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.  

 

While the aggregate economy of Latin America and the Caribbean (LAC) in 1980 was twice that of China and India combined, by 2004, it was 20 percent lower. Moreover, the share of both countries in world exports is now 50 percent higher than that of LAC, while in 1990 just the opposite was true.

 

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. China has become a significant exporter of financial capital, thereby contributing to low interest rates throughout the world. At the same time its direct investment in third countries is rapidly increasing.

 

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.

-