China and India: Angel or Devils for Latin America?

Latin American Economic Outlook 2008

China and India: Angel or il f i iDevils for Latin America?

Based on Chapter 4 of the Latin American Economic Outlook 2008

M i f ti d /d /l

Javier Santiso

More information on www.oecd.org/dev/leo

China, March 2008

Director & Chief EconomistOECD Development Centre

The OECD and Latin America: An emerging commitment

• Latin American market democracies matter for the OECD and its member countries

• The Latin American dimension at the OECD:

Mexico: Member since 1994; Chile: candidate since May 2007; Mexico: Member since 1994; Chile: candidate since May 2007; Brazil: enhanced cooperation, May 2007

Economic Surveys:1992 1995 1997 1998 19991992, 1995, 1997, 1998, 19992000, 2002, 2003, 2005, 2007

2003, 2005, 2007

2000, 2005, 2006


The Development Centre: A bridge between the OECD d i iOECD and emerging regions

• Membership of the Development CentreWith a Governing Board open to emerging countries, theD l t C t id f k f di lDevelopment Centre provides a framework for dialogueand experience sharing with regions all over the world.

Th L ti A i t i b f• Three Latin American countries are members ofthe Centre:

– Mexico Chil– Chile

– Brazil

The Center is less and less the Center and theP i h l d l th P i hPeriphery less and less the Periphery

0% 10% 20% 30% 40% 50% 60% 70% 80%

Share of World GDP

1952

1978

USA

Europe

Japan

USSR1978

2003

USSR

China

India

Source: OECD Development Centre, 2008; based on OECD Statistics.

For the first time, Major Outward FDI is coming from Emerging Countriesfrom Emerging Countries

20%

Share of Outward FDI• Major share of FDI by

14%

16%

18%

20%j byemerging multinationals from emerging Asia, Latin America and the Middle East.

8%

10%

12%

4

Developing economies

Latin America and the Caribbean

China incl Hong

• New global players with headquarters in emerging countries

2%

4%

6%Kong

India

countries.

• OECD-based companies increasingly targeted.

0%

1970

1973

1976

1979

198

219

85

198

819

91

199

419

97

200

020

03

200

6

increasingly targeted.

• In 2007 Outward FDI from Russia peaked to USD 48 bn.

Source: UNCTAD, World Investment Report 2007p 4

For the first time, Major Outward FDI is coming from Emerging Countries

Share of Outward

from Emerging Countries

World Investment

95%

100%

Share of Outward FDI

50%

60%

World Investment Shares

85%

90%

95

30%

40%

5

70%

75%

80%

0%

10%

20%

70%

1970

1973

1976

1979

198

2

198

5

198

8

199

1

199

4

199

7

200

0

200

3

200

6

Developed economies

-10%

0%

1970

1972

1974

1976

1978

198

019

82

198

419

86

198

819

90

199

219

94

199

619

98

200

020

02

200

420

06

France Germany

United Kingdom United States

Source: UNCTAD, World Investment Report 2007Japan

China: A Leading example of emerging marketslti ti lmultinationals

Figure 1. China’s Outward Foreign Direct Investment (1979-2006)

15

18

9

12

$ Bi

llion

3

6

US$

01979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Data sources: Ministry of Commerce and China Statistics Bureau

11 Trade Competition: An echo of the Asian boomTrade Competition: An echo of the Asian boom

22 SpecialisationSpecialisation: Evidence of a potential draw: Evidence of a potential draw

33 Infrastructure: A key for competitivenessInfrastructure: A key for competitiveness

Emerging economies are increasingly present th l b l b t t thi ion the global scene but not everything is new

2.50E+07

lars

)

Comparative Levels of GDP, China, United States and Latin America

1 00E+07

1.50E+07

2.00E+07

Inte

rna

tio

na

l d

oll

USA

China

0.00E+00

5.00E+06

1.00E+07

(mil

lio

n 1

99

0 I

Latin America

190

0

1930

196

0

199

0

2020

Source: OECD Development Centre, 2008; based on Maddison (2003) “The World Economy Historical Statistics”.

China as a leading Asian Driver of world growth: E t di b k t l?Extraordinary or back to normal?

