1. 1 Market access, export diversification & industrial upgrading in LATAM The Mercosur Chair Annual Seminar Paris March 6 2006 Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre

2. 2 1 Latin America: the challenge of diversification Suspects: whos to blame? 2 Country narratives: building new areas of CA 3 Conclusions 4

3. 3 Latin America 0 10 20 30 40 50 60 70 80 90 100 Ecuador Paraguay Bolivia Venezuela Chile Argentina Uruguay Colombia Peru Indonesia Brazil Canada Netherlands India Thailand Spain Malaysia Mexico Belgium UK France US Singapore Italy China Germany South Korea Taiwan Hong Kong Japan Source: WTO Exports of agricultural, energy and mineral products (% of the total) (2003) Export structure in comparison

4. 4 The challenge of diversification … Share of processed exports then (1970) and now (2000) Increased processing Decreased process Source: Bonaglia and Fukasaku (2003) Export Diversification in low Income countries, OECD Development Centre WP 209 A important role played by GSP, NAFTA & CBI… with some qualifications

5. 5 Whats wrong with natural resources? A boon or a curse? Sachs and Warner: countries rich in natural resources grow more slowly … … because of limited linkages and spillovers, lower skill content and incentives to rent seeking and corruption. More recent evidence is less negative, e.g. World Bank (2002) From natural resources to the knowledge economy - trade and job quality Source: Sachs and Warner (2001), The Curse of Natural Resources, European Economic Review

6. 6 Its not (only) what you have, its how you use it … These are countries that built – in different historical periods – their growth on natural resources (mineral, wood, agro, etc) … … managed to increase the technological and scientific content of resource-based clusters … … and developed new ones as well as new areas of competitive advantage (e.g. services). There are some encouraging examples in LATAM as well … … but Resource-Rich champions

7. 7 … Many … Many resource-rich underachievers Source: Manzano, 2006 Development Level of natural resource clusters in the Andean region (0=low, 10=high) Country Cluster Exploitation and Export, minimum processing Processing and export, import substitutions and public goods delivery Export of some of the goods and services that are substituted Export of processed refinedproducts, inputs, machines and services associated to the cluster. The firms of the country associated to the cluster start to invest abroad Bolivia Gas 10 0 0 0 Wood 10 7 2 2 Minerals 10 4 4 0 Soy 10 8 4 2 Colombia Coffee 10 8 8 4 Flowers 10 5 Fruits 10 8 1 Ecuador Bananas 10 2 2 Shrimp 10 9 2 2 Flowers 10 5 2 2 Oil 6 3 2 2 Peru Asparagus 10 9 1 8 Fish Flower 10 5 3 2 Minerals 10 2 1 7 Venezuela Aluminum 10 0 0 0 Iron 10 5 4 1 Oil 10 8 5 5

8. 8 … Gas, the unexploited potential Source: The Economist, The explosive nature of gas, Feb 9th 2006 Where demand and supply dont meet

9. 9 In fact export sophistication remains below benchmarks … Source: Hausmann, Hwang and Rodrik (2005), What You Export Matters, mimeo

10. 10 Even when looking at other resource- rich countries Source: Hausmann, Hwang and Rodrik (2005), What You Export Matters, minmeo

11. 11 1 Latin America: the challenge of diversification Suspects: whos to blame? 2 Country narratives: building new areas of CA 3 Conclusions 4

12. 12 Venezuela 83.1% Peru 70.7% Chile 59.1% Colombia 46.3% Argentina 38.0% Brazil 29.6% Mexico 14.6% Latam31.2% Source: BBVA over total exports (2004) Exports of commodities 60 70 80 90 100 110 120 130 140 150 160 170 1996199719981999200020012002200320042005 Source: BBVA BBVA-MAP Index of Latin America commodity prices (100 =jan03) TOTAL Without oil Good News: The commodity boom has been a bonanza

13. 13 Sad News: Capitalising on previous bonanzas was not easy The debt overhang: Resource-rich countries that performed poorly went through SAPs During the 1970s, high commodity prices might have induced resource- abundant countries to use them as collateral Then, the 1980s saw a fall in commodity prices, leading to a debt crisis faced by most of these countries. Source: Manzano and Rigobon (2001), Natural Resources or Debt Overhang? NEBR Working Papers

