The Trade Challenge for Latin America and the Caribbean

Lima, May 20, 2015.- Back in the 1980’s, trade ties for Latin America and the Caribbean were very similar to those of East Asia - thin and focused on a single key player in the North, United States and Japan, respectively. Today, East Asia’s trade network is much denser and productive, crisscrossing among its countries and extending to the north. In contrast, Latin America’s remains narrow and dominated by the United States, followed at a very distant second by Brazil.

The World Bank’s latest flagship report for the region, “Latin America and the Rising South: Changing World, Changing Priorities” launched in Lima, provides an in-depth look at these global connections in trade and finance, and a sober assessment of their promise and trials for the region.

The global economic landscape has experienced tectonic shifts that have left the old north-south hierarchy behind. In the past four decades, the gross domestic product (GDP) of the South doubled to about 40 percent of the world’s total, the share of global trade from the South also doubled to 51 percent and its share of global capital inflows nearly tripled to 50 percent. Within a decade the expectation is that the share of the developing world in global GDP will be higher (55 percent) than that of the North.

“The rise of the South has left a noticeable mark upon the world economy. But this unquestionable impact conceals important differences among the countries of the South,” said Augusto de la Torre, World Bank Chief Economist for the region. “The differences between the wealth of connections from Asia, compared to those of Latin America, suggest that our region is still not benefitting from the virtuous circle created by integrating more with your neighbors and then with the world”.

The report finds, for instance, that between 2000 and 2012, the South’s share of global manufacture exports increased from 32 to 48 percent but most it due to China. In fact, China’s share increased by more than 10 percentage points while the share of the other top 20 manufacture exporters from the South - which include Brazil and Chile - increased by only 8 percent in total. What’s more, for some countries in the South, including Mexico, it actually decreased.

Also significant is the fact that East Asian countries participate much more actively in cross-country production networks, known as Global Value Chains (GVCs), than most Latin American countries. In fact, the report finds that Latin American countries tend to integrate to GVCs only at the beginning –as exporters of raw materials- or at the end – as manufacturers of final goods – and not in the middle, a “sweet spot” that provides the most potential growth gains.

“The initial force from the global South’s emergence -and in particularly the China-led commodity boom- brought tremendous economic and social gains to Latin America. Today, however, as that force wanes, it is more pressing for Latin American countries to become better players in this transformed landscape,” said De la Torre. “What we have learned so far is that it is not enough to have global trade or to receive foreign direct investment. There is more to be done to take full advantage of that trade and investment”.

More precisely, Latin America and the Caribbean will need to find ways to improve its human and physical capital as well as its technological capacity and business environment. To that end, the report points to three policy areas for policymakers to consider in this transformed global environment that calls for a rethinking of priorities:

- Allowing economic flexibility in labor and capital reallocations so that labor and capital can find their way into the most productive sectors.

- Learning through international trade and investment so that the region does not underutilize its cross-border commercial and financial connections with neighbors and other partners.

- Raising saving rates to help enhance trade diversification by reducing overvalued currency that makes exports less competitive.

All these crucial reforms, the report concludes, will require deft political leadership. But it argues that this irreversible change in the global economy is a unique opportunity for Latin America to unleash its growth potential once and for all.