Fear of China: Is There a Future for Manufacturing in Latin America? Mauricio Mesquita Moreira IDB...

Fear of China: Is There a Future for Fear of China: Is There a Future for

Manufacturing in Latin America?Manufacturing in Latin America?

Mauricio Mesquita MoreiraMauricio Mesquita Moreira

IDBIDB

The Emergence of China: The Emergence of China: Challenges and Opportunities for Latin America and AsiaChallenges and Opportunities for Latin America and Asia

3-4 December 2004, Beijing, China3-4 December 2004, Beijing, China

Motivation Motivation

““It’s the manufacturing stupid!”It’s the manufacturing stupid!”

If anything, China’s emergence in the world If anything, China’s emergence in the world market challenges the view that the future of LAC market challenges the view that the future of LAC is in manufacturing.is in manufacturing.

Outline Outline

• Does manufacturing really matter for Does manufacturing really matter for LAC’s development?LAC’s development?

• The nature and size of the challenge.The nature and size of the challenge.

• The effects so far in terms of trade flows.The effects so far in terms of trade flows.

• Economic and policy implications.Economic and policy implications.

Manufacturing? Manufacturing?

• Manufacturing “bias” in the traditional development Manufacturing “bias” in the traditional development literature. “Normal pattern of development”.literature. “Normal pattern of development”.

• Evidence of this “bias” in the endogenous growth Evidence of this “bias” in the endogenous growth theories and contemporary development literaturetheories and contemporary development literature

• Empirical evidence, for the most part, is circumstantial. Empirical evidence, for the most part, is circumstantial. “Virtually every country that experienced rapid growth “Virtually every country that experienced rapid growth of productivity and living standards over the last 200 of productivity and living standards over the last 200 years has done so by industrializing…” Murphy, years has done so by industrializing…” Murphy, Shleifer and Vishny (1989),Shleifer and Vishny (1989),


• Sachs and Warner (1995, 1997) , the first to present hard Sachs and Warner (1995, 1997) , the first to present hard facts about the link between manufacturing and growth: facts about the link between manufacturing and growth: increasing returns and all that..increasing returns and all that..

• Later disputed by , e.g., Later disputed by , e.g., Lederman and Maloney (2003)Lederman and Maloney (2003) and and Manzano and Rigobon’s (2001). The issue would be export Manzano and Rigobon’s (2001). The issue would be export concentration and debt overhang.concentration and debt overhang.

• Yet, little is said about the link between natural resources and Yet, little is said about the link between natural resources and export concentration and debt. Stingy (2003), e.g. present export concentration and debt. Stingy (2003), e.g. present robust evidence of Dutch disease. robust evidence of Dutch disease.

• Indirect and negative impact of natural resource Indirect and negative impact of natural resource specialization on growth. E.g. Isham, Woolcock, Pritchett and specialization on growth. E.g. Isham, Woolcock, Pritchett and Busby (2003), Busby (2003),


• The issue is far from settled but the police debate rages on in LAC.The issue is far from settled but the police debate rages on in LAC.• Two strands of manufacturing pessimism seems to prevail :Two strands of manufacturing pessimism seems to prevail :• The World Bank (2002,2003) sticks to traditional trade theory and The World Bank (2002,2003) sticks to traditional trade theory and

suggests that the region’s future is agriculture and mining, seen a suggests that the region’s future is agriculture and mining, seen a pathway to a “knowledge economy”. Look at Canada, Finland, Sweden.pathway to a “knowledge economy”. Look at Canada, Finland, Sweden.

• Blum and Leamer (2003) Blum and Leamer (2003) “Natural resource rich communities invest their “Natural resource rich communities invest their resources in land, permanent crops and extractive equipment and very resources in land, permanent crops and extractive equipment and very little in human capital” ..“little in human capital” ..“Countries that cannot attract manufacturing Countries that cannot attract manufacturing activities face the very difficult problem of how to find work both for new activities face the very difficult problem of how to find work both for new entrants into the labor force ….” entrants into the labor force ….”

• But But “LAC is far way, rich in natural endowments and has a tropical “LAC is far way, rich in natural endowments and has a tropical climate […]” “[…] far away resource abundant tropical countries have climate […]” “[…] far away resource abundant tropical countries have great difficulties attracting manufacturing activities, other than mundane great difficulties attracting manufacturing activities, other than mundane and labor intensive tasks …and labor intensive tasks …


• Outright manufacturing pessimism seems to be Outright manufacturing pessimism seems to be unwarranted.unwarranted.

• Empirical evidence and Latin American own past Empirical evidence and Latin American own past belies enthusiasm for a natural resource solution. belies enthusiasm for a natural resource solution. There are the issues of human capital, technological There are the issues of human capital, technological externalities, export concentration and institutions.externalities, export concentration and institutions.

