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China and the Latin America Commodities Boom: A Critical Assessment

 

The text below is composed of short excerpts from Kevin P. Gallagher and Roberto Porzecanski’s “China and the Latin America Commodities Boom: A Critical Assessment” (Political Economy Research Institute, 10 February 2009).  The full text of “China and the Latin America Commodities Boom” is available (in PDF) at <www.peri.umass.edu/fileadmin/pdf/working_papers/
working_papers_151-200/WP192.pdf
>. — Ed.

INTRODUCTION: China Trade: Just What the Doctor Ordered?

Before the current crisis, there is a polarization of views on China’s impact in Latin America.  Some argued that the future of Latin American economic development is a bright one and China was to thank for it.  Others saw China as putting Latin America back into a world of primary product dependency and fiercely outperforming Latin America in global manufacturing markets.  We examine these claims in this paper and conclude that the latter claim is closer to the truth but far from certain.

In a special report devoted to “China’s Thirst for Resources”, The Economist magazine argued that China’s growth provides an unparalleled opportunity for Latin America (and Africa):

African and Latin American economies are growing at their fastest pace in decades, thanks in large part to heavy Chinese demand for their resources.  China’s burgeoning consumption has helped push the price of all manner of fuels, metals and grains to new peaks over the past year.  Even the price of shipping raw materials recently reached a record.  Analysts see little prospect of an end to the boom; the prices of a few commodities have fallen on the back of America’s worsening economic outlook, but others, including oil, wheat and iron ore, continue to set new records.  China, with about a fifth of the world’s population, now consumes half of its cement, a third of its steel and over a quarter of its aluminum.  Its imports of many natural resources are growing even faster than its bounding economy.  Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years (The Economist 2008: 3).

The opportunities that China’s rise presents have also been highlighted in academic circles.  A few examples will illustrate this point.  The majority of studies on the issue of China’s impacts on LAC economies have been conducted by international financial institutions.  Indeed, the most comprehensive assessments have been done by the World Bank, the Organization for Economic Cooperation and Development (OECD), and the Inter-American Development Bank (IDB).  These studies share the perspective that China’s rise has been an important engine of Latin American growth.

For example, a World Bank report argued that “the rising correlation between the growth of the two Asian economies [China and India] and LAC economies (with the exception of Central America and the Caribbean) seems to have been mainly driven by demand externalities and higher prices for commodities where LAC’s comparative advantage lies” (Lederman, Olarreaga, and Perry 2006).  Similarly, Blázquez-Lidoy, Rodríguez and Santiso argue that “even when trade is concentrated in a small basket of commodities, China’s strong demand for raw materials is good news for Latin America.  In economic terms, this event could be considered as a positive demand shock.  Even more, there is a positive impact on the region, even though direct trade with China does not rise” (Blázquez-Lidoy, Rodríguez, and Santiso 2006).

Finally, a landmark study conducted jointly by the Inter-American Development Bank and the David Rockefeller Center for Latin American Studies at Harvard University also captured this optimistic view:

China’s 1.3 billion people mean 1.3 billion potential consumers.  Aggregate consumption in China is relatively low and bound to rise with growing levels of national income.  Many Latin American countries are well positioned to supply the Chinese market with agricultural products, processed food, and beverages.  For example, Argentina and Brazil have found an important market in China for their agro-food industries.  As Chinese incomes grow, consumer tastes should also diversify, offering growth opportunities for exports such as wines, coffees, meats, fruits, and vegetables (some of which can exploit the inverted seasons of North-South temperate zones.)  China’s expansion has fueled strong external demand for nonagricultural raw and processed materials as well.  Latin American countries are exploiting this opportunity.  For example, Chile has found an important market in China for copper, ores, wood, pulp, and slag and ahs, while Brazil is selling iron ore and pellets (Devlin, Estevadeordal, and Rodriguez-Clare 2006).

The other side of the coin of these optimistic assessments regarding the positive impact of China’s growth in Latin America has been a concern about the fact that China is accentuating LAC’s dependence on primary commodities which in turn could exacerbate long held concerns in the region over commodity dependence.  These concerns are rife throughout the literature.  For example, The World Bank says:

The move towards natural-resource-intensive products implies a more concentrated export bundle in LAC.  This raises concerns regarding the vulnerability of LAC to future (negative) terms of trade shocks, but more importantly there is also a feeling within LAC that the gains associated with natural-resource-intensive exports are not being widely spread.  The economic, but also political, sustainability of this specialization in natural-resource-intensive sectors depends on the extent to which gains are shared with owners of other factors of production (Devlin, Estevadeordal, and Rodriguez-Clare 2006).

