With China or Against China?
The Dilemma Faced by Latin American Countries
Timothy J. Kehoe
University of Minnesota
and Federal Reserve Bank of Minneapolis
Globalization, Macroeconomic Imbalances
and South America’s Potential to be the World’s Food Basket
ICAE/IAAE Pre-Congress Workshop
Foz do Iguaçu, Brazil
August 2012
www.econ.umn.edu/~tkehoe
From the Economist:
The Americas
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Football and economics
Mexico 4, Brazil 2
Aug 11th 2012, 20:41 by T.W. | MEXICO CITY
This blog’s headline isn't a misprint, but a reference to the score in a longer-term
competition: economic growth. In recent years Brazil has outplayed Mexico,
growing at 6% or more as Mexico bumped along in the slow lane. But lately that
has changed…One reason for the turnaround is China. Its growth has been a
boon to Brazilian commodity exporters (who have made a fortune feeding the
Chinese economy) and a headache for Mexican manufacturers (who face stiffer
competition from Chinese companies in the United States). But with China
slowing down, the tables are turned…
Based on
Timothy J. Kehoe and Felipe Meza, “Catch-up Growth Followed
by Stagnation: Mexico, 1950–2010,” Latin American Journal of
Economics, 48 (2011), 227–268.
Timothy J. Kehoe and Kim J. Ruhl, “Why Have Economic
Reforms in Mexico Not Generated Growth?” Journal of Economic
Literature, 48 (2010), 1005–1027.
A digression on economic growth:
Real GDP per working-age person has grown by 2 percent per year
in the United States since 1875.
This growth is a combination of technological progress and
improvements in management.
Any country with stable institutions and policies should grow at
roughly 2 percent per year.
A country that improves its institutions and policies should grow
faster, until it reaches a new balanced growth path.
A country whose institutions deteriorate or whose policies
worsen…
Real GDP per working-age person in the United States
index (1900=100)
800
3
400
2
1
200
100
0
50
-1
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Real GDP per working-age person in Mexico
800
3
index (1900=100)
400
2
1
200
100
0
50
-1
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Between 1984 and 1995, Mexico implemented an impressive set of
economic reforms, yet its growth has been modest compared to
that of China…
Trade in Mexico and China
80
70
percent GDP
60
Mexico
50
40
China
30
20
10
0
1985
1990
1995
2000
2005
FDI inflows to Mexico and China
6
5
China
percent GDP
4
3
Mexico
2
1
0
1985
1990
1995
2000
2005
Real GDP per working-age person in Mexico and China
800
3.00
index (1985 = 100)
400
2.00
China
200
1.00
100
0.00
Mexico
50
-1.00
1985
1990
1995
2000
2005
Did Mexico gain from trade?
“The evidence points overwhelmingly to the conclusion that Mexico’s
reforms, backed by NAFTA, have largely been a disappointment for the
country. Despite dramatic increases in trade and foreign investment,
economic growth has been slow and job creation has been weak.”
Zepeda, E., T.A. Wise, and K.P. Gallagher, (2009)
“Rethinking Trade Policy for Development: Lessons from Mexico under NAFTA.”
The empirics: Does trade cause growth?
Yes!
Sachs and Warner (1995), Frankel and Romer (1999), Hall and Jones
(1999), Alcalá and Ciccone (2004), Dollar and Kraay (2004)…
No!
Rodriguez and Rodrik (2001), Rodrik, Subramanian, and Trebbi (2002),
Yanikkaya (2003) [developing countries], DeJong and Ripoll (2006)
[developing countries] …
Sources of Growth
Yt  At K t Lt 
Yt / N t  At1/(1 )  K t / Yt 
 /(1 )
 Lt / Nt 
William Lewis (2005), The Power of Productivity: Wealth,
Poverty, and the Threat to Global Stability.
Growth accounting for the United States
2.0
400
index (1950 = 100)
output
1.0
200
productivity
capital
100
0.0
labor
50
-1.0
1950
1960
1970
1980
1990
2000
2010
Growth accounting for China
3.000
800
index (1985 = 100)
2.000
400
output
productivity
1.000
200
capital
0.000
100
50
-1.000
1985
labor
1990
1995
2000
2005
Growth accounting for Mexico
2.0
400
index (1950 = 100)
output
1.0
200
productivity
capital
100
0.0
labor
50
-1.0
1950
1960
1970
1980
1990
2000
2010
Gains from trade
Real GDP growth versus real income growth in Mexico and China
Annual growth rate
(percent)
China 1998-2008
Mexico 1990-2000
Real GDP
per capita
8.989
1.782
Terms of
trade
premium
–0.761
–0.169
Gain from
variety
0.101
0.142
Real
income
per capita
8.329
2.093
Terms of trade premium in Mexico and China
4
Mexico (T0 = 1990)
percent real GDP (T0 = 0)
2
0
-2
-4
-6
China (T0 = 1998)
-8
0
2
4
6
year since T0
8
10
Standard trade theory does not explain
this productivity growth.
What theories of openness can do so?