• Geographical and endowment determinism does not Geographical and endowment determinism does not go a long way. As the “new” theories of growth go a long way. As the “new” theories of growth suggest, suggest, accumulation of human capital and the accumulation of human capital and the ensuing process of learning and innovation can ensuing process of learning and innovation can change a country’s destiny beyond its geography and change a country’s destiny beyond its geography and natural endowments. natural endowments.

• Whatever the “truth” , the fact is… Whatever the “truth” , the fact is… • Manufacturing accounts in Manufacturing accounts in average for 19% of average for 19% of

the GDP (2002).the GDP (2002).

Manufacturing Value Added (% of GDP)

10

15

20

25

30

35

40

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Brazil Colombia Latin America & Caribbean Mexico Venezuela, RB

Source: World Development Indicators


• True:True: the manufacturing share of GDP has been declining the manufacturing share of GDP has been declining

rapidly; rapidly; still dominated by “mundane” resource and labor still dominated by “mundane” resource and labor

intensive goods or are concentrated in the labor-intensive goods or are concentrated in the labor-intensive links of the value chain;intensive links of the value chain;

has been thoroughly outperformed by East Asia has been thoroughly outperformed by East Asia

• But, there seems to be more to it than But, there seems to be more to it than geography and endowmentsgeography and endowments


1965

2000

22.

53

3.5

4

6 7 8 9 10 11

ARGENTINA

19652000

22.

53

3.5

6 7 8 9 10 11

BRAZIL

1965 2000

1.5

22.

53

3.5

6 7 8 9 10 11

CHILE

1965 2000

1.5

22.

53

3.5

6 7 8 9 10 11

COLOMBIA

19652000

1.5

22.

53

3.5

6 7 8 9 10 11

COSTA RICA

19652000

1.5

22.

53

3.5

6 7 8 9 10 11

MEXICO

19752000

1.5

22.

53

3.5

6 7 8 9 10 11

URUGUAY

19702000

1.5

22.

53

6 7 8 9 10 11

VENEZUELA

19702000

1.5

22.

53

3.5

6 7 8 9 10 11

AUSTRALIA1970 2000

1.5

22.

53

6 7 8 9 10 11

CANADA

1970 2000

1.5

22.

53

3.5

6 7 8 9 10 11

FINLAND1970 2000

1.5

22.

53

3.5

6 7 8 9 10 11

SWEDEN

1965

2000

22.

53

3.5

6 7 8 9 10 11

THAILAND

Pre

dic

ted

and

obs

erv

ed m

anu

fact

urin

g s

har

e o

f GD

P (

in lo

g)

log real PPP per capita income

Selected LAC and resource-intensive countriesFigure 2: Predicted and observed manufacturing share of GDP:

Fixed effects regression y = 2.281x – 0.1348x2 – 6.8564 R2 = 0.06 Source: WDI and Penn World Tables 6.1


• In fact, there two important “omitted variables” In fact, there two important “omitted variables” in this storyin this story : :

The poor and volatile macroeconomic environment The poor and volatile macroeconomic environment throughout the 1980s and 1990s;throughout the 1980s and 1990s;

a reform of the state which has gone well beyond a reform of the state which has gone well beyond weeding out the excesses of the import substitution weeding out the excesses of the import substitution era.era.

• So, at the very least, it would risky and hasty So, at the very least, it would risky and hasty for LAC to turn its back on manufacturing; for LAC to turn its back on manufacturing;


• In fact, there are least two important “omitted In fact, there are least two important “omitted variables” in this story:variables” in this story:

• The poor and volatile macroeconomic The poor and volatile macroeconomic environment that prevailed in most countries in environment that prevailed in most countries in the region throughout the eighties and nineties the region throughout the eighties and nineties and a reform of the state which has gone well and a reform of the state which has gone well beyond weeding out the excesses of the beyond weeding out the excesses of the import substitution era. import substitution era.

China’s Challenge China’s Challenge

Four main factors:Four main factors:• EndowmentsEndowments• ProductivityProductivity• ScaleScale• The Role of GovernmentThe Role of Government

China’s Challenge: China’s Challenge: endowmentsendowments

Average Nominal Annual Wages in Manufacturing:China, Brazil and Mexico (1000 current US$)

0.0

2.0

4.0

6.0

8.0

10.0

1996 1997 1998 1999 2000 2001 2002

Brasil Mexico China

Source: China Statistical Yearbook, IBGE and INEGI annual industrial surveys

ProductivityProductivity

Labor Productivity in China and SelectedCountries. 2001.

