Beyond the China Boom
The following is a summary of an event held at the Dialogue on Tuesday, November 22nd.
Latin America must look beyond current patterns of trade if it is to achieve long-term growth, according to World Bank senior economist Augusto de la Torre. He was joined by Alejandro Izquierdo and Claudio Loser at the Inter-American Dialogue on November 22 to discuss the region’s economic relations with China and the future of economic growth.
According to De la Torre, Latin America’s economic prospects have improved considerably over the last decade – growth was bolstered by high commodity prices, global liquidity, stable macroeconomic policies, and solid institutions. China’s coincidental emergence in the region further boosted growth among South America’s major commodities exporters.
But in order to achieve long-term growth, Latin America cannot rely solely upon current trade and investment flows. The region must also address fundamental shortcomings in productivity, education, and innovation, which have limited growth prospects even during the so-called “China boom.”
All panelists agreed that China is not the answer to Latin America’s economic woes. China has provided a significant economic boost to several countries in the region, but trade with China has failed thus far to result in productivity gains, technology diffusion, or learning spillovers in the region. In this regard, the China-LAC relationship stands in stark contrast to that between Japan and the East Asian Tigers, which benefitted tremendously from Japanese trade and investment.
De la Torre noted that the high growth experienced by the East Asian Tigers from the 1970s to the 1990s was characterized by large flows of intra-industry trade and FDI with Japan, and a significant diffusion of technology and knowledge. While East Asia functioned as a trade network during its high growth period, Latin America’s trade with China remains “almost one-dimensional.” The region’s reliance upon raw materials exports to China has limited opportunities for technology diffusion and productivity growth.
Alejandro Izquierdo, senior economist at the Inter-American Development Bank, added that Latin America’s lower savings rates and levels of capital accumulation further limit growth in the region. Foreign direct investment in Latin America remains low at approximately 2 percent of GDP, compared to 5 percent in East Asia.
Panelists identified some positive, and potentially growth-promoting, Latin American economic developments – all believed that the region’s relatively strong institutions would likely protect it from a “resource curse,” for example. Promising technological innovation and value upgrading centered on current resource endowments (i.e. bio-technology, mining sector development, etc.) is also evident in some countries. Izquierdo encouraged Latin America to explore additional opportunities for technology integration in the commodities sector.
Claudio Loser, senior fellow at the Inter-American Dialogue agreed with De la Torre’s conclusions, but stressed that Latin America’s growth problems generally stem from the region’s own shortcomings, and not from external trade relations. According to Loser, Latin America has a “tremendous problem in education, a lack of competitiveness, lack of respect for the law, poor quality infrastructure, and weak institutions,” all of which must be solved through sound domestic or regional policy.
Panelists agreed that Latin America’s trade linkages provide the region not only with new avenues for growth, but also with valuable learning opportunities. It is now up to Latin American countries to address shortcomings and work toward productive trade relationships.