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Asia, Latin America Help Drive Global Growth

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Asia’s growing importance to Latin America’s growth became particularly evident during the recent financial crisis.

BY LUIS ALBERTO MORENO

It’s with humbleness and certain optimism that we are witnessing that the world’s trade routes are now changing direction and heading “South-South.”

This new “Latin American Decade” should be built in part on the increasing relationship with Asia. Between 2000 and 2009, Asia’s share of Latin American trade has more than doubled from 9 percent to approximately 20 percent.

This booming trade, driven by countries such as Japan, Korea and China has led Asia to overtake the European Union among the region’s top trade partners, and to be the second one to the United States.

Investments flows have also been showing strong dynamism and greater diversification than trade flows, covering areas as diverse as mining and manufacturing.

This growing integration with Asia is being strengthened and consolidated by the first building blocks of an institutional framework capable of reducing investments and trade costs.

Japan has signed a free trade agreement (FTA) with Mexico and his negotiating with Peru. Korea has FTA with Chile and negotiating with Mexico and China has FTAs with Chile, Peru and Costa Rica. More FTA’s are being negotiated.

Among the region’s relationships with Asia, China clearly stands out for the speed with which trade flows were built. In the space of ten years, two economies that barely traded, let alone exchanged investments, have become major trade partners.

REASONS FOR TAKE-OFF

The surge in Asian demand for Latin American’s exports helped a number of countries in the region to turn around their economies and resume growth, consolidating a recovery that had been initiated by more than a decade of market oriented reforms and sounder fiscal and monetary policies.

Asian contribution to the region’s growth went beyond the direct impact of exports and was also felt trough its contribution to the growth of the world economy.

Asia’s growing importance to the region’s growth became particularly evident during the recent financial crisis and ensuing worldwide recession.

The effectiveness of some China’s countercyclical policies was immediately felt in the region, providing a much welcomed counterbalance to the slump in the US and European markets. (…)

ASIA AS AN ESSENTIAL PARTNER

China has become the second-largest luxury goods market in the world, consuming 25 percent of luxury goods. China already has more millionaires than the United Kingdom – and the average age of those millionaires is an enviable 43, according to HSBC.

Just like with Japan earlier on, as their income rises Chinese and Korean consumers are becoming more health-conscious, environmentally-sensitive and brand-oriented.

There is uniqueness in every market and Asia has a scale that is unparalleled. Latin American entrepreneurs must therefore acknowledge that quality is increasingly a critical consideration.

These phenomenon entail untapped opportunities for our goods and services, especially high-quality ones: from our natural and unique grass fed beef, renowned wines, and specialized coffees to the high-quality services of our architects and engineers, both Asia and Latin American & the Caribbean stand to gain from more trade between them.

Simultaneously, foreign direct investment from Asia in Latin America continues to expand, especially in areas such as manufacturing, energy and transportation.

The Chinese market has already recognized this dynamic:

  • While Chinese companies are producing cars in Uruguay, Chilean architects are selling anti-seismic architectural services to China;
  • While Chinese companies are investing in Brazil’s energy sector, Mexican companies are producing consumer goods and pastries in China geared to the local market;
  • While Chinese companies are investing in Argentine rail transportation, Brazilian companies are developing highly sophisticated aircraft components, in China, geared towards the entire Asian markets;
  • While Huawei is increasing its investments in telecommunication services in Costa Rica, companies located in this country are exporting highly value added technological products to China, running a significant trade surplus.

Services could also be an immense area of opportunity. There is an increasing interest in the tourism industry, posing significant economic opportunities for both regions.

In 2009 alone, there were 47.66 million Chinese tourists visiting locations outside China. And we encourage them to visit Caribbean resorts.

Latin America and the Caribbean also represent an important logistical platform into the US and other markets.

Countries such as Panama, Mexico and others in the Central American and Caribbean Region are significant locations to develop trade and investment platforms to target markets in the western hemisphere.

In addition, there are interesting prospects for investment in the development of Base of the Pyramid markets.

The Base of the Pyramid market in Latin America and the Caribbean is composed of 70 percent of the population—that live on less than US$300 per month.

The size of the market is $500 billion per year and remains largely untapped, with huge unmet demands for price-conscious-high-quality goods and services. (…)

GREEN OPPORTUNITIES

We (…) have plenty to offer to Asia in terms of innovation and know-how in [one] key area of Green Growth: Sustainable agriculture and conservation.

Brazil is a significant example: over the past 30 years only 20 percent more land has come into agricultural use but production has risen by 150 percent.

Brazil was a net importer of food in 1973; according to some estimates it is heading to become the largest global exporter of agricultural products by the year 2020.

At the same time, Brazil is drastically pushing forward strong sustainability measures, especially to protect the Amazon jungle. As a result in 2008-2009 the deforestation rate of the Amazon recorded the lowest level in two decades.

There is significant accumulated know-how in Latin America on highly efficient sustainable agriculture techniques; and the pace of innovation keeps accelerating.

Embrapa, Brazil’s agricultural research institute, has now the world’s only laboratory deploying nanotechnology for agriculture; Braskem, a Petroquemical Brazilian firm, is about to open the World’s first green plastic plant, by developing ethylene from bioethanol. Uruguay has now the most advanced traceability system for the beef industry in the planet, allowing a customer to determine the precise origin of each piece of beef.

Sustainable mining is other area where South America has much to offer in terms of know how. Venezuela, for instance, developed advanced techniques to process heavy oil from the Orinoco Basin; without, it would not be possible to take advantage of these resources.

But the recent history of commodities in Latin America is not only about raw materials, it is about how to turn natural endowments into strong competitive advantages through innovation and highly effective value chains.

There is room for Asia and others to join and take advantage of Latin America’s strong knowledge and technological innovation in these and other areas. (…)

SOUTH-SOUTH DRIVES GROWTH

In conclusion, all the indications are that this shift in “South-South” economic power is not some recession-driven blip. It seems certain that emerging markets will not only drive recovery, but also lead global growth in the generation ahead.

Nor is this simply a question of economics. This “South-South” transference of economic power is increasingly driving a rebalancing of the centre of gravity in politics and culture too.

The pendulum will not swing back from this globalized world. We have no choice but to face up to the reality and opportunity that globalization brings, to forge fresh alliances, as today, and work together if we are to deliver economic and social development. (…)

Those people who have the deepest understanding of both emerging and mature markets will be in the highest demand. (…)

Luis Alberto Moreno is president of the Inter-American Development Bank. This column is based an excerpt of his speech at the China-Latin America Summit in Chengdu, China October 21, 2010.

 

 

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