0

20

40

60

80

100

120

Auto Consumer White Brown PCs

US

Mexico

Brazil

India

China

Korea

Brazil

India

China

Electronics Goods Goods

Korea Korea Korea

Mexico

Brazil

Mexico

India

China

Mexico

Brazil

India

China

MexicoBrazil

India

China

Source: McKinsey&Co 2003

ProductivityProductivity

Labor Productivity in Manufacturing: China, Brazil and Mexico(valued-added per worker, national accounts data. 1990=100).

0

50

100

150

200

250

300

350

400

450

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

China (implicit deflator) China (ex-factory deflator)

Brazil Mexico

Source: statistical offices

Productivity Productivity

Labor Productivity at the Firm Level: China, Brazil and Mexico.Annual Average (%)

0 2 4 6 8 10 12

China (1995-99)

Brazil (1996-2000)

Mexico (1995-2000)

Source: Lopez-Cordova and Moreira (2004) and Hu, Jeffeson, Xiaojing and Jinchang (2003)

Scale Scale

• The largest population in the world; The largest population in the world; • A surface that is roughly as large as the United A surface that is roughly as large as the United

States and 15 per cent larger than Brazil;States and 15 per cent larger than Brazil;• A US$1.3 billion economy, which is edging closer to A US$1.3 billion economy, which is edging closer to

the size of the entire LAC economy (US$1.6 billion).the size of the entire LAC economy (US$1.6 billion).• The PPP figures are even more impressive, putting The PPP figures are even more impressive, putting

the Chinese economy only behind that of the the Chinese economy only behind that of the United States. The largest Latin American economy United States. The largest Latin American economy in PPP terms—Brazil—is ranked 9th, with in PPP terms—Brazil—is ranked 9th, with approximately 20 percent of the size of the approximately 20 percent of the size of the Chinese economy. Chinese economy.

• Chinese exports, at US$365 billion, are already Chinese exports, at US$365 billion, are already higher than those of LAC as a whole. higher than those of LAC as a whole.

Scale Scale

• AdvantagesAdvantages Cost edge on high fixed cost, high-tech Cost edge on high fixed cost, high-tech

industries (industries (e.g. consumer electronics, domestic sales of US$ 41 billion, whereas Mexico has US$ 10 billion and Brazil, US$ 9 billion);

Better conditions to deepen the supply chain Better conditions to deepen the supply chain ((the division labor depends on the size of the marketthe division labor depends on the size of the market););

Lower infrastructure costLower infrastructure cost

The Role of Government The Role of Government

Factor and product markets.Factor and product markets.

•Factor sideFactor side::

abundant supply of credit to local firms, at abundant supply of credit to local firms, at very “competitive” interest ratesvery “competitive” interest rates;;a public funded national innovation system, a public funded national innovation system, which has contributed to reduce the costs and which has contributed to reduce the costs and risks of R&D; risks of R&D; a pragmatic enforcement of IPRs.a pragmatic enforcement of IPRs.


2.7

4.2

4.5

4.6

5.7

5.8

6.1

6.6

9.1

12.7

58.5

0 5 10 15 20 25 30

CHINA,P.R

KOREA

US

SPAIN

MALAYSIA

FRANCE

INDIA

MEXICO**

CHILE

COLOMBIA

BRAZIL*

Real Average Lending Rates for Selected Countries. 1990-2003, CPI deflator. % per annum

Source: IMF_IFS * 1997-2003 ** 1993-2003


Domestic Credit Provided by Banking Sector (% of GDP)

178.8

125.1

105.6

61.1

38.5

35.7

0 20 40 60 80 100 120 140 160 180 200

China

High Income Countries

Korea, Rep.

Brazil

Mexico

Colombia


Factor and product markets.Factor and product markets.

•Product sideProduct side::

Sector targeting: e.g. Sector targeting: e.g. semiconductors, semiconductors, automobile and software automobile and software Firm targeting: “National Champions”Firm targeting: “National Champions”..Still complex dual trade regime, which favor Still complex dual trade regime, which favor exports and restricts access to the domestic exports and restricts access to the domestic market (market (trading rights and distribution services, trading rights and distribution services, import and export regulation, non-tariff measures and import and export regulation, non-tariff measures and national treatmentnational treatment))

Trade effects Trade effects

LAC Net Exports to CHINA by factor intensity.US$ million 1980-2002

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

High Tech Low Tech Medium Tech

Primary Products Resource Based

Source: Comtrade

Trade effects Trade effects World market shares for manufactured exports:

1981-2002 (%)

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

ChinaE. Asia excl. ChinaMexicoLACLAC excl. Mexico

Source: ComtradeNote: Manufacturing is defined as SITC 5 to minus 68

Trade effectsTrade effectsLAC's World Market losses to China by technology intensity

(1990-2002).

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

. .

High-tech Medium-tech Low-tech Resource- Total exports

% o

f Tot

al M

anuf

Exp

orts

200

2

0

200

400

600

800

1,000

1,200

1,400

Loss

es to

Chi

na (m

illio

ns o

f USD

$)

Losses as % of category exports in 2002

Losses to China US$

Source: Comtrade with author's own calculation.

