The visible hand of China in Latin America Opportunities, Challenges and Risks Javier Santiso Chief Economist & Deputy Director OECD Development Centre Deutsche Bank Research Conference Berlin  September 13th 2007

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

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.

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

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

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

Are raw material prices facing a Chinese shock? Commodities Prices in real terms 40 60 80 100 120 140 1900 1915 1930 1945 1960 1975 1990 2005 China? Is China to blame for commodities prices? Source: OECD Development Centre. Based on Oxford Latin American Economic History Database and Thomson Datastream, 2007.

Latin America is endowed with natural resources and dependent on the commodities’ cycle LATIN AMERICA'S PERCENTAGE OF COUNTRIES' EXPORTS 10 20 30 40 50 60 70 80 90 100 Venezuela Chile Peru Argentina Colombia Brazil Latin America Mexico % of country's exports Commodities Oil Agriculture & other Source: OECD Development Centre, 2007. Based on: National Balance of Payments, 2005.

The stars have been lined up for Latin America: Asia is becoming a major growth pillar Source: World Integrated Trade Statistics (Comtrade), 2007.

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.

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

China’s global trade integration: a bonanza or a threat? EMERGING MARKETS SHARE IN WORLD OUTWARD FDI STOCK 12 Latin America and Caribbean Asia 10 8 US Billions 6 4 2 1980 1990 2000 2003 2004 Note: Emerging countries refer to Latin American and Asian. Source: OECD Development Centre 2007, based on Thomson Datastream (Economist Intelligence Unit).

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

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

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.

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.

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

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

A trade wake up call: Is China’s trade integration: a bonanza or a threat? Asian countries competition * vs. Chinese exports to US, % 10 20 30 40 50 60 70 Thailand Taiwan Indonesia Malaysia Philippines South Korea Singapore Japan Latin American countries competition* vs. Chinese main export products 0% 10% 20% 30% 40% 50% 60% México Brasil Colombia Argentina Perú Uruguay Chile Venezuela *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. å - n jt it a 2 1 ) ( *Value of exports to US from China in same product categories as country´s exports, as % of country´s total exports to US Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: Blázquez, Rodríguez and Santiso (2006)

Trade competition: Exploring export structures Indicators for Trade competition: 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. å = - n jt it a 2 ) ( 1 Conformity of t Coefficien tion Specialisa Indicator for market concentration: Where pij 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. n p HH j 1 2 - ÷ ø ö ç è æ = å Herfindahl Hirschmann Index:

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 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 CS CC CS and CC Latin America - China ARG BRA COL MEX BOL CHL GTM HND PAN PER PRY VEN CS and CC Other Emerging - India BGR CHN CRI ESP HUN JPN MYS PAK ROM RUS SLV SVK THA TUR USA 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 CS CC CS and CC Latin America - India ARG BOL BRA CHL COL GTM HND MEX PAN PER PRY VEN Note: CS and CC coefficients indicate export structure’s similarity of two partner countries. Source: OECD Development Centre, based on WITS Database, 2007.

Trade structure overlapping is more marked for African developing countries 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 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 CS CC CS and CC North and West Africa -China Algeria Cote d'Ivoire Egypt Mali Morocco Tunisia Burkina Faso Eritrea Senegal Ghana Niger Nigeria 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 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 CS CC CS and CC North and West Africa -India Egypt Morocco Cote d'Ivoire Burundi Benin Algeria Mali Mauritius Niger Nigeria Uganda Tunisia Senegal Source: OECD Development Centre, 2007.

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

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

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

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

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

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

A wake up for reforms: Infrastructure Source: OECD Development Centre, based on CG/LA database. 2007.

Pending reforms : the upgrade of port facilities

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 2005. 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?

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

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

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

Thank you Based on: Javier Santiso (ed.). “The Visible Hand of China in Latin America”. OECD Development Centre Studies, 2007. Javier.santiso@oecd.org