NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

In 1980 the Latin American and the Caribbean (LAC) economy was twice as large as that in China and India. By 2004, LAC was 20% smaller than China and India. The fast economic growth of these two countries was accompanied by a speedier integration in world markets, while LAC stayed behind. Today, China’s and India’s combined share of world exports is 50% larger than LAC’s share, while in 1990 the opposite was true. How has the rise of China and India affected LAC countries?

On the one hand China’s and India’s growth may have been pushing LAC countries out of world markets. On the other, they may also be an opportunity for LAC due to their appetite, especially in China’s case, for natural resources, and their rise as a source of financing. A recent World Bank study, “China’s and India’s challenge to Latin America” explores this very question and, as is usually the case, the results are mixed.

At the national level, findings suggest that China’s and India’s growth have had an overall positive impact on LAC countries. Economic growth in LAC countries has been found to be tightly correlated with that of China and India. This has partly happened thanks to the increased commodities demand in which LAC has a comparative advantage, such as minerals and metals (copper, iron ore and zinc) and other commodities like coffee. The impact of this increased demand has been uneven, positively impinging countries in the Southern Cone and the Andean region. In contrast, Central America and Mexico have been barely affected by this trend.

With regards to foreign direct investment (FDI), China and India have a very small presence in LAC. The authors nonetheless state that they have still had a positive impact in the financing of LAC regions, because their rise as exporters of capital in world markets has lowered the cost of borrowing capital for LAC countries. Additionally, China has recently become active in some Central American and Caribbean countries, such as Bahamas, Dominica, Grenada, Haiti and Honduras, where it is now offering bilateral aid. At any rate, the scope for bilateral cooperation is large and yet to be realized. The ample possibilities are exemplified by recent Chinese-Brazilian agreements on satellite development or the Chilean-Chinese agreements in mining, geosciences or forestry.

Therefore, at the aggregate level the rapid growth of China and India seems to be helping LAC countries. However, if we focus at the industry level, Chinese and Indian growth may also negatively impact specific exports. In manufacturing industries, LAC’s exports and Chinese exports tend to be relatively similar, because they both have strong labor intensive industries. This is especially true in textiles, electronic and electrical appliances, and telecommunications equipments. Along these lines, Mexico has received most of the pain here while countries more dependent on natural resources and scientific-knowledge intensive industries have done relatively well.

In comparison, the LAC services sector, in which India is a strong world player, has been barely affected, because tourism plays such a huge role in this area. LAC’s exports of services to the US are still seven times larger than exports of services by China and India combined and this state of affairs is expected to remain in the next few years.

The authors note that LAC countries face several key challenges as a consequence from Chinese and Indian growth. First, they should try to avoid their dependence on natural resource exports hindering their long-term growth. Second, LAC countries should also try to accommodate the layoffs that may occur in labor intensive industries by emphasizing the role of education and re-skilling former employees. Third, LAC countries should resist the temptation of raising tariffs for cheaper Chinese and Indian imports. Unfortunately, in the last decade LAC governments have initiated more antidumping cases against Chinese goods than the European Union or the US. Fourth, and most important for BoP readers, LAC countries should improve their natural resource management and rural development policies.

As a result from these trends it is likely that new market opportunities for BoP businesses will arise, most especially those businesses working with agriculture (eg. Microdrip or Jassar Farms), forestry (eg. Ecolog), rural areas (eg. Drishtee) or tourism (eg. Rainforest Expeditions).