GDP in U$ (% of World GDP, 2005)

China GDP (% of world total)005)

Germany

USA

20

25

30

35

Italy

France

5

10

15

20

0 10 20 30

Canada0

15

00

16

00

17

00

18

20

18

70

19

00

19

50

20

01

20

45

According to IMF estimates Chinese gross domestic product based on purchasing-power-parity(PPP) amounts to 13.6% of 2005 world GDP (20.7% in the case of USA).

Source: OECD Development Centre, 2008; Based on: International Financial Statistics and Angus Maddison, 2007.

China has doubled its GDP in 8 years…without the help of Money Doctors!help of Money Doctors!

GDP in constant prices

10000

12000Brazil China Korea

Japan Mexico

China

4000

6000

8000

10000

$ M

illio

ns

Japan Mexico

0

2000

4000

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

U$

Chi th t h b hi h th th b d i B il d M i

Source: OECD Development Centre, 2008; based on Datastream (Economist Intelligence Unit)

19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20

Chinese growth rates has been higher than those observed in Brazil and Mexico during their take-offs glorious years.

Latin America’s share of the world output is small when compared to Asia

GDP share of world output (WEO, 2005)

small when compared to Asia

p ( )

Emerging Asia EU

30 3%US

28 0%Korea/Japan

12 0%9.1% 30.3%28.0%12.0%

China5.0%5 0%

Latam4 7%4.7%

The rise of the Asian Giants impacts all Latin America Economies: For the best or the worstEconomies: For the best or the worst

Descriptive Statistics on Trade for Selected Countries

Sh i Sh f

Country

Share in Latin

America GDP (%) 2006 in

PPP

Exports Goods-

Servicesas % of GDP

Share of Exports to

Asian Drivers

(Avg. 2000-2006)

Trade Restrictiveness

Index(WB-OTRI 2005)

Main Exports

Argentina 12.8 23.6 9.7 22.8Animal feed, fixed veg. oils/fats, soft, heavy petrol, oil crude, oil seeds

Brazil 34.1 14.5 6.8 30.1Iron ore, oil seeds, meat, passenger cars, petrol/bitum sugarpetrol/bitum., sugar

Chile 4.0 39.6 11.5 14.2Copper, metal ore, fish, fruit/nuts, pulp, wood

Colombia 7.7 21.1 0.9 25.3Petrol, coal, coffee, heavy petrol, crude materials, iron

Mexico 23.2 29.7 0.7 32.0Petrol, passenger cars, telecomms. equipment, computer equipment

Peru 3.7 21.4 9.9 21.0Metal ore, copper, heavy petrol, animal feed, silver

Source: Economist Intelligence Unit.

Venezuela 4.0 32.9 0.2 21.8 Petrol, iron, aluminum

Increased Asian exports have nurtured fears in Latin AmericaLatin America

Latin American tariffs to China and the

19 00

Latin American tariffs to China and the rest of the World

Manufactured goods (SITC 6)

World

11 0013.0015.0017.0019.00

%

China

5.007.009.00

11.00

2000 2001 2002 2003 2004 2005 2006

Note: Does not include NTB data.

2000 2001 2002 2003 2004 2005 2006

Source: TRAINS Database (World Integrated TradeSolution), Nomenclature STIC Revision 3, 2007.

Source: Latinobarómetro survey. Santiago de Chile,2007.

However FDI flows to China have not diverted inward flows for other emerging marketsinward flows for other emerging markets

Inward FDI Flows USD Millions

ChinaLatin America 140000060000

Outward FDI Flows USD Millions

China

L ti A i

300000

350000

400000

70000

80000

90000

100000

AfricaDeveloping countries (right axis)

800000

1000000

1200000

40000

50000

Latin America

Africa

Developing countries (right axis)

100000

150000

200000

250000

20000

30000

40000

50000

60000

70000

400000

600000

800000

10000

20000

30000

0

50000

0

10000

20000

Avg. 1990‐2000

2003 2004 2005 20060

200000

0

10000

Avg. 1990‐2000

2003 2004 2005 2006

Source: OECD Development Centre, 2008; based on UNCTAD.

Latin America is endowed with natural resources and dependent on the commodities’ cycleand dependent on the commodities cycle

N t l R tNatural Resources as a percentage of Latin American Exports

100

Commodities

Oil

5060708090

100

ntry

's e

xpor

ts Agriculture & other

010203040

Venezuela Chile Peru Argentina Colombia Brazil Latin Mexico

% o

f cou

n

Source: OECD Development Centre 2008; Based on: National Balance of Payment

Venezuela Chile Peru Argentina Colombia Brazil LatinAmerica

Mexico

Source: OECD Development Centre, 2008; Based on: National Balance of Payment.

