China and India: Opportunity or Threat for Latin America?

Latin America’s eyes are on China and India. Both countries are admired for their economic success over the past years, but also have become an increasing source of mistrust as they might be displacing us on the global markets of manufactured goods and flows of foreign investment.

Part of the concern in Latin America can be attributed to the loss of economic importance vis a vis the two Asian economies, in spite of a broad range of reforms in the region, which started in the mid- to late 1980s. In 1980, the size of the economy of the Latin America and the Caribbean region was twice as large as that of China and India combined, which jointly represented 3 percent of world Gross Domestic Product (GDP). By 2004, the region was 20 percent smaller than China and India. Today, China is the sixth largest economy in the world in terms of GDP and India the tenth largest economy. Together they account for 6.4 percent of world GDP.

The fast economic growth of China and India was accompanied by their rapid integration into world markets while Latin America and the Caribbean (LAC) lagged behind. Today, China and India’s share of world’s exports is 50 percent larger than LAC’s share, whereas in 1990 the reverse was true. By 2004, the trade to GDP ratio of China was already 35 percent larger than that of LAC, and China has become the third largest economy in the world, just behind the United States and Germany.

A superficial look at these trends would suggest that China and India’s growth has been pushing the Latin American countries out of world markets. However, the belief that China and India are to blame for the modest growth of Latin America is misleading. In fact, the robust growth and increased participation of these two giants in the global economy has generally been positive for the region, in spite of certain adverse effects that Asian competition has had on some countries and industries. This is one of the findings of the new World Bank study, Latin America and the Caribbean’s Response to the Growth of China and India, which we just presented in Singapore during the Annual Meeting of the World Bank and the International Monetary Fund.

Among the more positive effects for Latin Americans is the increased demand and higher prices for commodities driven by increased imports from China and India, which has benefited exporters of goods such as copper, oil and soy from South America. Other positive aspects include greater opportunities for exporting manufactured goods to Asian markets, as well as new production alternatives and increased competition related to the acquisition of cheaper intermediate inputs from China and India and the participation in Asian production networks.

Other positive aspects include China’s financial and investment contributions. China has become a significant exporter of financial capital, due to its accumulation of reserves, which has contributed to keeping international rates low and ample global liquidity. At the same time its direct investment in third countries is rapidly increasing. Chinese foreign direct investment in the Latin America and the Caribbean region reached $4 billion in 2004, and the total amount of Chinese investments in Mexico up to that year exceeded $28 billion. As China liberalizes its financial sector, the potential for becoming an important source of financing for LAC economies has increased.

In terms of innovation, the scope for bilateral cooperation with Latin American countries is large and is exemplified by the Chinese-Brazilian agreements on satellite development which have led to the joint production of remote sensor satellites used for space imaging. China provided 70 percent and Brazil 30 percent of the financing and technology. There also exist bilateral agreements between Chile and China in the areas of mining and geosciences, plant quarantine and forestry.

Moreover, China has become active in the region in terms of bilateral aid, especially in Central America and the Caribbean region. Bahamas, Dominica, Grenada, Haiti, and Honduras have benefited from Chinese aid in the last ten years, including the construction of hospitals, schools and roads, as well as the reconstruction of hospitals. Part of this aid could also be used to promote bilateral investment and trade relationships, which are below potential.

It should be acknowledged, however, that these benefits have not come without their share of pain. Some industries – particularly in Mexico and Central America – have been negatively affected. Among these are industrial and electrical machinery, electronics and textiles and apparel.

Even so, we should not lose sight of the diversity of the countries in dealing with the Asian challenge. Costa Rica and the Dominican Republic, for example, are specializing in the production of higher quality, higher price textiles and clothing. By contrast, Haiti and Nicaragua are moving towards a lower-wage, unskilled labor production. For its part, the situation of Mexico is unique, since it is the only country in Latin America whose comparative advantages have moved in the same direction as the two Asian economies, since it has been the most affected by the emergence of China and India.

Latin American countries have been unable to take full advantage of the new opportunities offered by these two emerging powers. Instead of responding with protectionist policies, the region should be adopting aggressive strategies to increase its market share in these countries. Moreover, it should consolidate its ability to compete at the global level – taking advantage of cheap raw materials from these countries and integrating them into the Asian production networks-- and strengthen its domestic development agenda.

Better innovation and education policies are crucial in order to help companies and workers improve their competitive edge and acquire the necessary skills to move up to better quality products and higher-qualified labor. We need policies geared toward rural development, the preservation of resources and the creation of natural resource-based industries, to help economies respond positively to the greater demand and higher prices for commodities. It is also necessary to support the restructuring process in affected industries and the training and relocation of some workers.

In sum, China and India should not be seen as a threat but rather as an opportunity, that if fully seized, could help accelerate the economic growth in Latin America and strengthen the fight against poverty and inequality.
 

Pamela Cox and Guillermo Perry are respectively vice president and chief economist of the World Bank for the Latin American and Caribbean region.

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