This concern is also shared by Lall and Weiss, who argue that:

LAC faces a more serious threat over the long term: the export specialization of most of LAC is heavily biased towards resource-based primary products, with a very small share of technology-intensive products.  Chinese growth may thus constrain its ability to diversify into more dynamic and technologically advanced products, with potential harm to its dynamic comparative advantage (Lall and Weiss 2005).

This paper builds on this previous work by looking deeper at both the nature of LAC exports to China and the extent to which a possible shift toward primary and resource-based products is of concern to the region.

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Conclusion

In this paper we sought to provide a more critical analysis of China’s impact on the recent Latin American commodity boom.  In the recent boom, Latin American export growth, which was considerably faster than GDP growth, was being driven by a commodities boom.  Indeed, 70 percent of the growth in LAC exports has been due to growth in commodities exports, and commodities exports comprised 74 percent of all LAC exports.  China had both indirect and direct effects on this trend.  Directly, LAC exports to China increased by 370 percent since 2000.  This has been the cause of much cheer, but should be analyzed with more scrutiny.  Indirectly, Chinese consumption of global commodities was making them scarcer and boosting global prices and therefore leading to more LAC exports.

LAC exports to China were only 3.8 percent of all LAC exports.  In other words, 96.2 percent of all LAC exports did not go to China.  LAC’s exports to China comprised 5.8 percent of Chinese imports, the same level of LAC exports to China in the 1980s; 74 percent of all LAC exports to China were in primary commodities; growth in LAC exports to China was only 8 percent of all LAC export growth since the boom began in 2000; 10 sectors in six countries accounted for 74 percent of all LAC exports to China and 91 percent of all commodities exports to China; for the other countries in LAC the potential to trade with China is very low.

For the handful of countries that were “winning” the export game with China, will Chinese demand and high prices continue and will such longer term trends boomerang back to LAC in the form of Dutch Disease?  By all pre-crisis accounts, the commodities boom and Chinese demand were predicted to last relatively long, even though in early 2009 estimates it was already clear that the boom had come to a halt.  Pre-crisis estimates predicted that the commodities boom would be among the longest in history by lasting perhaps another 10 years.  China demand for the products LAC supplies is predicted out at least 20 more years.  It remains to be seen how these predictions fare in light of the recent economic and financial crisis.  Regarding Dutch Disease more research is needed to examine the independence and significance of an effect of China trade on LAC exchange rates and industrial composition.  We do know that exchange rates are appreciating and that the handful of nations in LAC with manufacturing competitiveness are losing some of that competitiveness vis-à-vis China.  Moreover, at least in Brazil there is evidence of a “frontier land expansion” in the environmentally sensitive Amazon in part due to China’s demand for soy.

Research indicates that LAC is more equipped than in the past to capture some of the rent from the recent and potential future commodities booms and use some of those funds for poverty alleviation, environmental protection, and industrial development.  Almost all the countries that benefited have some sort of institutional structure in place for such activity, though few are showing signs of putting them to proper use at present.  Indeed, in the current crisis environment it is very unlikely that such funds will go toward longer-term structural concerns such as industrial diversification.

Go to <www.peri.umass.edu/fileadmin/pdf/working_papers/
working_papers_151-200/WP192.pdf
> to read the rest of the paper.

Kevin P. Gallagher is a professor in the Department of International Relations, Boston University and researcher at the Global Development and Environment Institute (GDAE), Tufts University (kpg@bu.edu).  Roberto Porzecanski is a research fellow at GDAE (roberto.porzecanski@tufts.edu).  The above text is the introduction and conclusion of Gallagher and Porzecanski’s article “China and the Latin America Commodities Boom: A Critical Assessment,” which was first published by the Political Economy Research Institute on 10 February 2009.  It is reproduced here for educational purposes.  Download the full text of “China and the Latin America Commodities Boom” at <www.peri.umass.edu/fileadmin/pdf/working_papers/
working_papers_151-200/WP192.pdf
>.


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