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Fear of China: Is There a Future for
Manufacturing in Latin America?
Mauricio Mesquita Moreira
IDB
The Emergence of China:
Challenges and Opportunities for Latin America and Asia
3-4 December 2004, Beijing, China
Motivation
“It’s the manufacturing stupid!”
If anything, China’s emergence in the world
market challenges the view that the future of LAC
is in manufacturing.
Outline
•
•
•
•
Does manufacturing really matter for
LAC’s development?
The nature and size of the challenge.
The effects so far in terms of trade flows.
Economic and policy implications.
Manufacturing?
•
•
•
Manufacturing “bias” in the traditional development
literature. “Normal pattern of development”.
Evidence of this “bias” in the endogenous growth
theories and contemporary development literature
Empirical evidence, for the most part, is circumstantial.
“Virtually every country that experienced rapid growth
of productivity and living standards over the last 200
years has done so by industrializing…” Murphy,
Shleifer and Vishny (1989),
Manufacturing?
•
•
•
•
Sachs and Warner (1995, 1997) , the first to present
hard facts about the link between manufacturing and
growth: increasing returns and all that..
Later disputed by , e.g., Lederman and Maloney (2003)
and Manzano and Rigobon’s (2001). The issue would
be export concentration and debt overhang.
Yet, little is said about the link between natural
resources and export concentration and debt. Stingy
(2003), e.g. present robust evidence of Dutch disease.
Indirect and negative impact of natural resource
specialization on growth. E.g. Isham, Woolcock, Pritchett
and Busby (2003),
Manufacturing?
•
•
•
•
•
The issue is far from settled but the police debate rages on in
LAC.
Two strands of manufacturing pessimism seems to prevail :
The World Bank (2002,2003) sticks to traditional trade theory and
suggests that the region’s future is agriculture and mining, seen a
pathway to a “knowledge economy”. Look at Canada, Finland,
Sweden.
Blum and Leamer (2003) “Natural resource rich communities
invest their resources in land, permanent crops and extractive
equipment and very little in human capital” ..“Countries that
cannot attract manufacturing activities face the very difficult
problem of how to find work both for new entrants into the labor
force ….”
But “LAC is far way, rich in natural endowments and has a tropical
climate […]” “[…] far away resource abundant tropical countries
have great difficulties attracting manufacturing activities, other
than mundane and labor intensive tasks …
Manufacturing?
•
•
•
Outright manufacturing pessimism seems to be
unwarranted.
Empirical evidence and Latin American own past
belies enthusiasm for a natural resource solution.
There are the issues of human capital, technological
externalities, export concentration and institutions.
Geographical and endowment determinism does not
go a long way. As the “new” theories of growth
suggest, accumulation of human capital and the
ensuing process of learning and innovation can
change a country’s destiny beyond its geography and
natural endowments.
Whatever the “truth” , the fact is…
Manufacturing accounts in average for 19% of
the GDP (2002).
Manufacturing Value Added (% of GDP)
40
35
30
25
20
15
Brazil
Colombia
Latin America & Caribbean
Source: World Development Indicators
Mexico
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
10
1965
•
•
Venezuela, RB
Manufacturing?
•
True:
 the manufacturing share of GDP has been declining
rapidly;
 still dominated by “mundane” resource and labor
intensive goods or are concentrated in the laborintensive links of the value chain;
 has been thoroughly outperformed by East Asia
•
But, there seems to be more to it than
geography and endowments
Manufacturing?
Figure 2: Predicted and observed manufacturing share of GDP:
Selected LAC and resource-intensive countries
11
7
10
9
10
11
7
8
3
3.5
9
2.5
10
6
8
9
7
10
11
8
1970
6
7
8
9
10
11
6
7
8
THAILAND
Fixed effects regression
2
y = 2.281x – 0.1348x – 6.8564
2
R = 0.06
Source: WDI and Penn World Tables 6.1
3
3.5
2000
2
2.5
1965
6
7
8
9
10
9
10
11
SWEDEN
2000
1970
3
7
1970
2000
11
1.5
6
11
2
6
2
2
8
2000
FINLAND
1.5
2
1.5
7
10
1.5
11
2000
1970
9
VENEZUELA
2.5
2000
2.5
9
2.5
3
1970
6
1975
CANADA
3
3.5
AUSTRALIA
8
8
3.5
6
7
3
11
6
2000
2.5
10
11
2
9
10
1.5
8
9
URUGUAY
3.5
7
8
1.5
2
6
7
3
2000
2000
2
6
2.5
10
1.5
1.5
2
9
1965
2.5
1965
8
MEXICO
3
3
2000
2.5
7
3.5
3.5
COSTA RICA
6
1965
1.5
2
11
3.5
10
3
9
2.5
8
2000
2
7
COLOMBIA
1.5
2
2
6
1965
2.5
2000
2.5
2000
3
1965
3
1965
CHILE
3.5
BRAZIL
3.5
2.5 3.5
3
4
ARGENTINA
11
log real PPP per capita income
9
10
11
Manufacturing?