Direct export competition in third markets with China is relatively low, although Mexico is on the spotrelatively low, although Mexico is on the spot

Export Competition with China for selected countries (2000-05)

0 5

0.6

0.7

0.8

Hig

h co

mpe

t.

0.2

0.3

0.4

0.5

mpe

t.

H

0.0

0.1

Thai

land

Hun

gary

ea, R

ep.

Mex

ico

Mal

aysi

aed

Sta

tes

Czec

h …ng

apor

eRom

ania

ndon

esia

Turk

eyPo

land

hilip

pine

sBu

lgar

iaCr

oatia

Japa

nIn

dia

Slov

ak …

Spai

nos

ta R

ica

Paki

stan

Braz

ilSa

lvad

orCo

lom

bia

uate

mal

arg

entin

aPe

ruU

rugu

ayH

ondu

ras

Rus

sian

…Pa

nam

aCh

ileBo

livia

enez

uela

Para

guay

Low

co

T HKo

re MU

nite Si R In Ph Co El S C

Gu A U H Ve P

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India).

Source: OECD Development Centre, 2008; based on WITS Database, 2007.

Regarding competition with India in third markets, Latin America has little to fear (for the moment).America has little to fear (for the moment).

Export Competition with India for selected countries (2000-05)

0.5

0.6

0.7

0.8

Hig

h co

mpe

t.

0.1

0.2

0.3

0.4

com

pet.

0.0

Turk

eyBu

lgar

iaRom

ania

Paki

stan

Thai

land

El S

alva

dor

Croa

tiaIn

done

sia

ak R

epub

licPo

land

Spai

nBr

azil

ch R

epub

licKo

rea,

Rep

.Ar

gent

ina

nite

d St

ates

Hun

gary

Colo

mbi

aPa

nam

aU

rugu

ayM

exic

oCo

sta

Ric

aPe

ruG

uate

mal

aSi

ngap

ore

Japa

nM

alay

sia

Rus

sian

…Ph

ilipp

ines

Boliv

iaH

ondu

ras

Vene

zuel

aCh

ilePa

ragu

ayLow

c

Slov

a

Czec K

Un

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India).


Trade complementarities and potentialities with China remain unexplored today…

t.

p y

Trade Opportunities with China for selected countries (2000-05)

0.5

0.6

0.7

0.8

H

igh

com

pet

0.1

0.2

0.3

0.4

w c

ompe

t.

0.0

nite

d St

ates

Kore

a, R

ep.

Mal

aysi

aSi

ngap

ore

Thai

land

Japa

nM

exic

oPh

ilipp

ines

Indo

nesi

aCh

ina

Hun

gary

ech

Rep

ublic

n Fe

dera

tion

Arge

ntin

aBr

azil

Colo

mbi

aSp

ain

Pola

ndVe

nezu

ela

vak

Rep

ublic

Rom

ania

Bulg

aria

Croa

tiaEl

Sal

vado

rIn

dia

Turk

eyCo

sta

Ric

aG

uate

mal

aCh

ilePe

ruU

rugu

ayBo

livia

Paki

stan

Pana

ma

Hon

dura

sPa

ragu

ay

Low

U

Cze

Rus

sian

Slov

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China India)Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).


Major economies in the region have a lot to win from increasing trade with Indian partnersg p

Trade Opportunities with India for selected countries (2000-05)

0.5

0.6

0.7

0.8

H

igh

com

pet.

0 1

0.2

0.3

0.4

com

pet.

0.0

0.1

Colo

mbi

aVe

nezu

ela

Fede

ratio

nIn

done

sia

Arge

ntin

aM

exic

oM

alay

sia

ted

Stat

esPe

ruCh

ina

orea

, Rep

.Th

aila

ndG

uate

mal

aSi

ngap

ore

Japa

nSp

ain

Braz

ilh

Rep

ublic

Boliv

iaPo

land

Bulg

aria

Hun

gary

Croa

tiak

Rep

ublic

Rom

ania

Phili

ppin

esTu

rkey

Cost

a Ri

caCh

ileU

rugu

ayl S

alva

dor

Hon

dura

sPa

kist

anPa

nam

aPa

ragu

ay

Low

c

VRus

sian

FI A

Uni

t

Ko G S

Czec

h

Slov

ak P C El

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).

