Preliminary version Do not quote
3. The Impact of Trade Agreements on the Macro Economy As stated in the introduction, free trade agreements affect the macroeconomy differently.. Three areas are of particular important: 1) The institutional framework 2) The foreign sector 3) The public accounts and debt In what follows, an initial evaluation is presented on the possible macroeconomic implications of a free trade hemispheric agreement, such as the FTAA, on Latin American and the Caribbean countries. Before doing so, the following must be taken into account. Countries in Latin America and the Caribbean have certain common peculiarities but at the same time, a considerable amount of diversity exists. Table 2 shows the total gross domestic product and the GDP per inhabitant for all the countries in the region. The coefficient of variation and the distance between extreme values are examples of the vast differences between countries. Therefore, any consideration about the macroeconomic impact of trade agreements on countries in the region must be pondered by the diversity mentioned above, and consequently all comments made in this section must be taken solely as illustrations of these impacts. 3.1 The Institutional Framework There has been an increasing amount of literature about the positive impact that institutions have on the growth rate. Furthermore, Rodrick, Subramanian and Trebbi (2002) present evidence that the institutional framework is the most important variable in explaining growth. The most relevant institutions are those that have to do with property rights and law compliance. From the point of view of integration agreements, it is relevant to analyze the way in which these agreements impact institutions and hence, growth. From the point of view of this paper, it is important to evaluate the degree in which trade agreements improve the macro economic situation of member countries, among other things, through the improvement of the institutional framework. The impact of trade agreements on macro economic variables recognizes two channels: the indirect, through institutional improvement, and the direct. An example of the improvement of the macro economic context through the institutional channel is the independence of the central bank and the impact of property rights on the availability of internal and external credit. An example of the latter would be the impact of the Maastricht Treaty over the fiscal deficit and the interest rate of some member countries of the European Union.
9