•
In fact, there two important “omitted variables”
in this story :
 The poor and volatile macroeconomic environment
throughout the 1980s and 1990s;
 a reform of the state which has gone well beyond
weeding out the excesses of the import substitution
era.
•
So, at the very least, it would risky and hasty
for LAC to turn its back on manufacturing;
Manufacturing?
•
In fact, there are least two important “omitted
variables” in this story:
•
The poor and volatile macroeconomic
environment that prevailed in most countries in
the region throughout the eighties and nineties
and a reform of the state which has gone well
beyond weeding out the excesses of the
import substitution era.
China’s Challenge
•
•
•
•
Four main factors:
Endowments
Productivity
Scale
The Role of Government
China’s Challenge: endowments
Average Nominal Annual Wages in Manufacturing:
China, Brazil and Mexico (1000 current US$)
10.0
Brasil
Mexico
China
8.0
6.0
4.0
2.0
0.0
1996
1997
1998
1999
2000
Source: China Statistical Yearbook, IBGE and INEGI annual industrial
surveys
2001
2002
Productivity
Labor Productivity in China and Selected
Countries. 2001.
120
100
80
US
Korea
Korea
Korea
Mexico
Mexico
60
40
20
Korea
Brazil
Brazil
India
India
Mexico
China
0
Auto
India
Mexico
Brazil
India
India
China
Mexico
China
Consumer
Electronics
Source: McKinsey&Co 2003
Brazil
Brazil
China
White
Goods
China
Brown
Goods
PCs
Productivity
Labor Productivity in Manufacturing: China, Brazil and Mexico
(valued-added per worker, national accounts data. 1990=100).
450
400
350
China (implicit deflator)
China (ex-factory deflator)
Brazil
Mexico
300
250
200
150
100
50
0
1990
1991
1992
Source: statistical offices
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Productivity
Labor Productivity at the Firm Level: China, Brazil and Mexico.
Annual Average (%)
Mexico (1995-2000)
Brazil (1996-2000)
China (1995-99)
0
2
4
6
8
10
Source: Lopez-Cordova and Moreira (2004) and Hu, Jeffeson, Xiaojing and Jinchang
(2003)
12
Scale
•
•
•
•
•
The largest population in the world;
A surface that is roughly as large as the United States
and 15 per cent larger than Brazil;
A US$1.3 billion economy, which is edging closer to
the size of the entire LAC economy (US$1.6 billion).
The PPP figures are even more impressive, putting the
Chinese economy only behind that of the United
States. The largest Latin American economy in PPP
terms—Brazil—is ranked 9th, with approximately 20
percent of the size of the Chinese economy.
Chinese exports, at US$365 billion, are already higher
than those of LAC as a whole.
Scale
• Advantages
 Cost edge on high fixed cost, high-tech
industries (e.g. consumer electronics, domestic sales
of US$ 41 billion, whereas Mexico has US$ 10 billion
and Brazil, US$ 9 billion);
 Better conditions to deepen the supply chain
(the division labor depends on the size of the market);
 Lower infrastructure cost
The Role of Government
Factor and product markets.
•Factor side:
abundant supply of credit to local firms, at
very “competitive” interest rates;
a public funded national innovation system,
which has contributed to reduce the costs and
risks of R&D;
a pragmatic enforcement of IPRs.
The Role of Government
Real Average Lending Rates for Selected Countries.
1990-2003, CPI deflator. % per annum
BRAZIL*
58.5
COLOMBIA
12.7
CHILE
9.1
MEXICO**
6.6
INDIA
6.1
FRANCE
5.8
MALAYSIA
5.7
SPAIN
4.6
US
4.5
KOREA
4.2
CHINA,P.R
2.7
0
Source: IMF_IFS
5
10
15
20
* 1997-2003 ** 1993-2003
25
30
The Role of Government
Domestic Credit Provided by Banking Sector (% of GDP)
Colombia
35.7
Mexico
38.5
Brazil
61.1
105.6
Korea, Rep.
High Income Countries
125.1
China
178.8
0
20
40
60
80
100
120
140
160
180
200
The Role of Government
Factor and product markets.
•Product side:
Sector targeting: e.g. semiconductors,
automobile and software
Firm targeting: “National Champions”.
Still complex dual trade regime, which favor
exports and restricts access to the domestic
market (trading rights and distribution services,
import and export regulation, non-tariff measures and
national treatment)
Trade effects
LAC Net Exports to CHINA by factor intensity.
