The visible hand of China in Latin America Opportunities, Challenges and Risks Javier Santiso Chief Economist & Deputy Director OECD Development Centre Central Bank of Chile Santiago de Chile April 27th 2007

2 1 The cognitive effect: new emerging capitalisms. The trade effect: the dark side of the boom. 2 China and India as a wake up call. 3

3 China: extraordinary or back to normal? According to IMF estimates Chinese gross domestic product based on purchasing-power- parity (PPP) amounts to 13.6% of 2005 world GDP (20.7% in the case of USA). Source: OECD Development Centre Based on: International Financial Statistics and Angus Maddison, 2006.

4 Emerging Asia 9.1% GDP share of world output (WEO, 2005) EU 30.3% US 28.0% Korea&Japan 12.0% China 5.0% The cognitive impact: The emergence of new capitalisms. Center and Periphery rebalanced… LatAm 4.7% Asia represents more than one fifth of world output.

5 China has doubled its GDP in 8 years…without the help of Money Doctors! Chinese growth rates has been higher than those observed in Brazil and Mexico during their glorious years. Source: Datastream (Economist Intelligence Unit) China

6 1 The cognitive effect: new emerging capitalisms. The trade effect: the dark side of the boom. 2 China and India as a wake up call. 3

7 Are raw material prices facing a Chinese shock? Source: OECD Development Centre. Based on Oxford Latin American Economic History Database and Thomson Datastream, Is China to blame for commodities prices?

8 Latin America is endowed with natural resources and dependent on the commodities’ cycle Source: OECD Development Centre, Based on: National Balance of Payments, 2005.

9 Source: World Integrated Trade Statistics (Comtrade), The stars have been lined up for Latin America: Asia is becoming a major growth pillar

10 Whereas exports with the US are stable, countries are increasingly sensitive to China Source: OECD Development Centre, based on IMF Trade Statistics, and OECD Trade Directorate, 2007.

11 Latin America is tackling its vulnerability to US slowdown by diversifying exports Source: OECD Development Centre and UNCTAD, 2007.

12 China’s global trade integration: a bonanza or a threat? EMERGING MARKETS SHARE IN WORLD OUTWARD FDI STOCK US Billions Latin America and CaribbeanAsia Source: OECD Development Centre 2007, based on Thomson Datastream (Economist Intelligence Unit). Note: Emerging countries refer to Latin American and Asian.

13 China’s global trade integration: a bonanza or a threat? Source: Ministry of Commerce of the People ’ s Republic of China, 2006.

14 1 The cognitive effect: new emerging capitalisms. The trade effect: the dark side of the boom. 2 China and India as a wake up call. 3

15 A monetary wake up call: China’s rise has had a significant impact on exchange rates… Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.

16 A monetary wake up call: China’s rise has had a significant impact on exchange rates… Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.

17 … with striking appreciation effects in some African countries Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.

18 … with striking appreciation effects in some African countries Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.

19 Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: Bl á zquez, Rodr í guez and Santiso (2006) A trade wake up call: Is China’s trade integration: a bonanza or a threat? *Arithmetic average of the following indexes: CC= and CS= where ajt and ait equals the share of item “n” over total exports of countries j (China) and i in time t.   n n jt n it aa   n n jt n n it n n jt n it aa aa 22 )()( *Value of exports to US from China in same product categories as country´s exports, as % of country´s total exports to US

20 Trade competition: Exploring export structures      nn n jt n it n n jt n it n n jt n it aa aa aa 22 )()( Conformity oftCoefficien tionSpecialisa oftCoefficien Indicators for Trade competition: Indicator for market concentration: represents the share of total exports from country i in t. CS and CC are dispersion measures of export composition. If closer to 1, potential trade competition is high. it: a n n p HH n j j              Where p ij is the market share of country j on exports of country i. Values closer to 1 indicate a high degree of product (or destination) concen- tration. Herfindahl Hirschmann Index:

21 A Trade wake up call: China competes intensively with Latin America on a global level CS and CC Other Emerging - China CRI CZE ESP HUN IDN KOR PAK PHL SLV THA BGR HRV IND JPN MYS ROM RUS SGP SVK TUR USA CS CC CS and CC Latin America - China ARG BRA COL MEX BOL CHL GTM HND PAN PER PRY VEN CS CC CS and CC Other Emerging - India BGR CHN CRI ESP HUN JPN MYS PAK ROM RUS SLV SVK THA TUR USA CS CC CS and CC Latin America - India ARG BOL BRA CHL COL GTM HND MEX PAN PER PRY VEN CS CC Source: OECD Development Centre, based on WITS Database, Note: CS and CC coefficients indicate export structure’s similarity of two partner countries.

22 Trade structure overlapping is more marked for African developing countries CS and CC East, Central and South Africa - India Ghana Madagascar Ethiopia Kenya Togo Malawi Sudan Cape Verde Mozambique Zimbabwe Cameroon Tanzania C.A.R Gambia CS CC CS and CC North and West Africa -India Egypt Morocco Cote d'Ivoire Burundi Sudan Benin Algeria Gambia Mali Mauritius Niger Nigeria Uganda Tunisia Ghana Senegal CS CC CS and CC East, Central and South Africa - China Benin Cameroon C.A.R. Gabon Gambia Kenya Madagascar Mauritius South Africa Sudan Tanzania Togo Uganda Zimbabwe CS CC CS and CC North and West Africa -China Algeria Sudan Cote d'Ivoire Egypt Mali Morocco Tunisia Burkina Faso Eritrea Senegal Ghana Niger Nigeria CS CC Source: OECD Development Centre, 2007.

23 Specialisation patterns have unevenly evolved in recent years Source: OECD Development Centre, 2007.

24 Diversification is a concern for Latin America’s competitiveness… Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.

25 Productspecialisation has increased recently in the region… Product specialisation has increased recently in the region… Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.

26 …whereas in Africa there is a larger pool of destinations Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.

27 Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics. …also accompanied by a higher concentration on specific goods

28 11,700 Km Lower transport and communication costs Access to FTA Just-in-time delivery Mexico is more competitive in manufacturing more sophisticated products which require frequent communication with the client or supplier and short reaction times. Shipping time 24 Days 160 Km 4 Days Mexico benefits from its geographic proximity to its major export markets: A wake up for reforms: The proximity to export markets

29 A wake up for reforms: Infrastructure Source: OECD Development Centre, based on CG/LA database

30 Pending reforms : the upgrade of port facilities

31 Conclusions: A Watch List  Africa and Latin America: Out of the Value-Chain Game?  The share of China’s total exports produced by foreigners has risen sharply, from 32% to 60% between 2000 and  Foreign outsourcing is becoming a major driver of India’s and China’s high tech exports, both countries moving up quickly in the value added ladder.  In 2005 for example, of China’s top 100 exporters, 53 were foreign companies and all were electronics/information technology companies.  After China: India?

32 Another Emerging Player from Asia: India’s M&A in 2006 Source: OECD Development Centre. Based on Dealogic and local press.

33 The rise on outward direct investment among emerging economies is remarkable Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.

34 …helping to the fall of cost of capital Source: OECD Development Centre 2007, based on Thomson Datastream (Economist Intelligence Unit). * Data for 2007 is estimated and includes recent deals

Thank you Based on: Javier Santiso (ed.). “The Visible Hand of China in Latin America”. OECD Development Centre Studies,