The visible hand of China in Latin America
Opportunities, Challenges and Risks
Javier Santiso
Chief Economist & Deputy Director
OECD Development Centre
London Business School
London  June 2007
1
The cognitive effect: new emerging capitalisms.
2
The trade effect: the dark side of the boom.
3
China and India as a wake up call.
2
China: extraordinary or back to normal?
China GDP (% of world total)
GDP in U$ (% of World GDP,
2005)
35
USA
30
Japan
25
Germany
20
U. Kingdom
France
15
China
10
Italy
5
Spain
2045
2001
1950
1900
1870
30
1820
20
1700
10
1600
0
1500
0
Canada
According to IMF estimates Chinese gross domestic product based on purchasing-powerparity (PPP) amounts to 13.6% of 2005 world GDP (20.7% in the case of USA).
Source: OECD Development Centre
Based on: International Financial Statistics and Angus Maddison, 2006.
3
The cognitive impact: The emergence of new
capitalisms. Center and Periphery rebalanced…
GDP share of world output (WEO, 2005)
Emerging
China
Asia
5.0%
9.1%
Korea&Japan
12.0%
Asia represents more than one
fifth of world output.
US
28.0%
EU
30.3%
LatAm
4.7%
4
China has doubled its GDP in 8
years…without the help of Money Doctors!
GDP in constant prices
U$ Millions
12000
10000
Brazil
China
Japan
Mexico
Korea
China
8000
6000
4000
2000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
0
Source: Datastream (Economist Intelligence Unit)
Chinese growth rates has been higher than those observed in Brazil and Mexico
during their glorious years.
5
1
The cognitive effect: new emerging capitalisms.
2
The trade effect: the dark side of the boom.
3
China and India as a wake up call.
6
Are raw material prices facing a Chinese
shock?
Commodities Prices in real terms
140
120
China?
Is China to
blame for
commodities
prices?
100
80
60
40
1900
1915
1930
1945
1960
1975
1990
2005
Source: OECD Development Centre.
Based on Oxford Latin American Economic History Database and Thomson Datastream, 2007.
7
Latin America is endowed with natural resources
and dependent on the commodities’ cycle
LATIN AMERICA'S PERCENTAGE OF
COUNTRIES' EXPORTS
Commodities
% of country's exports
Oil
100
90
80
70
60
50
40
30
20
10
0
Agriculture & other
Venezuela
Chile
Peru
Argentina
Colombia
Brazil
Latin
America
Mexico
Source: OECD Development Centre, 2007.
Based on: National Balance of Payments, 2005.
8
Whereas exports with the US are stable,
countries are increasingly sensitive to China
EXPORTS TO U.S. AS PERCENTAGE OF TOTAL EXPORTS
Exports to US as % of Total
.
1995-2005
90
80
70
60
50
40
30
20
10
0
1995
Argentina
Brazil
Chile
Mexico
China
India
2005
Indonesia
Korea
Philippines
Asia
Latin America
EXPORTS TO CHINA AS PERCENTAGE OF TOTAL EXPORTS
Exports to US as % of Total
.
1995-2005
1995
25
2005
20
15
10
5
0
Argentina
Brazil
Chile
Latin America
Mexico
India
Indonesia
Korea
Philippines
Asia
Source: OECD Development Centre, based on IMF Trade Statistics, and OECD Trade Directorate, 2007.
9
Latin America is tackling its vulnerability to
US slowdown by diversifying exports
LATIN AMERICA: EXPORTS TO CHINA AS
PERCENTAGE OF TOTAL EXPORTS
1999
2005
Chile
Peru
Argentina
Brazil
Colombia
Venezuela
Ecuador
Mexico
0
2
4
6
8
Percentage
10
12
14
Source: OECD Development Centre and UNCTAD, 2007.
10
1
The cognitive effect: new emerging capitalisms.
2
The trade effect: the dark side of the boom.
3
China and India as a wake up call.
11
A trade wake up call: Is China’s trade
integration: a bonanza or a threat?
*
Asian countries competition vs. Chinese exports to
US, %
70
60
50
40
30
20
10
0
60%
Latin American countries competition* vs. Chinese
main export products
50%
40%
30%
20%
10%
0%
a
*Value of exports to US from China in same product categories as
country´s exports, as % of country´s total exports to US
Source: C.HJ.Kwan, Nomura Institute of Capital Markets
Research
*Arithmetic average of the following indexes: CC=
n
 (a
n
n
it
)
2
n
it
n
a jt
 (a
n
jt
)
2
and CS= 1 -
1
2
a
n
it
- a njt
n
n
where ajt and ait equals the share of item “n” over total exports of countries j (China) and i in
time t.
Source: Blázquez, Rodríguez and Santiso (2006)
12
Diversification is a concern for Latin
America’s competitiveness…
Latin America
Herfindahl-Hirschmann Index by Destination
2005
Brazil
Argentina
Chile
Uruguay
Dominica
Guyana
Peru
Paraguay
Nicaragua
Bolivia
Colombia
Costa Rica
Panama
Ecuador
Guatemala
Honduras
Venezuela
Belize
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Mexico
HH Index
2000
Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.
13
Product specialisation has increased recently
in the region…
Latin America
Herfindahl-Hirschmann Index by Product
2005
Brazil
Costa Rica
Latin
America
Argentina
Honduras
Mexico
Nicaragua
Uruguay
Colombia
Guatemala
Peru
Guyana
Bolivia
Chile
Paraguay
Panama
Belize
T. and
Tobago
Dominica
Ecuador
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Venezuela
HH Index
2001
Source: OECD Development Centre. Based on CEPAL (2006) and World Trade Integrated Statistics.
14
A wake up for reforms:
The proximity to export markets
Mexico benefits from its geographic proximity to its major export markets:
• Lower transport and communication costs
• Access to FTA
• Just-in-time delivery
24 Days
4 Days
160 Km
11,700 Km
Shipping time
Mexico is more competitive in manufacturing more sophisticated products
which require frequent communication with the client or supplier and short
reaction times.
15
Pending reforms : the upgrade of port
facilities
Container Handling Charges
Cargo
Mandatory
Handing
Price
Fixed
Cooperative
Median
Port
Country
World
CMPCH
LSU
Services
Restriction
Agreements Agreements
Clearance Efficiency Crime Index
Bank
Index
Index
Index
Index
Index
Index
time (Days) Index (1-7)
(1-7)
Singapore
1
0.38
0
0.33
2
6.76
6.72
US$/TEU
117
NA
NA
Hong Kong
0
0.25
0
0
NA
6.38
5.46
NA
NA
NA
Taiwan
0.5
0
0
0
NA
5.18
4.49
140
163
NA
Japan
0.75
0.13
0.89
1
NA
5.16
5.16
250
202
NA
Malaysia
0
0.25
0
0.38
7
4.95
5.76
75
NA
NA
Spain
0
0.06
1
0
4
4.88
6.08
200
105
NA
0
0
0
NA
4.12
5.22
NA
NA
Korea
0.38
NA
0.5
0
0.38
4
3.98
5.12
93
NA
Thailand
0.63
NA
Argentina
0
0
1
7
3.81
4.52
NA
139
NA
0.13
0
0
0
NA
3.81
5.02
NA
NA
Vietnam
0.5
NA
Chile
0
0.43
1
3
3.76
6.05
100
NA
0.25
202
China
0.5
0
0
0
7
3.49
4.44
NA
110
NA
Indonesia
1
0
0.38
5
3.41
4.06
NA
NA
0.06
NA
Mexico
0.5
0
1
4
3.34
2.61
NA
NA
0.38
NA
Venezuela
0
0
1
1
11
3.28
3.63
NA
NA
NA
El Salvador
0
0
0
1
4
2.95
2.3
NA
NA
61
Brazil
0.5
0.75
0
1
10
2.92
4.45
328
292
NA
0
0.5
1
7
2.88
3.32
NA
142
NA
Peru
0.5
0
0
0
1
NA
2.79
4.28
NA
NA
NA
India
0.5
0
0
0.38
7
2.79
3.51
118
NA
NA
Philippines
Ecuador
0
0
0.43
1
15
2.63
3.65
NA
139
NA
Costa Rica
0
0
0
1
4
2.46
3.28
NA
NA
68
Colombia
0.5
0.13
0.5
1
7
2.26
1.88
NA
NA
NA
Bolivia
NA
NA
NA
NA
9.5
1.61
4.38
NA
NA
NA
0
0
0
1
5
NA
NA
NA
NA
NA
Uruguay
NA: Not Available
Source: Data for the first 4 columns was kindly provided by Carsten Fink, Aaditya Mattoo, and Ileana Cristina Neagu* (2002).
16
Conclusions: A Watch List

