Review: Latin America and Shifting Wealth
Latin America and Shifting Wealth is part of the Latin American Economic Outlook 2014, published jointly by the OECD (Organization for Economic Co-operation and Development), CAF (Development Bank of Latin America) and ECLAC (Economic Commission for Latin America and the Caribbean) (Latin American Economic Outlook 2014). In this chapter, the author discusses the economic growth of emerging economies, with special emphasis on China, the role played by Latin America in that growth and the options available for Latin America to improve its own possibility to achieve economic growth.
As the main features of the global wealth shift towards emerging economies, the author emphasizes the importance of positive demographic dividend of those economies, the role of middle class, and the rise of China as the leader of the shift. At the same time, he rightly points out that neither the demographic dividend nor a skilled middle class are the exclusive criteria for growth. They are just some of the favorable conditions and there are exceptions like China, which has shown development despite having an unfavorable demographic trend. China’s growth is attributed to its investment in labor intensive sectors without diminishing the importance of agriculture and educating its workforce in knowledge and technology based industries. In the second phase of the wealth shift, China has made domestic demand drive its economic growth, restricting Latin America in the process to be a mere supplier of raw materials to facilitate the growth.
Then the author proceeds to explain the importance of Latin America in enabling the growth of Asian majors led by China and the setbacks faced by the region due to the global wealth shift. Though the countries rich in natural resources have performed well by exporting their raw materials to China, they are under the threat of losing their market when China diversifies is economy to other sectors. South American countries, highly dependent on natural resource exports are in higher threat, Central American countries have a few labor intensive industries while Mexico has well sophisticated businesses like automobiles and chemicals. However, the author offers hope to Latin America by saying that countries like India can occupy the void left by China and serve as suitable markets to their exports.
Next the focus is thrown on the second phase of wealth shift. With China turning towards high value added goods and services, the dependence on Latin American raw materials has reduced. According to the author, even if the region tries to specialize itself in manufacturing industries, it has to face competition from other emerging giants like India and South Africa. So he offers a solution to this problem. He wants Latin America to diversify its economy, intensify regional trade and create value addition in its production chain. Sole dependence on natural resources can eventually stagnate an economy when the resource is no longer in demand or when it forces the economy to concentrate only on that particular resource due to huge global demand. The regional trade agreements currently in existence are based solely on political considerations rather than on trade complementarities in the region. The natural resources of South and Central Americas are very different and provide a huge scope for intra-regional trade. He wants them to be exploited well.
The diversification strategy offered by the author is also very interesting. He wants the Latin American region to focus on sectors that have high export potential but are not actively exported, sectors which closely match the countries’ capabilities and sectors in which China may not be a competitor. Though this is one model, similar models can be adopted by different countries of the region depending on their economic and social requirements. For value addition in production chain, the author wants the region to focus on its agricultural and services sector, since manufacturing sector may face a stiff competition from other Asian developing countries. Finally the author concludes by suggesting a public private partnership for investing in skill development, acquisition of technical and knowledge based assets and designing and implementing appropriate policies for economic improvement of the Latin American region.
Though this chapter perfectly pictures the current state of affairs in the economy of Latin America and suggests a possible future course of action, it has left a few questions unanswered:
Latin America is advised to concentrate on value addition in services rather than in manufacturing sector as it may face competition from countries like India in labor intensive industries. However India is not seen as a threat in services sector by the author. But in reality, India too is in very nascent stage in manufacturing involving skilled labor, and is well established in services sector. Similarly China too has been able to achieve its robust growth by focusing on manufacturing first and then on knowledge intensive services sector. Is it still right for Latin America to overlook manufacturing and take up services sector development?
Educated human capital is an asset to any emerging economy. Despite having a good proportion of middle class population, why is Latin America finding it difficult to tap the potential? Is it because the government is not encouraging entrepreneurship and the prevalent social unrest in many of its countries (Arias)?
Works Cited
OECD, CAF and ECLAC. Latin American Economic Outlook 2014: Logistics and Competitiveness for Development. Paris: OECD Publishing, 2013. Print.
Arias, Oscar. Culture Matters – The Real Obstacles to Latin American Development. ForeignAffairs.com, Feb 2011. Web.
