The 1990s were a time of economic optimism for much of Latin America. Incomes were rising, industries were becoming more competitive on the global stage and much of the region was gradually building up an advanced industry base. Today, at least with respect to advanced industry competitiveness, the picture is less than rosy. The region has lost global market share in advanced industries, losing out on the jobs, exports and incomes associated with that. Some of that lost opportunity stems from the failure of many nations in the region to make the right economic and trade policy reforms. But much of it comes from China’s mercantilist trade and economic policies which made it virtually impossible for Latin America to grow its advanced industries. China’s unfair growth sucked the air out of regions nascent advanced industry growth shoots, with the result that the region is now extremely weak.
The Hamilton Center on Industrial Strategy at the Information Technology and Innovation Foundation examined national changes in industry concentration and global shares of output for seven advanced sectors that the Center has aggregated into the Hamilton Index of Advanced-Technology Performance: pharmaceuticals; electrical equipment; machinery and equipment; motor vehicle equipment; other transportation equipment (e.g., shipbuilding, aerospace, railways); computer, electronic, and optical products; and information technology (IT) and information services.
Using OECD data available on seven Latin America nations (Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico and Peru) that collectively account for around 90% of the region’s GDP, the data shows that the region’s relative performance in advanced industries is weak and declining, especially over the last 15 years.
The index uses a key indicator to measure of how important these industries are to each economy. The location quotient (LQ), which is calculated as an industry’s share of national GDP divided by its share of global GDP, provides a global benchmark measure of a country industrial concentration. An LQ of 1 means the country’s production in an industry is proportionally the same as the global average; an LQ greater than 1 means the country’s output is more than the global average relative to the size of its economy; and an LQ less than 1 means the country’s relative concentration is lower than the global average.
In 2018 Latin America’s LQ for the seven advanced industries was 0.57, meaning that the output of these industries as a share of the region’s economy is a bit more than half the global economy average. For comparison the United States LQ was 0.94, China’s 1.33, Japan’s 1.44, and Germany’s 1.74.
These industries became a smaller share of the Latin American economy, declining from their peak of 0.73 in 2002, right after China joined the World Trade Organization. In part because of its adjacency to the United States, Mexico leads the region with an LQ of 0.96 (almost at the global average), followed by Brazil (0.56), Costa Rica (0.41), Argentina (0.36), Chile (0.28), Colombia (0.23), and Peru (0.19).
In terms of industries, the region is above the global average on only one, motor vehicles, with an LQ of 1.17. While the region’s GDP is 5.3% of global GDP, its share of global motor vehicle output is 6.4%. But this strong performance is all because of Mexico, which produces 4.3% of global vehicle output, while accounting for just 1.4% of global GDP. In fact, Mexico has a location quotient in this industry 5.5 times larger than the United States’ LQ.
Other industries in the region are weaker. The region’s LQ for biopharmaceuticals is 0.54, with Argentina leading (0.79). Its LQ for electrical equipment is 0.50, with Mexico leading (0.83). Machinery and equipment is even weaker with an LQ of 0.44 (Mexico leading at 0.59.) IT and other Information services have an LQ of 0.41, with Costa Rica leading at 1.07. Both other transportation equipment and computer and electronics are both 0.40, with Chile leading in the former (0.73), and Mexico in the latter (1.05).
In terms of trends from 1995 to 2018, the pattern is diverse. Costa Rica’s economy became more specialized in advanced industries, growing a whopping 129%, from 0.18 to 0.41. Chile and Mexico were next, both increasing 24%. Peru increased 14%, albeit only to an LQ of just 0.19. Argentina, Colombia, and Brazil all become less specialized in advanced industries, with their LQs declining 31, 25, and 22%, respectively. Overall, the region became 8.4% less specialized in advanced industries. The decline since 2005 (after China’s growth had begun to accelerate) is even sharper, with the region’s LQ falling 19%, with losses of 38% in Brazil and Colombia.
When it comes to individual industries, the IT and other information services saw the biggest decline, with the region’s LQ falling from 0.76 to 0.44. But this was not principally due to the U.S. gain, which increased its LQ 24% from 1.08 to 1.35. Rather, the rapid rise of sector in India (LQ increased 73% to 1.89) and Eastern Europe (LQ increased 188% to 1.25) shows that, with the right policies, less developed nations can thrive in this sector. Within the region, Costa Rica was the star, with its LQ increasing an amazing 2,208%, more than another other nation in the world. But every other nation in the region saw declines of between 39 and 57% in their LQs.
The pharma LQ fell in the region by 39%, with the steepest decline in Argentina (49%). Machinery and equipment also became less important (LQ falling 12%), with Costa Rica and Peru more than doubling their LQ’s, but Colombia and Brazil’s LQ falling 59 and 26% respectively. Computers and electronics fell by 8%, with the industry becoming a smaller share of all the economies except in Peru (increased 14%) and Chile where it almost doubled, albeit to only 0.18.
The other transportation equipment sector changed little, with Costa Rica and Argentina seeing large declines, and Chile and Peru seeing large increases. Electrical equipment became a bit more important in the region (LQ increasing by 6%), but that growth was driven by Chile and Mexico, with the other countries either stable or falling.
The region performed best in motor vehicles, in part because it is the least traded of all the seven industries and local demand is more likely to be created by local supply. The region went from slightly less specialized than the global average in 1995 (LQ of .92) to 20% more specialized in 2018 (LQ of 1.2), although as noted this was all due to Mexico’s growth.
What explains the region’s poor performance in growing, or even retaining, its global competitiveness in advanced industries, other than the motor vehicle sector? The biggest factor appears to be China. After China joined the World Trade organization in 2001, it became the global hub for many industries, including machinery, electrical equipment and electronics. In electrical equipment, China went from producing 7.9% of global output in 2000 to 34% in 2018. During the same period, Latin America’s share fell from 3.9 to 2.8%. In machinery and equipment, China share swelled from 6.6% to 25%, while the region’s share shrank from 3.3% to 2.4%. And in computers and electronics China went from 6.2% to 25%, while the region fell from 4.5% to 2.2%.
If these seven Latin American nations region had captured just 20% of China’s increase in production in these three industries (most of which was for exports to the rest of the world, rather than domestic consumption), Latin America’s overall location quotient would risen to equal the United States, rather than fall to 0.58. But that was not to be, as China, with its extensive suite of unfair mercantilist policies, particularly currency manipulation in the 2000s, and forced localization and tech transfer, IP theft, and massive subsidies over the entire period, became a black hole of investment attraction, drying up opportunities for other parts of the world.
To be fair, many Latin American nations did not take the steps many nations did to reform their tax and regulatory systems (including intellectual property protection), education systems and infrastructures (including digital infrastructures) to lead in industries like IT and information services and biopharmaceuticals. Or if they did, they are backsliding now, with the rise of leftist, anti-business governments in nations like Mexico, Colombia, and perhaps Brazil.
Going forward the region risks devolving into a colonial dependency, shipping raw materials to China while hosting busloads of Chinese tourists, all the while consuming more and more Chinese advanced goods. That’s not the future most in Latin America would wish.
If Latin America wants to avoid this fate, it needs to make a key decision: does it want to look east to China or north to the United States. The United States is leading the world in efforts to get China to roll back its unfair, mercantilist trade and economic policies. But that task will be much harder if the region sides with China or avoids the fight altogether and sits on the sidelines. Moving to a world with much closer trade and economic integration with the United States will be one in which the region will at least have a chance to grow its advanced industries.
Robert D. Atkinson is President of the Information Technology and Innovation Foundation in Washington, D.C.