). By focusing on national priorities, CAF was trying to find common ground amongst its members so they could take notice that the institution could still be a timely financing agent, despite regional disagreements.