Source: OECD Development Centre, based on WITS Database, 2007.




In which sector is Latin America specialised? Let’s not forget intra-industry tradeg y

Vollrath's Relative Comparative Advantage Index Latin America 2005 - Selected countries

Good Product Name Argentina Brazil Chile Colombia Mexico Peru Venezuela Average LAC

0 Food & live animals 3.12 1.80 1.24 0.92 -0.16 0.61 -3.32 0.98

1 Beverages and tobacco 1.93 1.73 2.40 0.03 1.69 -1.48 -2.03 1.16e e ages a d tobacco 93 3 0 0 03 69 8 03 6

2 Crude mater.ex food/fuel 0.96 1.92 2.53 0.85 -0.63 2.65 -1.01 1.40

3 Mineral fuel/lubricants 1.57 -1.02 -2.30 3.43 1.36 -0.63 7.15 1.21

4 Animal/veg oil/fat/wax 4.28 1.40 -1.08 -0.34 -2.32 -0.51 -5.40 0.904 Animal/veg oil/fat/wax 4.28 1.40 1.08 0.34 2.32 0.51 5.40 0.90

5 Chemicals/products n.e.s -0.98 -1.33 -0.81 -1.04 -1.19 -2.04 -2.14 -1.17

6 Manufactured goods -0.41 0.61 1.38 -0.40 -0.81 0.27 -0.90 -0.22

7 Machinery/transp equipmt -2.06 -0.64 -3.57 -2.44 0.13 -3.93 -4.34 -0.71

n e s = not elsewhere specified

7 Machinery/transp equipmt 2.06 0.64 3.57 2.44 0.13 3.93 4.34 0.71

8 Miscellaneous manuf arts -1.27 -0.40 -2.52 0.07 0.27 0.21 -4.00 -0.21

9 Commodities nes 0.63 8.91 1.74 1.26 -1.21 9.78 2.04 0.81

Source: OECD Development Centre, based on WITS Database, SITC Revision 3 (three-digit classification) 2007.

n.e.s. not elsewhere specified.

Note: Positive values of the index reveals a comparative advantage, whereas a negative indicates a comparative disadvantage.

India and China’s increasing demand can have adverse effectshave adverse effects

1 200

China’s and India’s rising demand for Latin American commodities (1998-2005)

Agricultural Raw Materials 2000=10

0)

Increasing commodities prices(1900-2005)

Aluminium Coffee

Copper Petroleum

400

600

800

1 000

1 200

$ m

illio

ns

Food

Ores & Metals

400

800

1200

1600

2000

Pric

e in

dex

(197

0=

Copper Petroleum

0

200

1998 2001 2003 2005

0

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Ri i i l t f L ti A i

800

1000

s

Rise in Indian imports from Latin America (1997-2005)

Sugar/mollasses/honey

Copper ores/concentrates

Fixed veg oil/fat, soft 8 000

10 000

100 000

120 000

ons

.

ns

Rise in mineral exports from Latin America (1998-2005)

Petroleum and products (left)Copper ores/concentrates (right)Nickel ores/concs/etc (right)

0

200

400

600

$ m

illio

ns d g o / a , o

0

2 000

4 000

6 000

0

20 000

40 000

60 000

80 000

$ m

illio

$ m

illio .

Source: OECD Development Centre, based on WITS Database, 2007.

0

1997 1998 1999 2000 2001 2002 2003 2004 2005

00

1998 1999 2000 2001 2002 2003 2004 2005

Product specialisation has increased in the region in the last five yearsin the region in the last five years

Source: OECD Development Centre, 2008; Based on ECLAC and World Trade Integrated Statistics.

Latin America’s is increasingly looking towards Asia for exportstowards Asia for exports…

LATIN AMERICA: EXPORTS TO CHINA AS PERCENTAGE OF TOTAL EXPORTSPERCENTAGE OF TOTAL EXPORTS

Chile

1999 2005

Brazil

Argentina

Peru

Chile

Ecuador

Venezuela

Colombia

0 2 4 6 8 10 12 14

Mexico

Percentage

Source: OECD Development Centre 2008; and UNCTAD, 2007.

