Convergence or Deglobalization
by Gustavo Beliz
Director, Institute for the Integration of Latin America and the Caribbean (INTAL)
Some of us, in our small and specialised consulting group in Argentina, attended on Thursday a seminar at INTAL, in Buenos Aires. It is called GLOCAL (Global and Local). Former Justice Minister, today director of INTAL, Gustavo Beliz opened the seminar. Here we would like to bring you some of his thoughts on how us within LAC (Latin America and the Caribbean) ought to prepare ourselves -rather sooner- in order to be able to adapt to the new winds blowing through China. Education and technology are two of the key requirements needed, if we are to begin bridging the gap.
It would mean far too long a reading for this column if we brought you the whole paper in a single presentation. Making a sort of abstract, on the other hand, would deprive you of Beliz's fascinating view on the actual situation. We have set here, therefore, the first part.
He who is indifferent to the future is condemned to worry about the present, warned Confucius wisely. And few issues are as relevant for the future of Latin America and the Caribbean (LAC) as their strategy of integration with China and the impact of the new geopolitical playing field for the region’s economies. In just a few years, the Asian giant has gone from being a minor market to one of the main trading partners, has displaced traditional export destinations, and begun to supply vital financing flows for projects ranging from hydroelectric dams, sports stadiums, and highways, to foreign currency swaps. A number of factors have made China’s exponential growth possible in recent decades: betting on innovation, increased productivity, and a long-term outlook are just some of them. In 2010, China overtook Japan to become the world’s second largest economy, with a share of approximately 15% of global GDP. in 2015, it completed the 12th five-year Plan, whose objective was to consolidate China as a major power, and in 2016, it launched the 13th fiveyear Plan, with a focus on strengthening internal consumption and private investment, and positioning capital in strategic sectors.
[Up to now]the majority of LAC countries took more or less direct advantage of the growing needs for raw materials and food, and, with no more effort than taking advantage of natural conditions, rode the wave emerging in the far east. Convergence was almost automatic. Bilateral trade rose from us$ 18,000 million in 2004 to us$ 260,000 million in 2014. Currently, 36% of mining exports from the region, 12% of food, and 10% of energy are destined for the Chinese market. After the 2008-2009 crisis, the emerging countries began to behave as an auxiliary engine of the world economy, a dynamic and vital engine popularized by the acronym BRICs (Brazil, Russia, India, China, and South Africa). Demand for commodities, particularly from China, held steady and prices remained high offsetting other deflationary forces during the crisis.
Eight years later, the situation has changed completely.
While the US economy has recovered some -if not all- semblance of normality, the BRICs are far from growing as before. In China’s case, its economy is undergoing a process of transformation surrounded by question marks.
Three trends are operating simultaneously in the production of this new look. First, there has been a redesign of trade tactics, driven by the explosive growth of productivity and expansion to other sectors and markets. As shown in an article by Song & Wagner (University of Chile), the density of trade links has its correlate in the Chinese investment that countries receive for financing infrastructure works and other public works projects. It also relates to Chinese companies’ inroads into the domestic economies and with the purchase of local enterprises that make use of its extraordinary savings rate.
After a remarkable expansion, the Chinese economy is growing at the lowest rate in 30 years, putting the brakes on global markets. the consequences for the region have been immediate: 60% of external sales consist of commodities and almost 20% of hydrocarbons. The fall in raw materials prices (especially oil) has made the value of regional exports plummet. Consequently, there is an increased risk of suffering the aftermath of greater dependence and of the primarization of exports. These effects are due to a period of prosperity followed by a change in the phase of the cycle, reflected in falling commodity prices, as we have seen in recent years. The commodity boom could have given rise to a typical case of “dutch disease” with its wake of exposure and vulnerability. the difficult remedies would have been , particularly from China, the early formation of counter-cyclical funds and the implementation of active policies to encourage export diversification and so reduce the problems of primarized trade.
Despite a sharp slowdown, the Chinese economy is still moving on positive ground. But it is unlikely this ascending phase of the cycle will last forever: there is no downturn or growth that lasts one hundred years. Sooner or later, there will be a sea change and we [here in LAC] have to be prepared.
The second prevailing trend is taking place in the financial sphere and is another key piece of the transformation under way. With such new banking institutions as the Asian infrastructure investment Bank (AIIB) or the new development Bank (NDB), a gradual opening up of the capital markets and greater exchange rate flexibility, China has started down the road to internationalising its finances. Andrew Sheng of the Fung Global Institute, one of the leading experts in the new financial architecture of Asia, is optimistic in his vision about China’s future.
A follower of nobel Prize Winner Douglass North, Sheng argues that the switch to market policies, the growth of competition, and the emergence of globally competitive firms like Huawei or Alibaba are evidence of the sound health of an economy still bearing the burden of weak institutions. The risks for the region are associated with the potential infection and propagation effect of sharp swings in the markets. macroeconomic stability, reputation, and clear rules are in this sense a powerful antidote to growing risk aversion and to capital starting a flight-to-quality.
We now have the challenge to resist the temptation to reduce China’s role to a last-resort lender and to rationally optimize the resources available for financing infrastructure.
Third, there is a trend in technological change that, as happened with the motor car, the telephone, or the internet, could alter the way we interact with the world. And China is at the forefront of this disruption. According to a recent report by the Oxford Martin School, China replaced the United States as the largest industrial automation market: 77% of Chinese jobs are at risk of automation, well above the 57% OECD country average.
How will such exponential technological change impact our [LAC] region? In november 2015, the China daily newspaper reported that a Chinese consortium is to open the world’s largest
cloning laboratory in the city of Tianjin, where it plans to produce a million head of cattle per year. The vision of a China specializing in intensive products and cheap labor, and a buyer of food is naive. During his talk at INTAL 50, commemorating our institute’s fiftieth anniversary, Raymond McCauley of Singularity University stated that it will soon be possible on supermarket shelves to buy genetically and biotechnologically engineered burgers manufactured in laboratories. Companies such as Memphis Meats, Mosa Meat, and Modern Meadow are competing in Silicon Valley as pioneers in lowering the price and enhancing the popularity of artificial meat. We have to be careful: only Mercosur exports us$9 billion of beef per annum. Estimates show that a 10% increase in r&d investment translates into an almost 2% increase in total factor productivity (TFP), and China plans to raise its investment in r&d from 2% to 3% of GDP by 2020: a 50% increase.