US$ million 1980-2002
4,000
3,000
2,000
1,000
-2,000
-3,000
High Tech
Low Tech
Primary Products
Resource Based
-4,000
Source: Comtrade
Medium Tech
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-1,000
1980
0
Trade effects
World market shares for manufactured exports:
1981-2002 (%)
18.0%
China
E. Asia excl. China
Mexico
LAC
LAC excl. Mexico
15.0%
12.0%
9.0%
6.0%
3.0%
Source: Comtrade
Note: Manufacturing is defined as SITC 5 to minus 68
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
0.0%
Trade effects
LAC's World Market losses to China by technology intensity
(1990-2002).
1.4%
Losses to China US$
1,200
1.0%
1,000
0.8%
800
0.6%
600
400
0.2%
200
0.0%
0
High-tech
Medium-tech
Low-tech
Source: Comtrade with author's own calculation.
Resource-
.
0.4%
.
% of Total Manuf Exports 2002
1.2%
Total exports
Losses to China (millions of USD$)
1,400
Losses as % of category exports in 2002
Trade effects
LAC's Annual World Market losses to China
(1990-2002, SITC 5 digits)
2.5%
2.0%
2.0%
1.5%
1.0%
1.0%
1.0%
0.6%
0.5%
0.3%
0.1%
0.2%
0.7%
0.5%
0.3%
0.4%
0.3%
0.4%
0.0%
90-91 91-92 92-93 93-94 94-95 95-96
Source: Comtrade, author's own calculation.
96-97 97-98 98-99 99-00 00-01 01-02 90-02
Trade effects:
LAC World Market losses to China by selected countries and subregions, as a percentage of 2002 manufacturing exports (1990-2002,
SITC 5 digits)
6.0%
5.0%
4.2%
4.0%
4.1%
4.0%
3.0%
2.0%
1.1%
1.2%
1.0%
0.3%
0.0%
ANDEAN
BRAZIL
CACM
Source: Comtrade, author's own calculation.
CHILE
MEXICO
MERCOSUR
Trade effects:
LAC's World Market Losses to China by Selected Markets, as a
percentage of 2002 manufacturing exports (1990-2002, SITC 5 digits)
9.0%
8.1%
8.0%
7.0%
6.1%
6.0%
5.0%
4.0%
3.0%
2.1%
2.0%
1.0%
1.4%
0.7%
0.4%
0.0%
All
East Asia
Source: Comtrade, author's own calculation.
EU
LAC
Rest of the
World
USA
Trade effects:
China's Share of Manufacturing Imports in Selected Sub-regions and
Countries. 1990-2002
16%
1990
1995
2002
12%
8%
4%
0%
Mexico
Source: Comtrade
Mercosur
LAC
Chile
ANDEAN
CACM
USA
Trade effects: the potential threat
Brazil's and Mexico Import Penetration* in Manufacturing goods.
World and China (1996 - 2003)
World %
40
35
China %
Brazil-World
Mexico-World
Brazil-China
Mexico-China
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
30
25
20
15
10
5
0
1996
1997
1998
1999
2000
2001
2002
2003
* Import divided by apparent consumption. Brazil's and Mexico's output data converted to US dollars using,
respectively, 1998 and 1994 real exchange rate
Source: own calculation based on IBGE and SECEX data.
Trade effects:
the potential competition
Coefficient of Correlation for Export Composition
LAC-China: Manufacturing, US market (HS 6 digits)
0.6
Andean
Brazil
CACM
Chile
LAC
Mexico
0.5
0.4
0.3
0.2
0.1
0
1992
-0.1
1993
1994
Source: Comtrade
1995
1996
1997
1998
1999
2000
2001
2002
Trade effects:
the potential competition
Coefficient of Correlation for Export Composition
LAC-China: Manufacturing, Rest of the world (HS 6 digits)
0.5
0.4
Andean
Brazil
CACM
Chile
LAC
Mexico
0.3
0.2
0.1
0
1992
1993
1994
-0.1
Source: Comtrade
1995
1996
1997
1998
1999
2000
2001
2002
Conclusions
Is there a future for manufacturing in Latin
America?
China does not make this future any
brighter, given its combination of
endowments, scale, fast productivity growth
and a strong state.
This is particularly true in a world market
already overcrowded by at least three
generations of Asian Tigers and facing the
prospects of others, such as India, to come.
Conclusions
Not a reason for concern if manufacturing
did not really matter for development. Yet,
both theory and evidence suggest otherwise.
Even leaving China apart, manufacturing in
LAC is usually seen with pessimism on the
grounds of geography and endowments. The
tribulations of the sector on the last two
decades seem to corroborate this view.
Yet, geography and endowments do not tell
the whole story.
Conclusions
the legacy of the ISI era, decades of macroeconomic
volatility and the demonization government
intervention, have to be factor in.
These are all policy-related factors and welldesigned policies, backed by strong institutions, can
overcome the restrictions imposed by endowments
and geography.
It all depends a policy agenda, which should aim at:
a) the consolidation of the macro stability; b) the
formation of a large regional market to reduce de
disadvantage of scale; c) the relaxation of excruciating
credit-constraints on local firms; d) the enhancement
of frail local technological capabilities