14. 14 Market access and supply capacity UNCTAD (2004) * : market access is key, but domestic supply capacity appears to have been a more limiting element of export performance in African, Middle Eastern and Latin American countries OECD (2004) ABC Study ** : important policy changes but a need to address the competitiveness agenda –Gains from economic integration could be higher if domestic conditions improved Apparel manufacturing: The unintended effects of preferential market access (textile rules of origin -> specialisation at the bottom end of the value chain) *** *M. Fugazza (2004), Export Performance And Its Determinants: Supply And Demand Constraints, Policy Issues In International Trade And Commodities Study Series No. 26 ** A. Goldstein, The Dynamics of Foreign Direct Investment and A-B-C Competitiveness, chapter 3 in Trade and Competitiveness in Argentina, Brazil and Chile: Not as Easy as ABC *** Bair and Dussel Peters(2005), Global Commodity Chians and Endogenous Growth: Export Dynamism and Development in Mexico and Honduras, World Development

15. 15 1 Latin America: the challenge of diversification Suspects: whos to blame? 2 Country narratives: building new areas of CA 3 Conclusions 4

16. 16 Brazil: Trade openness and the catching-up process Successful Asian emerging countries were able to simultaneously combine growth with trade opening. Brazil has recently started to open up its economy. In 2005 the trade surplus reached a record USD 45 billion, an increase of 33% yoy (in spite of a 13% appreciation of the Real).

17. 17 Within the 50 LATAM companies that had greater profits in 2004, 19 are Brazilian, with an average utility over sales of 18%. The average ratio of exports over total sales was 32%. The 50 most profitable firms 19 16 7 3 11111 0 5 10 15 20 BrazilMexicoChileArgentinaColombiaEcuadorPanamaPeruVenezuela Source: America Economia 2005 Brazilian firms are beginning to increase activities overseas

18. 18 Brazil: Embraer & t Brazil: Embraer & the aircraft cluster Crucial role of public policy directed towards the lead firms Location in a privileged FDI area attracting additional investments and 2 nd -tier suppliers. However, the local aeronautic SME remains weak A. Goldstein (2005), Lead Firms and Clusters in the North and in the South: A Comparison of the Aerospace Industry in Montreal and São José dos Campos in E. Giuliani et al (eds) Clusters Facing Competition: The Importance of External Linkages, Editions Ashgate.

19. 19 Chile: Salmon, wine and copper – more than commodities Exports have changed to include more technology and added value in sectors linked to natural resources that utilize technology in novel ways Governments changing role in developing a world class export industry: from facilitator to regulator Wine: in 1984, only 2 per cent of the total production volume was exported, 7 per cent in 1989, and in 63 per cent 2002. Salmon: With $1.2 billion exported, Chile qualified as the worlds top exporter of farmed salmon in 2003. Chilean salmon farming only began in 1979 and salmon is not a species native to this country Copper: from basic mining to a hi-tech cluster

20. 20 Costa Rica: hi-tech success or new- economy enclave? Considered as the most successful example of trade-FDI-led growth, thanks to a well managed development strategy to promote non-traditional exports (e.g. INTEL 1998) Recently, some skepticism on the ability to create stronger linkages to the domestic economy and promote upgrading of domestic suppliers (enclave) Challenges remain in improving firm-level capabilities and favouring linkage-formation New opportunities emerging in the service sector (e.g. tourism) Ciravegna and Giuliani (2005), MNC-dominated clusters and the upgrading of domestic suppliers: the case of Costa Rican Electronics and Medical Device industries,mimeo

21. 21 1 Latin America: the challenge of diversification Suspects: whos to blame? 2 Country narratives: building new areas of CA 3 Conclusions 4

22. 22 Some of the main challenges facing LATAM are to push forward the competitiveness agenda to boost productivity, diminish transaction costs and overcome inefficiencies. Conclusions Domestic reforms, coupled with market access in OECD and regionally have been fundamental for the emergence of new industries, often building on the natural resource wealth Export sophistication remains low and the emergence of CHINDIA, pushing commodity prices up, could be a double- edged sword Market niches are a moving target: a need to constantly adapt and improve/create new areas of competitive advantage Slow advancement in multilateral liberalisation would be detrimental for LATAM and, in any case, cannot be an excuse for delaying much-needed domestic reforms.

23. 23 Thank you for your attention!