China and Latin America: rewards and risks Kevin P. Gallagher Global Development Policy Program Department of International Relations Boston University

Outline: One Point, Five Questions LAC trade/investment with China has real benefits: –New export market for LAC commodities –New investment destination for Chinese finance –Price effect on LAC commodities –Cheaper import prices for manufactures and consumers Five Questions: –How long will Chinese demand last and in what form? –What are the implications for competitiveness and industrialization? –How will employment and environment be effected? –Will LAC channel the benefits to productive use? –What can LAC learn from China?

Approx. $75b in 2011 ($4.2b in 2000) 11.7 percent of all LAC exports More than 25% of China’s commodity imports Source: Author’s calculations based on United Nations commodity Trade Statistics, 2012

Source: Author’s calculations based on United Nations commodity Trade Statistics, 2010

Source: Author’s calculations based on United Nations commodity Trade Statistics, 2012

The New Banks in Town: Chinese Finance in Latin America

LAC’s (new) largest creditor

Chinese Development Bank, Export-Import Bank of China and a few others have provided $75 billion (USD) of loan commitments to Latin American governments since 2005

Loans to sectors that get little finance

Pay a premium and hire the Chinese

The China Hedge

What about the Longer-Run Future? Will Chinese demand and prices continue? Competitiveness and De-industrialization? Impact on employment and environment? Will LAC channel China benefits productively? What can LAC learn from China?

Chinese Demand?

Sources: BP Statistical Review of World Energy 2010; and World Bank.

Note: Apparent consumption = Production + Import -Export Sources: Iron Ore Statistics 2010 (UNDP); and World Bank.

Notes: Apparent consumption for China, reported consumption for Japan and the U.S. Sources: International Copper Study Group; and World Bank.

Note: Soyabean consumption per capita is domestic supply quanitity divided by total population. Sources: Food and Agriculture Organization (FAO); and World Bank.

Competitiveness? Resource Curse?

Rising Wages in China

Source: updated from Gallagher, Kevin P., and Lyuba Zarsky (2007), The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley. MIT Press.

De-Industrialization in Brazil? Source: Financial Times, 2011

Jobs and Environment

Source: UN FAO Commodity Price Statistics, April 1, 2011

AMAZON SOY PRODUCTION 1990 Source: del Carmen, Maria Vera-Diaz, Robert K. Kaufmann, Daniel Neptstad, and Peter Schlesinger (2008), “An Interdisciplinary model of soybean yield in the Amazon Basin: The Climatic, Edaphic, and Economic Determinants,” Ecological Economics, 65, 2,

AMAZON SOY PRODUCTION 2005 Deforestation: 528,000 km 2 Mato Grosso 40% Source: del Carmen, Maria Vera-Diaz, Robert K. Kaufmann, Daniel Neptstad, and Peter Schlesinger (2008), “An Interdisciplinary model of soybean yield in the Amazon Basin: The Climatic, Edaphic, and Economic Determinants,” Ecological Economics, 65, 2,

Will LAC Channel Channel China benefits? Stabilization funds Development banking, SWFs, and endogenous innovation Environmental protection

WHAT CAN LAC LEARN FROM CHINA?

China’s Neo-developmentalism and Mexico’s Neo-liberalism Macro/Factor side China Undervalued exchange rateUndervalued exchange rate Abundant supply of credit to local firms, at very “competitive” interest rates A public funded national innovation system, which has contributed to reduce the costs and risks of R&D Major public investment in human capital A pragmatic enforcement of IPRs Diaspora venture capital Mexico Tendency to overvalue exchange rate Very low levels of credit or support to domestic firms Very poor national innovation system Passive approach to IPRs and FDI

Mexico’s Neo-Liberalism Micro/Product Side Mexico ‘Horizontal’ policy that favors foreign firms –(exchange rate plus maquila programs) –No indigenous innovation Rapid liberalization of markets Reliance on low wage assembly operations Passive “quantity over quality” approach to FDI China Sector targeting: e.g. semiconductors, automobile and software Firm targeting: “National Champions” and “indigenous innovation” “dual track” approach to liberalization that combines state support and gradual, experimental liberalization Proactive approach to FDI and learning in key sectors

World Development Indicators, 2012 Upgrading for Growth?

Political Economy Implications

Politics

Brazil and China: the political economy of the tricky Export expansion, employment decline in primary sector, environmental degradation and associated activism Export contraction and employment decline in urban manufacturing centers Some positive response –Leveraging Chinese demand to climb the value chain –Stabilization fund –BNDES industrialization strategies –Environment?

Lessons for Policy LAC could learn how to be more of a strategic globalizer from China, and build on new innovations of its own LAC innovations –Stabilization funds –Environmental protection* China –Focus on industrialization and modern services Leveraging location-specific assets Innovation and science policy –Coalitions for global economic governance