Market access, export diversification

1
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
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1
Latin America the challenge of diversification
2
Suspects whos to blame?
3
Country narratives building new areas of CA
4
Conclusions
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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
Chile
India
UK
China
Bolivia
Italy
Peru
US
Ecuador
Spain
Uruguay
Brazil
Japan
Paraguay
Colombia
Venezuela
Argentina
Indonesia
France
Taiwan
Canada
Mexico
Thailand
Malaysia
Belgium
Germany
Singapore
Netherlands
Hong Kong
South Korea
Source WTO
4
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
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Whats 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
6
Its not (only) what you have, its 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 resource-rich underachievers
Development Level of natural resource clusters in
the Andean region (0low, 10high)
Source Manzano, 2006
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Gas, the unexploited potential
Where demand and supply dont meet
Source The Economist, The explosive nature of
gas, Feb 9th 2006
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In fact export sophistication remains below
benchmarks
Source Hausmann, Hwang and Rodrik (2005), What
You Export Matters, mimeo
10
Even when looking at other resource-rich
countries
Source Hausmann, Hwang and Rodrik (2005), What
You Export Matters, minmeo
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1
Latin America the challenge of diversification
2
Suspects whos to blame?
3
Country narratives building new areas of CA
4
Conclusions
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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
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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
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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 -gt 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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1
Latin America the challenge of diversification
2
Suspects whos to blame?
3
Country narratives building new areas of CA
4
Conclusions
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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).
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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.
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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.
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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
• Governments 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 worlds 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-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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1
Latin America the challenge of diversification
2
Suspects whos to blame?
3
Country narratives building new areas of CA
4
Conclusions
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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.
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Thank youfor your attention!