…which has made the region more resilient and diversified geographicallydiversified geographically

0 90

0.60

0.70

0.80

0.90

igh

conc

en.

2000 2005

0.30

0.40

0.50

w c

once

n.

H

i

0.00

0.10

0.20

co ela

ras

ala

dor

ma

age

ica

bia

via ua uay

eru

ana

uay ile na zil

Low

Mex

i

Ven

ezue

Hon

dur

Gua

tem

a

Ecua

d

Pana

m

LAC

ave

ra

Cos

ta R

i

Col

omb

Bol

iv

Nic

arag

Para

gu Pe

Guy

a

Uru

gu Chi

Arg

enti

Bra

z

Source: OECD Development Centre, 2008; Based on CEPAL (2006) and World Trade Integrated Statistics.




Latin America’s performance on trade infrastructure is poorp

40

Time for exports 2000

r

Cost to exports

5101520253035

Day

s

0

400

800

1200

1600

$ pe

r co

ntai

ne

0

Col

ombi

a

Ven

ezue

la

Indi

a

Peru

Ave

rage

LA

C

Chi

le

Chi

na

Bra

zil

Mex

ico

Arg

entin

a

0

Col

ombi

a

Arg

entin

a

Ave

rage

LA

C

Mex

ico

Bra

zil

Indi

a

Peru

Ven

ezue

la

Chi

le

Chi

na

4

5

6

7

ure

Indi

cato

r

Regional performance in the infrastructure pillar

0

1

2

3

Latin America and C.

India China Eastern Europe East Asian NIC's

Infr

astr

uct

Source: Based on Doing Business Report. World Bank, 2007.

…and most of its competitors score better on infrastructurebetter on infrastructure

I f t t t

6

7

vel

Infrastructure assesment

Ports Railways

3

4

5

Hig

h le

v

0

1

2

Low

leve

l

USA

Chi

na

Pana

ma

Arg

entin

a

Mex

ico

Ecua

dor

Col

ombi

a

Bra

zil

Cos

ta R

ica

Source: OECD Development Centre, 2008; based on CG/LA database. 2007.

A wake up call for reforms: The proximity to export markets

• Lower transport and communication costs

Mexico benefits from its geographic proximity to its major export markets:

The proximity to export markets

• Lower transport and communication costs • Access to FTA

• Just-in-time delivery

11,700 Km

24 Days

160 Km

4 Days

11,700 Km

Shipping time

Mexico is more competitive in manufacturing more sophisticated products which require frequent communication with the client or supplier and short reaction times.pp

Conclusion: For the first time ever the key question for the region is China (Commodity Prices)

• The impact of China on the World Economy is increasing. Market participants do not anticipate a considerable slowdown of this participants do not anticipate a considerable slowdown of this economy.

• This is good news for Latin America given its growth trade connexion with China.

Real GDP growth Outlook Investment banks' forecast changes

10%

12%Forecast end-2007

China's and India's trade with Latin America(US$ millions)

25000

Chinese Exports to LAC

4%

6%

8%

10%Revised forecasts, feb-2008

10000

15000

20000p

Chinese Imports from LAC

Indian Exports to LAC

Indian Imports from LAC

0%

2%

US Eurozone Japan ChinaSource: JP M organ, 2008

0

5000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: OECD Development Centre, Latin American Economic Outlook, 2008

Conclusion: For the first time ever the key question for the region is China (Commodity Prices)

• Chinese demand for Latin American commodities as well as commodity prices are increasing commodity prices are increasing.

• Good news in the short term. It could be a bad news in the long run.

China’s and India’s rising demand for Latin American commodities (US$ millions, 1998-2005)

1 200

Commodity Prices (100 Basis Index = 1975)

160018002000

Al i i

600

800

1 000 Agricultural Raw Materials

Food

Ores & Metals

600800

1000120014001600 Aluminium

Copper

Petroleum

0

200

400

1998 2001 2003 2005

0200400600

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

1998 2001 2003 2005Source: OECD Development Centre, Latin American Economic Outlook, 2008

Source: OECD Development Centre, Latin American Economic Outlook, 2008


www oecd org/dev/leowww.oecd.org/dev/leo

Thank youMerciObrigadoObrigadoGracias