Trade effectsTrade effectsLAC's Annual World Market losses to China

(1990-2002, SITC 5 digits)

0.3%0.1% 0.2%

0.6%0.5%

0.3%0.4%

0.3%0.4%

1.0% 1.0%

2.0%

0.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 90-02

Source: Comtrade, author's own calculation.

Trade effects: Trade effects:

LAC World Market losses to China by selected countries and sub-regions, as a percentage of 2002 manufacturing exports (1990-2002,

SITC 5 digits)

4.2%4.0%

1.1% 1.2%

0.3%

4.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

ANDEAN BRAZIL CACM CHILE MEXICO MERCOSUR



LAC's World Market Losses to China by Selected Markets, as a percentage of 2002 manufacturing exports (1990-2002, SITC 5 digits)

0.7%

8.1%

2.1%1.4%

6.1%

0.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

All East Asia EU LAC Rest of theWorld

USA



China's Share of Manufacturing Imports in Selected Sub-regions and Countries. 1990-2002

0%

4%

8%

12%

16%

Mexico Mercosur LAC Chile ANDEAN CACM USA

1990 1995 2002

Source: Comtrade

Trade effects: Trade effects: the potential threatthe potential threat

Brazil's and Mexico Import Penetration* in Manufacturing goods.World and China (1996 - 2003)

0

5

10

15

20

25

30

35

40

1996 1997 1998 1999 2000 2001 2002 2003

0.00.10.20.30.40.50.60.70.80.91.01.11.21.31.4

Brazil-World Mexico-World

Brazil-China Mexico-China

* Import divided by apparent consumption. Brazil's and Mexico's output data converted to US dollars using,

respectively, 1998 and 1994 real exchange rate Source: own calculation based on IBGE and SECEX data.

World % China %

Trade effects:Trade effects: the potential competitionthe potential competition

Coefficient of Correlation for Export CompositionLAC-China: Manufacturing, US market (HS 6 digits)

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Andean Brazil CACM

Chile LAC Mexico

Source: Comtrade

Trade effects:Trade effects: the potential competitionthe potential competition

Coefficient of Correlation for Export CompositionLAC-China: Manufacturing, Rest of the world (HS 6 digits)

-0.1

0

0.1

0.2

0.3

0.4

0.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Andean Brazil CACM

Chile LAC Mexico

Source: Comtrade

Conclusions Conclusions

Is there a future for manufacturing in Is there a future for manufacturing in Latin America? Latin America?

China does not make this future any China does not make this future any brighter, given its combination of brighter, given its combination of endowments, scale, fast productivity endowments, scale, fast productivity growth and a strong state. growth and a strong state.

This is particularly true in a world This is particularly true in a world market already overcrowded by at least market already overcrowded by at least three generations of Asian Tigers and three generations of Asian Tigers and facing the prospects of others, such as facing the prospects of others, such as India, to come. India, to come.

Conclusions Conclusions

Not a reason for concern if manufacturing Not a reason for concern if manufacturing did not really matter for development. Yet, did not really matter for development. Yet, both theory and evidence suggest both theory and evidence suggest otherwise. otherwise.

Even leaving China apart, manufacturing Even leaving China apart, manufacturing in LAC is usually seen with pessimism on in LAC is usually seen with pessimism on the grounds of geography and the grounds of geography and endowments. The tribulations of the sector endowments. The tribulations of the sector on the last two decades seem to on the last two decades seem to corroborate this view. corroborate this view.

Yet, geography and endowments do not Yet, geography and endowments do not tell the whole story. tell the whole story.

Conclusions Conclusions the legacy of the ISI era, decades of the legacy of the ISI era, decades of macroeconomic volatility and the demonization macroeconomic volatility and the demonization government intervention, have to be factor in. government intervention, have to be factor in.

These are all policy-related factors and well-These are all policy-related factors and well-designed policies, backed by strong institutions, designed policies, backed by strong institutions, can overcome the restrictions imposed by can overcome the restrictions imposed by endowments and geography. endowments and geography.

It all depends a policy agenda, which should It all depends a policy agenda, which should aim at: a) the consolidation of the macro aim at: a) the consolidation of the macro stability; b) the formation of a large regional stability; b) the formation of a large regional market to reduce de disadvantage of scale; c) market to reduce de disadvantage of scale; c) the relaxation of excruciating credit-constraints the relaxation of excruciating credit-constraints on local firms; d) the enhancement of frail local on local firms; d) the enhancement of frail local technological capabilitiestechnological capabilities

Fear of China: Is There a Future for Manufacturing in Latin America? Mauricio Mesquita Moreira IDB...

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