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					Market access, export diversification & industrial upgrading in LATAM

Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre

T h e

M e r c o s u r

C h a i r

A n n u a l Paris 

S e m i n a r 6 2006
1

March

1 2 3
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Latin America: the challenge of diversification
Suspects: who’s to blame? Country narratives: building new areas of CA

Conclusions

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100

20

30

50

60

80

10

40

70

90

0

Source: WTO

Ecuador Paraguay Bolivia Venezuela Chile Argentina Uruguay Colombia Peru Indonesia Brazil

Latin America

Canada Netherlands India Thailand Spain Malaysia Mexico Belgium UK France US Singapore Italy China Germany South Korea Taiwan Hong Kong Japan

Export structure in comparison
Exports of agricultural, energy and mineral products (% of the total) (2003)

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Share of processed exports then (1970) and now (2000)
A important role played by GSP, NAFTA & CBI… with some qualifications
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The challenge of diversification …
Increased processing
DOM HAI MEX JAM ELS HND BRB SUR TTB BAH

Share of Processed X in Total (average 1996-2000)

90 80 70 60 CRI 50 40 BOL GTM NIC

BRZ

ARG CUB UGY VEN

PER CHL

30 COL 20 10 0 0 10 20 30 40 50 60 70 80 90 100 ECU GUY BLZ PGY

Decreased process

Share of Processed X in Total (average 1966-1970)
Source: Bonaglia and Fukasaku (2003) “Export Diversification in low Income countries,” OECD Development Centre WP 209

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What’s wrong with natural resources?
A boon or a curse?
 Sachs and Warner: countries rich in natural resources grow more slowly …
 … because of limited linkages and spillovers, lower skill content and incentives to rent seeking and corruption.

 More recent evidence is less negative, e.g. World Bank (2002) From natural

resources to the knowledge economy - trade and job quality

Source: Sachs and Warner (2001), “The Curse of Natural Resources,” European Economic Review

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It’s not (only) what you have, it’s how you use it …
Resource-Rich champions
 These are countries that built – in different historical periods – their growth on natural resources (mineral, wood, agro, etc) …  … managed to increase the technological and scientific content of resource-based clusters …

 … and developed new ones as well as new areas of competitive advantage (e.g. services).

 There are some encouraging examples in LATAM as well …  … but
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… Many resource-rich underachievers
Development Level of natural resource clusters in the Andean region (0=low, 10=high)
Exploitation and Export, minimum processing 10 10 10 10 10 10 10 10 10 10 6 10 10 10 10 10 10 Processing and export, import substitutions and public goods delivery 0 7 4 8 8 10 10 10 9 5 3 9 5 2 0 5 8 Export of some of the goods and services that are substituted 0 2 4 4 8 10 8 2 2 2 2 1 3 1 0 4 5 Export of processed refined products, inputs, machines and services associated to the cluster. The firms of the country associated to the cluster start to invest abroad 0 2 0 2 4 5 1 2 2 2 2 8 2 7 0 1 5

Country Cluster Bolivia Gas Wood Minerals Soy Colombia Coffee Flowers Fruits Ecuador Bananas Shrimp Flowers Oil Peru Asparagus Fish Flower Minerals Venezuela Aluminum Iron Oil

Source: Manzano, 2006

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… Gas, the unexploited potential
Where demand and supply don’t meet

Source: The Economist, “The explosive nature of gas”, Feb 9th 2006

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In fact export sophistication remains below benchmarks …

Source: Hausmann, Hwang and Rodrik (2005), “What You Export Matters,” mimeo

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Even when looking at other resourcerich countries

Source: Hausmann, Hwang and Rodrik (2005), “What You Export Matters,” minmeo

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Latin America: the challenge of diversification
Suspects: who’s to blame? Country narratives: building new areas of CA

Conclusions

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Good News: The commodity boom has been a bonanza
BBVA-MAP Index of Latin America commodity prices (100 =jan03)
170 160 150 140

Exports of commodities over total exports (2004)
Venezuela
83.1%

130 120
110 100 90 80 70
TOTAL

Without oil

Peru Chile

70.7% 59.1%
46.3% 38.0% 29.6% 14.6%

Colombia Argentina Brazil Mexico
2003 2005

1996

1997

1998

1999

2000

2001

2002

2004

60

Latam
Source: BBVA

31.2%

Source: BBVA

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Sad News: Capitalising on previous bonanzas was not easy
 The debt overhang:  Resource-rich countries that performed poorly went through SAPs  During the 1970s, high commodity prices might have induced resourceabundant countries to use them as collateral  Then, the 1980s saw a fall in commodity prices, leading to a debt crisis faced by most of these countries.

