36239969

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Market access, export Market access, export diversification & industrial diversification & industrial upgrading in LATAMupgrading in LATAM

The Mercosur Chair

Annual Seminar

Paris March 6 2006

Javier SantisoChief Development Economist & Deputy Director

OECD Development Centre

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11 Latin America: the challenge of diversificationLatin America: the challenge of diversification

Suspects: who’s to blame? Suspects: who’s to blame? 22

Country narratives: building new areas of CACountry narratives: building new areas of CA33

ConclusionsConclusions44

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Latin America

0

10

20

30

40

50

60

70

80

90

100Ecu

ad

or

Para

gu

ay

Boliv

ia

Ven

ezu

ela

Ch

ile

Arg

en

tin

a

Uru

gu

ay

Colo

mb

ia

Peru

Ind

on

esi

a

Bra

zil

Can

ad

a

Neth

erl

an

ds

Ind

ia

Th

aila

nd

Sp

ain

Mala

ysi

a

Mexic

o

Belg

ium

UK

Fran

ce

US

Sin

gap

ore

Italy

Ch

ina

Germ

an

y

Sou

th K

ore

a

Taiw

an

Hon

g K

on

g

Jap

an

Source: WTO

Exports of agricultural, energy and mineral productsExports of agricultural, energy and mineral products((% of the total) (2003% of the total) (2003))

Export structure in comparisonExport structure in comparison

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The challenge of diversification …The challenge of diversification …Share of processed exports then (1970) and now (2000)Share of processed exports then (1970) and now (2000)

BAH

CUBUGY

CHL

PER

TTBSUR

ARG

BRB

DOMMEXHAI

BOL

CRI

ECU

COL

GUY

BRZ

JAM

HNDELS

NICGTM

VEN

BLZ PGY

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Share of Processed X in Total (average 1966-1970)

Sh

are

of

Pro

cess

ed X

in

To

tal

(ave

rag

e 19

96-2

000)

Increased processing

Decreased process

Source: Bonaglia and Fukasaku (2003) “Export Diversification in low Income countries,” OECD Development Centre WP 209

A important role played by GSP, NAFTA & CBI… with some qualifications

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What’s wrong with natural What’s wrong with natural resources? resources? A boon or a curse?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 It’s not (only) what you have, it’s how you use it …how you use it …

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

Resource-Rich champions

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… … Many Many resource-rich underachievers

Source: Manzano, 2006

Development Level of natural resource clusters in the Andean region (0=low, 10=high)

Country Cluster

Exploitation and Export, minimum processing

Processing and export, import substitutions and public goods delivery

Export of some of the goods and services that are substituted

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 Bolivia Gas 10 0 0 0 Wood 10 7 2 2 Minerals 10 4 4 0 Soy 10 8 4 2 Colombia Coffee 10 8 8 4 Flowers 10 10 10 5 Fruits 10 10 8 1 Ecuador Bananas 10 10 2 2 Shrimp 10 9 2 2 Flowers 10 5 2 2 Oil 6 3 2 2 Peru Asparagus 10 9 1 8 Fish Flower 10 5 3 2 Minerals 10 2 1 7 Venezuela Aluminum 10 0 0 0 Iron 10 5 4 1 Oil 10 8 5 5

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… … Gas, the unexploited potentialGas, the unexploited potential

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

Where demand and supply don’t meet

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In fact export sophistication In fact export sophistication remains below benchmarks …remains below benchmarks …

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

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Even when looking at other Even when looking at other resource-rich countries resource-rich countries

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

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Suspects: who’s to blame? 22



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Venezuela 83.1%

Peru 70.7%

Chile 59.1%

Colombia 46.3%

Argentina 38.0%

Brazil 29.6%

Mexico 14.6%

Latam 31.2%

Source: BBVA

over total exports (2004)

Exports of commodities

60

70

80

90

100

110

120

130

140

150

160

170

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Source: BBVA

BBVA-MAP Index of Latin America commodity prices

(100 =jan03)

TOTAL

Without oil

Good News: The commodity boom Good News: The commodity boom has been a bonanzahas been a bonanza

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Sad News: Capitalising on previous Sad News: Capitalising on previous bonanzas was not easybonanzas was not easy

The debt overhang:

Resource-rich countries that performed poorly went through SAPs

During the 1970s, high commodity prices might have induced resource-abundant 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 capacityMarket 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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Suspects: who’s to blame? Suspects: who’s to blame? 22



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Brazil: Trade openness and the Brazil: Trade openness and the catching-up processcatching-up process

Successful Asian emerging countries were able to simultaneously combine growth with trade opening.

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).

-1,0

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

0,0 0,2 0,4 0,6 0,8 1,0 1,2

Thailand Taiwan South Korea Japan India China

2001-04

1951-55

2001-04

1951-55

Trade openness and development

Real tradeopenness(as a % of GDP)

Dev

iation

ofRea

l GDP pe

rcap

ita with

resp

ectt

owor

ldav

erag

e(in

loga

rith

ms)

Source: BBVA using Penn World Tables and IMF data

1951-55

2001-04

0%

5%

10%

15%

20%

25%

30%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Brazilian Real Trade Openness(as a % of GDP)

Source: BBVA

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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%.

The 50 most profitable firms19

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7

3

1 1 1 1 1

0

5

10

15

20

Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru VenezuelaSource: America Economia 2005

Rk Firm Sector Exports04 (US$ Mill) % of sales % of sales

3 Petrobras Petroleum 6.728,7 16,5 11,212 Vale do Rio Doce Mining 2.433,5 23,5 30,632 Grupo Votorantim Holding 1.544,6 26,6 18,948 Usiminas Steel 1.137,3 24,7 9,121 Gerdau Steel 1.066,7 14,4 11,663 Gerdau Açominas Steel 935,6 24,5 22,440 Telesp Telecom 821,7 16,4 -66 CSN Steel 746,6 20,2 20,2

144 CST Steel 611,9 31,9 53,594 Cemig Electricity 521,7 19,4 -20 Electrobras Electricity 487,2 6,5 -62 Embraer Aerospace 473,1 12,3 86,952 Ambev-CBB Drinks 437,6 9,7 -

208 Aracruz Celulose Paper 402,5 31,3 61,8102 Balgo Mineira Steel 391,6 15,5 -143 Cosipa Steel 363,2 18,8 33,531 Telemar Norte Leste Telecom 345,5 5,9 -16 Odebrecht Holding 320,2 3,9 -

Utility

Source: America Economia 2005

Brazilian firms are beginning to increase activities overseas

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Brazil: Embraer & tBrazil: 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 – Chile: Salmon, wine and copper – more than commoditiesmore 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 new-Costa Rica: hi-tech success or new-economy enclave?economy 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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Suspects: who’s to blame?Suspects: who’s to blame? 22



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Some of the main challenges facing LATAM are to push forward the competitiveness agenda to boost productivity, diminish transaction costs and overcome inefficiencies.

Conclusions

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 double-edged sword

Market niches are a moving target: a need to constantly adapt and improve/create new areas of competitive advantageSlow 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 youThank youfor your attention!for your attention!

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