Dispute Settlement Mechanisms

Over the last couple of decades, there has been a growing awareness in academic and policymaking circles regarding the importance of institutions for economic development. Institutions constitute the rules of the game in a society or, more precisely, the restrictions designed by members of a society to influence human interaction. Any transformation affecting these rules may clearly have a direct impact on behavioral patterns (North, 1990). As new cross-country institutional databases have become available, a growing body of empirical work has been confirming the important role played by the quality of institutions in a wide variety of dimensions of economic performance, such as the depth of financial markets, success in attracting foreign direct investment (FDI) or keeping inflation under control, and, most importantly, the growth performance of nations. While institutions have an impact on economic development, important economic reforms, such as the creation of a regional integration agreement, may in turn affect the development of national institutions. They do so by establishing new rules and expectations as to how various policy options should be selected and implemented; by opening up new opportunities as well as establishing restrictions in the design and application of economic and trade policy; by generating new stakeholders while disenfranchising previous ones; and by laying the groundwork for a new philosophy in development policy. Accordingly, Rodrik (1999, 2000) has pointed out that assessing the ultimate effectiveness of economic and trade policy reforms should be based not only on their immediate impact on economic variables, but also in terms of their contribution to the development of a high-quality institutional environment in a given country. The move toward trade liberalization in the countries of Latin America under the framework of the World Trade Organization (WTO), as well as the formation of regional trade agreements, has tested the adequacy of the prevailing institutions, both at the national and regional level, and in various instances led to their strengthening and reform. Just as national institutions are key determinants of national economic performance, regional integration agreements also require their own wellfunctioning institutions in order to be effective. The effectiveness of regional integration agreements, in terms of their impact on trade and investment flows, is closely related to the capacity of the countries involved to enforce the obligations stipulated in such agreements. This chapter describes the key institutional factors involved in integration experiences in the region. In particular, it looks at the development of dispute settlement procedures, discusses the extent to which they have been used, and demonstrates the vital policy role that these mechanisms play in the process of economic integration.