Source: Manzano and Rigobon (2001), “Natural Resources or Debt Overhang?” NEBR Working Papers

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Market access and supply capacity
 UNCTAD (2004)*: market access is key, but domestic supply capacity appears to have been a more limiting element of export performance in African, Middle Eastern and Latin American countries
 OECD (2004) ABC Study**: important policy changes but a need to address the competitiveness agenda
– Gains from economic integration could be higher if domestic conditions improved

 Apparel manufacturing: The unintended effects of preferential market access (textile rules of origin -> specialisation at the bottom end of the value chain)***
*M. Fugazza (2004), “Export Performance And Its Determinants: Supply And Demand Constraints,” Policy Issues In International Trade And Commodities Study Series No. 26 ** A. Goldstein, The Dynamics of Foreign Direct Investment and A-B-C Competitiveness, chapter 3 in Trade and Competitiveness in Argentina, Brazil and Chile: Not as Easy as ABC *** Bair and Dussel Peters(2005), “Global Commodity Chians and Endogenous Growth: Export Dynamism and Development in Mexico and Honduras,” World Development

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Latin America: the challenge of diversification
Suspects: who’s to blame? Country narratives: building new areas of CA

Conclusions

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Brazil: Trade openness and the catching-up process
Deviation of Real GDP per capita with respect to world average (in logarithms)

Trade openness and development
1,0 0,8 0,6 0,4 0,2 0,0 - 0,2 - 0,4 - 0,6 - 0,8 - 1,0 0,0

2001- 04

1951- 55 2001- 04 2001- 04 1951- 55 1951- 55 Thailand
0,2

Successful Asian emerging countries were able to simultaneously combine growth with trade opening.
India
1,0

Taiwan
0,4

South Korea
0,6

Japan
0,8

China
1,2

Real trade openness (as a % of GDP)

Brazil has recently started to open up its economy. In 2005 the trade surplus reached a record USD 45 billion, an increase of 33% yoy (in spite of a 13% appreciation of the Real).

Source: BBVA using Penn World Tables and IMF data

Brazilian Real Trade Openness
30% 25% 20% 15% 10% 5% 0% (as a % of GDP)

Source: BBVA

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

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Brazilian firms are beginning to increase activities overseas
The 50 most profitable firms
20 19 16 15

Rk 3 12 32 48 21 63 40 66 144 94 20 62 52 208 102 143 31 16

Firm

Sector

10 7

5 3 1 1 1 1 1

Petrobras Petroleum Vale do Rio Doce Mining Grupo Votorantim Holding Usiminas Steel Gerdau Steel Gerdau Açominas Steel Telesp Telecom CSN Steel CST Steel Cemig Electricity Electrobras Electricity Embraer Aerospace Ambev-CBB Drinks Aracruz Celulose Paper Balgo Mineira Steel Cosipa Steel Telemar Norte Leste Telecom Odebrecht Holding

Utility Exports 04 (US$ Mill) % of sales % of sales 6.728,7 16,5 11,2 2.433,5 23,5 30,6 1.544,6 26,6 18,9 1.137,3 24,7 9,1 1.066,7 14,4 11,6 935,6 24,5 22,4 821,7 16,4 746,6 20,2 20,2 611,9 31,9 53,5 521,7 19,4 487,2 6,5 473,1 12,3 86,9 437,6 9,7 402,5 31,3 61,8 391,6 15,5 363,2 18,8 33,5 345,5 5,9 320,2 3,9 -

0
Brazil Mexico Chile Source: America Economia 2005 Argentina Colombia Ecuador Panama Peru Venezuela

Source: America Economia 2005

Within the 50 LATAM companies that had greater profits in 2004, 19 are Brazilian, with an average utility over sales of 18%. The average ratio of exports over total sales was 32%.
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Brazil: Embraer & the aircraft cluster

 Crucial role of public policy directed towards the lead firms
 Location in a privileged FDI area attracting additional investments and 2nd-tier suppliers.

 However, the local aeronautic SME remains weak

A. Goldstein (2005), “Lead Firms and Clusters in the North and in the South: A Comparison of the Aerospace Industry in Montreal and São José dos Campos” in E. Giuliani et al (eds) Clusters Facing Competition: The Importance of External Linkages, Editions Ashgate.

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Chile: Salmon, wine and copper – more than commodities
 Exports have changed to include more technology and added value in sectors linked to natural resources that utilize technology in novel ways
 Government’s changing role in developing a world class export industry: from facilitator to regulator

 Wine: in 1984, only 2 per cent of the total production volume was exported, 7 per cent in 1989, and in 63 per cent 2002.
 Salmon: With $1.2 billion exported, Chile qualified as the world’s top exporter of farmed salmon in 2003. Chilean salmon farming only began in 1979 and salmon is not a species native to this country

 Copper: from basic mining to a hi-tech cluster
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Costa Rica: hi-tech success or neweconomy enclave?
 Considered as the most successful example of trade-FDI-led growth, thanks to a well managed development strategy to promote non-traditional exports (e.g. INTEL 1998)  Recently, some skepticism on the ability to create stronger linkages to the domestic economy and promote upgrading of domestic suppliers (enclave)
 Challenges remain in improving firm-level capabilities and favouring linkage-formation

 New opportunities emerging in the service sector (e.g. tourism)

Ciravegna and Giuliani (2005), “MNC-dominated clusters and the upgrading of domestic suppliers: the case of Costa Rican Electronics and Medical Device industries,”mimeo

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Latin America: the challenge of diversification
Suspects: who’s to blame? Country narratives: building new areas of CA

Conclusions

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Conclusions
Some of the main challenges facing LATAM are to push forward the competitiveness agenda to boost productivity, diminish transaction costs and overcome inefficiencies.
Domestic reforms, coupled with market access in OECD and regionally have been fundamental for the emergence of new industries, often building on the natural resource wealth Export sophistication remains low and the emergence of CHINDIA, pushing commodity prices up, could be a doubleedged sword

Market niches are a moving target: a need to constantly adapt and improve/create new areas of competitive advantage
Slow advancement in multilateral liberalisation would be detrimental for LATAM and, in any case, cannot be an excuse for delaying much-needed domestic reforms.
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Thank you for your attention!

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