Latin America must redefine relations with China

Latin America will have to redefine its relations with China if it wants to resume economic growth and benefit from continued investment by the Asian country, according to a new report led by the Organization for Economic Cooperation and Development (OECD).

The recommendation comes from a paper entitled “Economic perspectives for Latin America 2016 — towards a new partnership with China“, co-authored by OECD, the Economic Commission for Latin America (ECLAC), and the Latin America Development Bank (CAF).

“Latin America has not been very proactive in its relationships with China and the world. It has been very passive, Latin America will have to redefine its economic structure,” said Ángel Melguizo, head of the Latin America and Caribbean Unit at the OECD, in an interview with Dialogo Chino.

The report, released this week at the Wilson Center in Washington DC, recommends that Latin American economies diversify and modernise their production structures.

Despite its economic slowdown, China is and will continue to be an important actor and agent for “real change” in Latin America, the report says. Therefore, the region must make deepening its relationship with China a central part of its development plans.

Exhausted model

In recent years, Latin America’s ties with China have evolved through trade and investment. But the countries of the region have yet to fully embrace specific reforms that stimulate inclusive growth and create a mutually beneficial partnership with China.

Trade between China and Latin America grew at unprecedented rates over the last 15 years, according to the OECD. Since 2000, trade flows between the two increased 22-fold. Between 2001 and 2010, exports of Latin American mineral products and fossil fuels to China grew at 16% per year.

China is currently the largest trading partner for major economies in the region such as Brazil, Chile and Peru. Raw material exports to China represent 73% of Latin America’s total, while manufactured products account for no more than 6%.

However, this growth model has already reached its limit, the authors of the study say. Today, Chinese demand for raw materials has slowed, which along with the crash in global commodity prices impacts economies in the region that depend on foreign currency.

Latin America grew just 1% in 2014, far below the 5% rates recorded in the mid-2000s which can be explained by the region’s vulnerability to external conditions. Projections indicate that this year the region will record growth rates of -1% to 0.5%, about 3% less than expected. The OECD estimates that over the next five years Latin American growth will be “extremely low” at around 2%. According to Melguizo, this is evidence of the “weakness of the productive structure.”

“If the region wants to have stable and strong growth, it will have to increase its productivity levels,” said Adriana Arreaza Coll, Director of Macroeconomic Studies at CAF, who adds that the region also urgently needs to fill infrastructure gaps.

The acceleration of the economies in the region seen in the early 2000s helped reduce poverty “spectacularly,” according to the report, but profound socioeconomic challenges still persist. Poverty affects 28% of the region’s population – some 164 million people – which means it retains the unenviable title of most unequal region in the world.

Development Agenda

Despite China’s potential to become a key actor in improving Latin America’s prospects, relations are asymmetrical, the authors stressed.

“The economic growth model of the 2000s is over, now is the time to activate another model and consider China for help in this new stage. We believe that, over the next two decades, there will be a new association with China, since it will continue to invest and lend to the region,” stated Melguizo.

New opportunities may open up in the food sector, for example, since China has a greater population than its water supplies and arable land can support. However, this also implies impacts for Latin America.

“It will be an importer of raw food with more protein, because a new Chinese middle class is rising. We estimate that one billion Chinese people will be in the middle class in 2030,” Melguizo added.

China has declared Latin America a priority for its investments. Since 2010, Chinese loans have reached US$ 94 billion, compared to the US$ 156 billion lent by the World Bank, CAF, and IDB (Inter-American Development Bank) combined.

In addition to environmental sustainability, a commitment to transparency and good governance is needed if the region is to turn around it’s fortunes, the study says.

“Latin America sells very little technology. The supply of exports exclusively followed Chinese demand. Now is the time to identify what productive structures that the region wants to have and to offer,” Melguizo says

Innovation

There is also a lack of investment in innovation, education and skills in Latin America, the study says.

Capital investments in Latin America are much smaller than in other OECD countries. By 2030, 90 million Latin Americans will have completed higher education, some 19% of the labor force, whereas in China this figure is 220 million (representing 21% of its workforce).

One in five students in the Latin America study science and technology, whereas half of Chinese students graduate in this field.

A regional approach to “win-win” relationships

The report says that the relationship with China will not reach its full potential if the region does not go beyond establishing bilateral agreements as individual countries. The study points to regional bodies the Caribbean Community (Caricom), the Central American Common Market, the Southern Common Market (Mercosur), and the Pacific Alliance as a potential bases for better coordination with China.

“It would make sense to have dialogue between the China and the region as a whole. It’s a question of economic logic to achieve a more harmonious relationship. We need a more unified position,” he said.

China would also benefit from this new relationship with Latin America by presenting itself as a “secure market for its exports and an attractive destination to diversify its investments abroad,” the report says.