Fear of China: Is There a Future for Manufacturing in Latin America? Mauricio Mesquita Moreira IDB...
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Transcript of 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),
Manufacturing? Manufacturing?
• 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),
Manufacturing? Manufacturing?
• 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 …
Manufacturing? Manufacturing?
• 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
Manufacturing? Manufacturing?
• 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
Manufacturing? Manufacturing?
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
Manufacturing? Manufacturing?
• 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;
Manufacturing? 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.
The Role of Government The Role of Government
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
The Role of Government The Role of Government
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
The Role of Government The Role of Government
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
Source: Comtrade, author's own calculation.
Trade effects: Trade effects:
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
Source: Comtrade, author's own calculation.
Trade effects: Trade effects:
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