Africa and Latin America: Out of the Value-Chain Game?

The share of China’s total exports produced by foreigners has risen sharply,
from 32% to 60% between 2000 and 2005.

Foreign outsourcing is becoming a major driver of India’s and China’s high
tech exports, both countries moving up quickly in the value added ladder.

In 2005 for example, of China’s top 100 exporters, 53 were foreign
companies and all were electronics/information technology companies.

After China: India?
17
Another Emerging Player from Asia:
India’s M&A in 2006
Target
Nationality
Corus
Oil & Gas Assets (Campos Basin)
Omnimex de Colombia
Oil & Gas Assets (Brazil)
Greater Nile Petroleum (25%)
Glaceau (30%)
Shell Development Angola
Oil & Gas Assets (Syria)
Betapharm Arzneimittel
Hansen Transmissions
Eve Holding
Terapia
Total
UK/NL
Brazil
Colombia
Brazil
Sudan
US
Angola
Syria
Germany
Belgium
Belgium
Rumania
Acquirer
Tata Group
Oil & Natural Gas
Oil & Natural Gas
ONGC Videsh
Oil & Natural Gas
Tata tea
Oil & Natural Gas
Oil & Natural Gas
Dr Reddy's Lab
Suzlon Energy
Suzlon Energy
Ranbaxy
RECENT INDIAN INVESTMENTS 2006
Deal Value ($m)
Corp
Corp: China Group
Corp
Corp
Corp: China Group
7700
1670
850
820
783
677
600
581
572
562
548
324
15687
RECENT INDIAN INVESTMENTS
(EXCLUDING CORUS-TATA DEAL)
9%
26%
22%
US
Europe
Latin America
Africa
13%
US
Europe
Latin America
Africa
4%
22%
61%
43%
Source: OECD Development Centre. Based on Dealogic and local press.
18
The rise on outward direct investment
among emerging economies is remarkable
Outward Foreign Investment by country
1999-2007
U$ Millions
30000
25000
Brazil
China
20000
India
Russia
15000
10000
5000
2007
2007
2006
2005
2004
2003
2002
2001
2000
-5000
1999
0
Source: OECD Development Centre. Based on Economist Intelligence Unit, 2007.
19
…helping to the fall of cost of capital
Total LatAm outward FDI vs LatAm spreads
US$ millions
Outward FDI
Spreads
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
500
450
400
350
300
250
200
150
100
50
0
2003
2004
2005
2006
2007
* Data for 2007 is
estimated and
includes recent deals
Source: OECD Development Centre 2007, based on Thomson Datastream (Economist Intelligence Unit).
20
Thank you
Based on:
Javier Santiso (ed.). “The
Visible Hand of China in Latin
America”. OECD Development
Centre Studies, 2007.
Javier.santiso@oecd.org