The visible hand of China in Latin America Opportunities, Challenges and Risks Javier Santiso Chief Economist & Deputy Director OECD Development Centre

The visible hand of China in Latin America

Opportunities, Challenges and Risks

Javier Santiso

Chief Economist & Deputy Director

OECD Development Centre

London Business SchoolLondon June 2007

2

11 The cognitive effect: new emerging capitalisms.The cognitive effect: new emerging capitalisms.

The trade effect: the dark side of the boom. The trade effect: the dark side of the boom. 22

China and India as a wake up call.China and India as a wake up call.33

3

China: extraordinary or back to normal?China: extraordinary or back to normal?

GDP in U$ (% of World GDP, 2005)

0 10 20 30

Canada

Spain

Italy

China

France

U. Kingdom

Germany

Japan

USA

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).

China GDP (% of world total)

0

5

10

15

20

25

30

35

1500

1600

1700

1820

1870

1900

1950

2001

2045

Source: OECD Development Centre

Based on: International Financial Statistics and Angus Maddison, 2006.

4

EmergingAsia9.1%

GDP share of world output (WEO, 2005)

EU30.3%

US28.0%

Korea&Japan12.0%

China5.0%

The cognitive impact: The emergence of The cognitive impact: The emergence of new capitalisms. Center and Periphery new capitalisms. Center and Periphery

rebalanced…rebalanced…

LatAm4.7%

Asia represents more than one fifth of world output.

5

China has doubled its GDP in 8 years…China has doubled its GDP in 8 years…without the help of Money Doctors!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)

GDP in constant prices

0

2000

4000

6000

8000

10000

12000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

U$ M

illio

ns

Brazil China Korea

Japan MexicoChina

6




7

Are raw material prices facing a Are raw material prices facing a Chinese shock?Chinese shock?

Source: OECD Development Centre.

Based on Oxford Latin American Economic History Database and Thomson Datastream, 2007.

Is China to blame for commodities prices?

Commodities Prices in real terms

40

60

80

100

120

140

1900 1915 1930 1945 1960 1975 1990 2005

China?

8

Latin America is endowed with natural Latin America is endowed with natural resources and dependent on resources and dependent on the the

commodities’ cyclecommodities’ cycle

Source: OECD Development Centre, 2007.

Based on: National Balance of Payments, 2005.

LATIN AMERICA'S PERCENTAGE OF COUNTRIES' EXPORTS

0102030405060708090

100

Venezuela Chile Peru Argentina Colombia Brazil LatinAmerica

Mexico

% o

f co

untr

y's

export

s

Commodities

Oil

Agriculture & other

9

Whereas exports with the US are Whereas exports with the US are stable, countries are increasingly stable, countries are increasingly

sensitive to Chinasensitive to China

Source: OECD Development Centre, based on IMF Trade Statistics, and OECD Trade Directorate, 2007.

EXPORTS TO U.S. AS PERCENTAGE OF TOTAL EXPORTS 1995-2005

0

10

20

30

40

50

60

70

80

90

Argentina Brazil Chile Mexico China India Indonesia Korea Philippines

Expo

rts

to U

S as

% o

f Tot

al

.

1995 2005

EXPORTS TO CHINA AS PERCENTAGE OF TOTAL EXPORTS1995-2005

0

5

10

15

20

25

Argentina Brazil Chile Mexico India Indonesia Korea Philippines

Expo

rts

to U

S as

% o

f Tot

al

. 1995 2005

Latin America Asia

Latin America Asia

10

Latin America is tackling its Latin America is tackling its vulnerability to US slowdown by vulnerability to US slowdown by

diversifying exportsdiversifying exports

Source: OECD Development Centre and UNCTAD, 2007.

LATIN AMERICA: EXPORTS TO CHINA AS PERCENTAGE OF TOTAL EXPORTS

0 2 4 6 8 10 12 14

Mexico

Ecuador

Venezuela

Colombia

Brazil

Argentina

Peru

Chile

Percentage

1999 2005

11




12

Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research

Source: Blázquez, Rodríguez and Santiso (2006)

A trade wake up call: Is China’s trade A trade wake up call: Is China’s trade integration: a bonanza or a threatintegration: a bonanza or a threat??

Asian countries competition*

vs. Chinese exports to US, %

010203040506070

Thailand

Taiw

an

Indo

nesia

Mal

aysia

Philipp

ines

Sout

h Ko

rea

Sing

apor

e

Japa

n

Latin American countries competition* vs. Chinese main export products

0%

10%

20%

30%

40%

50%

60%

Méx

ico

Brasil

Colom

bia

Argen

tina

Perú

Urugu

ay

Chile

Venez

uela

*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

njt

nit aa

2

11

n

njt

n

nit

n

njt

nit

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

13

Diversification is a concern for Latin Diversification is a concern for Latin America’s competitiveness…America’s competitiveness…

Latin AmericaHerfindahl-Hirschmann Index by Destination

00.10.20.30.40.50.60.70.80.9

Mex

ico

Beliz

e

Ven

ezue

la

Hon

dura

s

Gua

tem

ala

Ecua

dor

Pana

ma

Cos

ta R

ica

Col

ombi

a

Boliv

ia

Nic

arag

ua

Para

guay

Peru

Guy

ana

Dom

inic

a

Uru

guay

Chi

le

Arg

entin

a

Braz

il

HH

Ind

ex

2000 2005

Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.