Induced technological change: Costantini-Melitz (2007),
Gibson (2007), Holmes-Schmitz (2001), Schmitz (2005)
Technology transfer through FDI: Helpman-Melitz-Yeaple (2004),
McGrattan-Prescott (2007), Ramondo-Rodriguez-Clare (2008)
Incentives for internal reforms: Bajona-Chu (2008)
What are the barriers to growth in Mexico?
Poor financial institutions
Lack of contract enforcement
Problems in labor markets
…also problems with crime
But China has many of these same sorts of problems
Poor financial institutions
Lack of contract enforcement
Problems in labor markets
…also problems with the political system
But why is China growing so rapidly?
But why is China growing so rapidly?
For the same reasons that Mexico grew rapidly between 1950 and
1980:
Urbanization
Industrialization
Basic education
Urban population Mexico
80
70
percent
60
50
40
30
20
1900
1920
1940
1960
1980
2000
Composition of GDP in Mexico
70
services
60
percent
50
40
30
manufacturing
20
10
agriculture
0
1950
1960
1970
1980
1990
2000
Literacy rate, population age 10 and older in Mexico
100
percent
80
60
40
20
0
1895
1910
1925
1940
1955
1970
1985
2000
Urban population in China
50
percent
40
30
20
10
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Composition GDP in China
50
services
percent
40
30
manufacturing
20
agriculture
10
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Literacy rate, population age 15 and older in in China
100
percent
80
60
40
20
0
1982
1986
1990
1994
1998
2002
2006
But why is China growing so rapidly?
For the same reasons that Mexico grew rapidly between 1950 and
1980:
Urbanization
Industrialization
Basic education
Hypothesis: Mexico would have grown more rapidly between
1950 and 1980 if it had been open to foreign trade and investment.
When will the barriers to growth that are limiting Mexico’s growth
start to bind on China?
Purchasing power parity GDP in Mexico and China
2005 U.S. dollars per person
25,000
20,000
Mexico GDP per working-age person
15,000
Mexico GDP per capita
10,000
5,000
China GDP per working-age person
China GDP per capita
0
1985
1990
1995
2000
2005
When will the barriers to growth that are limiting Mexico’s growth
start to bind on China?
Hypothesis: Absent major reforms, China’s growth will slow to
about 2 percent per year within the next 10, perhaps before Chain
reaches the level of real GDP per working-age person of Mexico.
What about other countries in Latin America, like Argentina and
Brazil?
Real GDP per per working-age person in Argentina
index (1900=100)
3
800
2
400
1
200
100
0
50
-1
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Real GDP per per working-age person in Brazil
index (1900=100)
800
3
400
2
200
1
100
0
50
-1
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Argentina exports
0.35
0.30
0.25
fraction of total
Brazil
0.20
0.15
United States
China
Chile
0.10
0.05
0.00
1998
2000
2002
2004
2006
2008
2010
Brazil exports
0.30
0.25
United States
fraction of total
0.20
0.15
China
0.10
Argentina
Germany
0.05
Japan
0.00
1998
2000
2002
2004
2006
2008
2010
Mexico exports
0.90
United States
0.80
0.70
fraction of total
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1998
Canada
2000
2002
2004
2006
2008
2010
Argentina exports to China
0.90
0.80
Soy Beans
0.70
fraction of total
0.60
0.50
0.40
0.30
0.20
Soy Bean Oil
Soy Bean Residue
(Feed)
Crude Petroleum
0.10
Oil Pipe Tubing/Casing
0.00
1998
2000
2002
2004
2006
2008
2010
Brazil exports to China
0.50
Iron Ore
0.45
0.40
fraction of total
0.35
0.30
Soy Beans
0.25
0.20
0.15
0.10
Soy Bean Residue
(Feed)
Soy Bean Oil
0.05
0.00
1998
Crude Petroleum
2000
2002
2004
2006
2008
2010
Mexico exports to China
0.18
0.16
Copper Ore
0.14
Crude Petroleum
0.12
fraction of total
Pison Engines
0.10
Motor Vehicles
for Persons
0.08
Iron Ore
0.06
0.04
0.02
0.00
1998
2000
2002
2004
2006
2008
2010
Real commodity prices (deflated by U.S. PPI)
700
600
index (1998=100)
500
crude oil
400
300
iron ore
200
maize
100
0
1998
soybeans
2000
2002
2004
2006
2008
2010
Exports as Percent of GDP
40
35
China
30
percent of GDP (%)
Mexico
25
Argentina
20
15
Brazil
10
5
0
1998
2000
2002
2004
2006
2008
2010
From the Economist:
The Americas
Previous
Next
Latest Americas view
Latest from all our blogs
Football and economics
Mexico 4, Brazil 2
Aug 11th 2012, 20:41 by T.W. | MEXICO CITY
This blog’s headline isn't a misprint, but a reference to the score in a longer-term
competition: economic growth. In recent years Brazil has outplayed Mexico,
growing at 6% or more as Mexico bumped along in the slow lane. But lately that
has changed…One reason for the turnaround is China. Its growth has been a
boon to Brazilian commodity exporters (who have made a fortune feeding the
Chinese economy) and a headache for Mexican manufacturers (who face stiffer
competition from Chinese companies in the United States). But with China
slowing down, the tables are turned…