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The Economist: Pacific pumas

The Economist: Pacific pumas

Posted by Dubraswka Aguilar on November 14, 2014

About four centuries ago Latin America became central to the trans-Pacific economy, according to “Pacific Worlds”, a book by Matt Matsuda, an historian. Silver from Bolivia travelled by galleon from Acapulco to Manila, where it was trans-shipped to China and became a vital substitute for its debased currency. Back came silks, porcelain and slaves. One, an Indian noblewoman sent by slavers to New Spain, became famous for her long dark braids and colourful clothes. She was known as La China Poblana. Her dress sense, influenced by her Asian heritage, is now considered the epitome of traditional Mexican style.

After a long interlude, once again a roaring trade has developed between Asia and Latin America. It has quadrupled since 2004. Asia has overtaken the European Union as Latin America’s second-biggest trading partner after the United States. Latin America’s share of Asian trade is less impressive but has still doubled (see chart 5). China has the biggest share, swamping the region with its own products and gobbling up Latin America’s natural resources (see article). Two-way trade grew more than 20-fold in the ten years to 2013, and China has overtaken the United States as the biggest trade partner of Brazil, Chile and Peru.

Chinese investment in Latin America has increased, too, though the figures are murky because China parks much of its capital in tax havens in the British Virgin Islands and Cayman Islands before investing it. According to the UN’s Economic Commission for Latin America and the Caribbean, since 2010 China has been investing about $10 billion a year in the region. Thomson-Reuters, a data firm, says that since 2000 Chinese firms have announced more acquisitions in Latin America than in Africa or South-East Asia. Much of the investment has been energy-related. In contrast, Japan, the biggest Asian investor in Latin America, puts most of its money into manufacturing facilities to make things such as cars.

In the past few years Latin American exports across the Pacific have slowed as China’s economy has become less dynamic and commodity prices have dropped. The growing trade gap has given rise to two worries: that the region is relying too heavily on basic exports again and succumbing to a “natural-resource curse”, as it has done before; and that it will take the wrong lesson from China and embrace state capitalism. Leftist governments on Latin America’s Atlantic coast, such as those in Brazil, Venezuela and Argentina, which privatised heavily in the 1990s, have since moved strategically and in some cases ideologically closer to China.

The question is why Latin America has failed to match the success of the East Asian model. Augusto de la Torre, the World Banks’s chief economist for Latin America, explains: “After the second world war the East Asian economies linked up to Japan, and in the process of getting connected they created the ‘Asian Factory’. It became a virtuous circle. The better they connected to the world, the better they connected to each other.” Latin America’s post-war experience has been the reverse: “We were connected to the most important growth centre, the United States. But instead of the ‘Latin American Factory’, we got dependency theory, structural adjustment and a lot of disappointment.”

The World Bank says that East Asia’s poorer countries, whose GDP per person in the 1960s was a third of Latin America’s, have almost caught up. Between the 1960s and the late 2000s their productivity growth averaged more than 2% a year, whereas in Latin America it was only just above zero. Mr de la Torre points to lack of investment as one of Latin America’s main problems. Average investment rates have been stuck around 20% of GDP for decades, whereas in East Asia in the 1990s they averaged over 35% of GDP, so electricity and transport networks there are now far denser. East Asia has also made huge strides in education, which has improved the quality of its workers.

Antoni Estevadeordal of the Inter-American Development Bank (IDB) says the poor infrastructure has impeded trade within Latin America as well as the creation of inter-regional supply chains. In a recent report the IDB heretically suggested Latin American policymakers should look to East Asia and emulate aspects of its industrial policy, considered unthinkable in the “Washington Consensus” 1990s.

Not coincidentally, such lessons are being absorbed most quickly along Latin America’s Pacific coastline. Four relatively open economies, Chile, Colombia, Mexico and Peru, in February signed a landmark trade pact, the Pacific Alliance, to strengthen economic ties to Asia. Their combined population is 212m and they conduct half of Latin America’s trade. They are already the most Asia-oriented in the region. Since 2004 they have signed or started work on at least a dozen free-trade agreements with Asian countries, with Chile leading the way.

Once Colombia has ratified the Pacific Alliance, more than nine-tenths of tariffs will be abolished and common rules of origin will help encourage the development of regional supply chains, says Andrés Rebolledo, head of Chile’s international trade division. The first priority is regional integration: the countries hope to improve air and maritime connections and court foreign investment to improve infrastructure links. They have already united their stockmarkets.

A hard act to follow

But they will struggle to match Asia’s success. East Asia’s economic integration started organically, with copious investment from Japan, and free-trade agreements came only after the nuts and bolts of commerce had been established. So far there are few signs that big multinational investors are rushing to take advantage of the Pacific promise. Geography—a long, straggling South American coastline versus a circle of trade around the South China Sea—may also be putting the pact at a disadvantage.

But other bold steps may help. Mexico, for example, has noted the galling failure of NAFTA to create a manufacturing hub anything like as vibrant as East Asia’s. It is suffering from an onslaught of Chinese imports, including industrial components that go into its own exports, so the government of Enrique Peña Nieto has embarked on far-reaching reforms to modernise the economy. They include measures to bolster competition where monopolies and oligopolies have dominated until now, such as in energy, telecommunications and broadcasting. One of the aims is to bring down electricity costs, improving Mexico’s cost advantage over China in manufacturing.

Japan has seized on Mexico’s promise. Last year Nissan opened a new $2 billion factory in Aguascalientes, its second in the state. New cars whirr off the production lines at the rate of almost two every minute. Mexico has overtaken Brazil to become the world’s seventh-largest carmaker and now exports not just to the United States but to South America too.

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