14

ProductProduct specialisation has increased specialisation has increased recently in the region…recently in the region…

Latin AmericaHerfindahl-Hirschmann Index by Product

0.000.100.200.300.400.500.600.700.80

Ven

ezue

la

Ecua

dor

Beliz

eT.

and

Toba

goD

omin

ica

Pana

ma

Para

guay

Chi

le

Boliv

ia

Guy

ana

Peru

Gua

tem

ala

Col

ombi

a

Uru

guay

Nic

arag

ua

Mex

ico

Hon

dura

s

Cos

ta R

ica

Latin

Am

eric

aArg

entin

a

Braz

il

HH

Ind

ex

2001 2005

Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.

15

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: A wake up for reforms: The proximity to export marketsThe proximity to export markets

16

Pending reforms : the upgrade of port Pending reforms : the upgrade of port facilitiesfacilities

World Bank

US$/TEU

CMPCH Index

LSU Index

Singapore 1 0.38 0 0.33 2 6.76 6.72 117 NA NAHong Kong 0 0.25 0 0 NA 6.38 5.46 NA NA NATaiwan 0.5 0 0 0 NA 5.18 4.49 140 163 NAJapan 0.75 0.13 0.89 1 NA 5.16 5.16 250 202 NAMalaysia 0 0.25 0 0.38 7 4.95 5.76 75 NA NASpain 0 0.06 1 0 4 4.88 6.08 200 105 NAKorea 0 0.38 0 0 NA 4.12 5.22 NA NA NAThailand 0.5 0.63 0 0.38 4 3.98 5.12 93 NA NAArgentina 0 0.13 0 1 7 3.81 4.52 NA 139 NAVietnam 0 0 0 0.5 NA 3.81 5.02 NA NA NAChile 0 0.25 0.43 1 3 3.76 6.05 202 100 NAChina 0.5 0 0 0 7 3.49 4.44 110 NA NAIndonesia 1 0.06 0 0.38 5 3.41 4.06 NA NA NAMexico 0.5 0.38 0 1 4 3.34 2.61 NA NA NAVenezuela 0 0 1 1 11 3.28 3.63 NA NA NAEl Salvador 0 0 0 1 4 2.95 2.3 NA NA 61Brazil 0.5 0.75 0 1 10 2.92 4.45 328 292 NAPeru 0.5 0 0.5 1 7 2.88 3.32 NA 142 NAIndia 0 0 0 1 NA 2.79 4.28 NA NA NAPhilippines 0.5 0 0 0.38 7 2.79 3.51 118 NA NAEcuador 0 0 0.43 1 15 2.63 3.65 NA 139 NACosta Rica 0 0 0 1 4 2.46 3.28 NA NA 68Colombia 0.5 0.13 0.5 1 7 2.26 1.88 NA NA NABolivia NA NA NA NA 9.5 1.61 4.38 NA NA NAUruguay 0 0 0 1 5 NA NA NA NA NANA: Not AvailableSource: Data for the first 4 columns was kindly provided by Carsten Fink, Aaditya Mattoo, and Ileana Cristina Neagu* (2002).

Container Handling ChargesCooperative Agreements

Index

Median Clearance time (Days)

Port Efficiency

Index (1-7)Crime Index

(1-7)

Country

Cargo Handing

Restriction Index

Mandatory Services

Index

Price Fixed Agreements

Index

17

Conclusions: A Watch ListConclusions: 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?

18

Another Emerging Player from Asia: Another Emerging Player from Asia: India’s M&A in 2006India’s M&A in 2006

Source: OECD Development Centre. Based on Dealogic and local press.

Target Nationality Acquirer Deal Value ($m)

Corus UK/NL Tata Group 7700Oil & Gas Assets (Campos Basin) Brazil Oil & Natural Gas Corp 1670Omnimex de Colombia Colombia Oil & Natural Gas Corp: China Group 850Oil & Gas Assets (Brazil) Brazil ONGC Videsh 820Greater Nile Petroleum (25%) Sudan Oil & Natural Gas Corp 783Glaceau (30%) US Tata tea 677Shell Development Angola Angola Oil & Natural Gas Corp 600Oil & Gas Assets (Syria) Syria Oil & Natural Gas Corp: China Group 581Betapharm Arzneimittel Germany Dr Reddy's Lab 572Hansen Transmissions Belgium Suzlon Energy 562Eve Holding Belgium Suzlon Energy 548Terapia Rumania Ranbaxy 324Total 15687

RECENT INDIAN INVESTMENTS 2006(EXCLUDING CORUS-TATA DEAL)

9%

22%

43%

26%

USEurope

Latin AmericaAfrica

RECENT INDIAN INVESTMENTS

4%

61%

22%

13%

US

Europe

Latin America

Africa

19

The rise on outward direct investment The rise on outward direct investment among emerging economies is among emerging economies is

remarkableremarkable

Outward Foreign Investment by country1999-2007

-5000

0

5000

10000

15000

20000

25000

300001999

2000

2001

2002

2003

2004

2005

2006

2007

2007

U$ M

illions

Brazil China

India Russia

Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.

20

……helping to the fall of cost of capitalhelping 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

Total LatAm outward FDI vs LatAm spreads

05000

100001500020000

250003000035000

4000045000

2003 2004 2005 2006 2007

US

$ m

illi

on

s

0

50

100

150

200

250

300

350

400

450

500

Outward FDI Spreads

Thank you

Based on:

Javier Santiso (ed.). “The Visible Hand of China in Latin America”. OECD Development Centre Studies, 2007.

[email protected]

Documents

The visible hand of China in Latin America Opportunities, Challenges and Risks Javier Santiso Chief Economist & Deputy Director OECD Development Centre