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Market access, export diversification & industrial upgrading in LATAM. Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre. The Mercosur Chair Annual Seminar Paris  March 6 2006. 1. Latin America: the challenge of diversification. 2.

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market access export diversification industrial upgrading in latam

Market access, export diversification & industrial upgrading in LATAM

Javier Santiso

Chief Development Economist & Deputy Director

OECD Development Centre

The Mercosur Chair

Annual Seminar

Paris  March 6 2006

slide2

1

Latin America: the challenge of diversification

2

Suspects: who’s to blame?

3

Country narratives: building new areas of CA

4

Conclusions

export structure in comparison
Export structure in comparison

Exports of agricultural, energy and mineral products

(% of the total) (2003)

100

90

Latin America

80

70

60

50

40

30

20

10

0

India

Chile

UK

China

Bolivia

Italy

Peru

US

Ecuador

Spain

Uruguay

Brazil

Japan

Colombia

Paraguay

Indonesia

Argentina

Taiwan

France

Venezuela

Mexico

Canada

Thailand

Malaysia

Belgium

Germany

Singapore

Hong Kong

Netherlands

South Korea

Source: WTO

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

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

Increased processing

Decreased process

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

what s wrong with natural resources a boon or a curse
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

it s not only what you have it s how you use it
It’s not (only) what you have, it’s 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

many resource rich underachievers
… Many resource-rich underachievers

Processing and

Export of some

Export of processed refined

products,

Exploitation

export, import

of the goods

inputs, machines and services associated to

and Export,

substitutions and

and services

the cluster. The firms of the country

minimum

public goods

that are

associated to the cluster start to invest

Country

Cluster

processing

delivery

substituted

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

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

Source: Manzano, 2006

gas the unexploited potential
… Gas, the unexploited potential

Where demand and supply don’t meet

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

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

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

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

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

slide11

1

Latin America: the challenge of diversification

2

Suspects: who’s to blame?

3

Country narratives: building new areas of CA

4

Conclusions

good news the commodity boom has been a bonanza
Good News: The commodity boom has been a bonanza

BBVA-MAP Index of Latin America commodity prices

Exports of commodities

(100 =jan03)

over total exports (2004)

170

160

Venezuela

83.1%

150

Peru

70.7%

140

Without oil

130

Chile

59.1%

120

Colombia

46.3%

110

TOTAL

100

Argentina

38.0%

90

Brazil

29.6%

80

70

Mexico

14.6%

60

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Latam

31.2%

Source: BBVA

Source: BBVA

sad news capitalising on previous bonanzas was not easy
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 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

market access and supply capacity
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

slide15

1

Latin America: the challenge of diversification

2

Suspects: who’s to blame?

3

Country narratives: building new areas of CA

4

Conclusions

brazil trade openness and the catching up process
Brazil: Trade openness and the catching-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).

slide17

Brazilian firms are beginning to increase activities overseas

The 50 most profitable firms

19

20

16

15

10

7

5

3

1

1

1

1

1

0

Source: America Economia 2005

Brazil

Mexico

Chile

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%.

brazil embraer t he aircraft cluster
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.

chile salmon wine and copper more than commodities
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
costa rica hi tech success or new economy enclave
Costa Rica: hi-tech success or new-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

slide21

1

Latin America: the challenge of diversification

2

Suspects: who’s to blame?

3

Country narratives: building new areas of CA

4

Conclusions

slide22

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 double-edged 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.