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China May Not Be Long-Term Engine of Latin American Growth

WASHINGTON, Aug 19 2011 (IPS) - China’s burgeoning presence as a leading trade and investment partner in Latin America is still an overriding concern for some observers in Washington, as the East Asian giant appears to have changed the focus of economic development in countries south of the U.S.’s border.

The Chinese “footprint” in Latin America was featured in a discussion Wednesday at the Washington-based Brookings Institution, highlighting new research on the decade-long south-south partnership. Though the relationship has proved to be most lucrative since 2000, when China’s rapid urbanisation created a huge market for Latin American exports, experts now warn that the once-easy profits won’t last forever.

“Latin America cannot count on fast growth in terms of demand for commodities from China forever, and this of course means there are some policy challenges that [the region] will have to face,” said Mauricio Cárdenas, director of the Latin America Initiative at Brookings. “Latin America has to begin thinking about ways to generate growth more indigenously.”

According to a paper by Cárdenas and Adriana Kugler, Latin America’s economy today is marked by steep deindustrialisation and a lack of productivity in its biggest market, the services industry – largely due to an increase in demand for primary goods from booming countries like China.

Though the United States and the European Union have historically held the reins of Latin America’s trade and growth, the U.N. Economic Commission for Latin America and the Caribbean estimates that China could become the region’s second largest trading partner as early as 2015, and in fact is already leading in Brazil.

The problem with the current structure of trade within a majority of Latin American countries, Cárdenas argues, is that the numbers are unsustainable.

For example, the last 10 years have witnessed a ballooning of Chilean exports to China from five to nearly 25 percent of total exports since 2000.

Given that China’s primary demand is for natural commodities such as crude oil to fuel its ever-increasing urbanisation programme, experts fear that this demand could easily peter out.

“In the case of exports from Latin American countries to China, they are heavily concentrated in one to two types of goods,” Cárdenas explained. “Whereas imports from China are much more diversified.”

As Latin America imports a variety of goods from highly industrialised or industrialising areas, it has slowed its own manufacturing plans, a far cry from the manufacturing boom of the late 20th century, which left the economy undervalued, even while increasing production.

An over-emphasis on production in the 1980s and 1990s, combined with neoliberal policies conducive with the Washington Consensus, left the region underdeveloped in key areas such as education and science and technology, Mauricio Mesquita Moreira principal economist at the Inter-American Development Bank and panelist at the Brookings event, said Wednesday.

He echoed concerns that that Latin America’s fast-paced industrial growth, hand in hand with China, was simply not sustainable.

Moreira said that prior to 2000, Latin America reached a point of saturation with production. “It was inevitable, and desirable that we would see a decline in the share of manufacturing in most countries in the region, particularly the largest countries where industrialisation went further, like Brazil,” he said.

But despite the leveling-out hypothesis that many economists predicted, the current lag in manufacturing in Latin America is tied to its policies and trading partners.

“Recent deindustrialisation trends appear closely related to an influx of inexpensive Chinese goods,” said Margaret Myers, programme director at the Inter-American Dialogue. “Manufacturing sectors in the region simply cannot compete.”

In Brazil, for example, production and goods are very expensive, due in large part to the country’s economic policies. The country’s industrial output fell 1.6 percent in June, the second worst decline in production since the global meltdown in 2008, due in large part to its outdated labour laws, excessive taxation, and system of tariffs, Myers told IPS.

The situation seems precarious for the region, as countries deepen their dependence on a diverse range of manufactured imports from China, and on revenues from its exports.

China’s involvement has upset trade balances within the region itself – oil- and mineral-rich countries like Venezuela and Brazil boast trade surpluses with the Asian nation, whereas Mexico is nursing a deficit of 11 billion dollars.

“If Chinese growth were to slow, and if slower growth were accompanied by a decrease in demand for commodities, this could have a disastrous effect on certain countries in Latin America,” Myers told IPS.

China has vehemently argued against this assumption. The country’s Ministry of Foreign Affairs has insisted that China’s interests are geared towards a harmonious and collaborative trade partnership. According to IAD, however, the view within Latin America and the U.S. is that the relationship is based predominantly on the exploitation of natural resources.

Some countries are taking precautions against economic downturns by using current revenue strains to their advantage, such as Chile’s re- vamped Economic and Social Stabilization Fund (ESSF), created in 2007 out of revenues from its copper exports.

Moreira said that the region should use the resources they have and current revenue strains to their advantage, investing in the wealth of resources and human capital that would be the best avenue for sustainable development in the future.

“The best thing that we could do is to try to channel those resources to one of the biggest weaknesses of the region, which is education, science and technology,” he said. “Then you’re going to be able to not just be stuck in basic commodity exports, but to add value to those exports – that’s a clear opportunity we have.”

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