International Economic Integration and Growth in Latin America
Integration of Latin America into the international economy over the past quarter century has led to faster export growth, but not to faster GDP or productivity growth
Contrary to mainstream analysis, under the current market reforms countries have underperformed as compared to the prior period of state-led industrialization
Growth was much more volatile than in the past, reflecting large vulnerabilities to external shocks
Deeper integration into the global economy has been a distinctive feature of Latin American development strategies over the past quarter century. The dominant elements of such integration have been export-led growth relying on market forces and open capital accounts. This has been combined with some state intervention to promote foreign direct investment (FDI), export processing zones, and regional integration and free trade agreements.
The effects of integration
Integration into global markets has not proven to be successful for most Latin American countries. Contrary to mainstream analysis, under the current market reforms countries have underperformed as compared to the prior period of state-led industrialization.
Good export performance has been the most positive outcome of Latin America’s increased economic integration, with intraregional trade having a particularly positive effect on exports. However, good trade performance has not been reflected in GDP or productivity growth in most economies of the region. Furthermore, while the recent commodity boom has been a windfall, particularly for South American mineral exporters, this generates risks of further accelerating the premature de-industrialization process that has taken place since the 1970s.
The process of open integration in the global economy has also left a legacy of weaknesses in technologies that support the productive capacity. Although FDI and the rise of companies operating in multiple Latin American countries have been positive features of the ongoing transformations, openness to volatile financial flows from outside the region has been a major source of the steeply rising and falling business cycles that have characterized the past decades in Latin America.
The collapse of global trade during the great recession in 2008-09 and its incomplete recovery have no doubt added an extra element of uncertainty in trade and production sector structures. This means, in particular, that growth in Latin America is likely to be even slower going forward. Weak trade growth may also encourage increased protectionism. Natural resource exporters may continue to benefit from high commodity prices, but there is also a level of uncertainty about how long exceptional conditions in commodity markets are likely to last. Under these conditions, it is essential for Latin American countries to adjust their development strategies.
Strategies to pursue
There are three recommended strategies for addressing these policy challenges, which could be adopted in various mixes.
- Increasing capacity
Latin American countries need to adopt active policies that concentrate on upgrading technology for existing and new activities in manufacturing, natural resource extraction or service sectors. Upgrading can involve a mix of support to research and development as well as encouraging those productive branches, firms and exports that have higher technological content. The essential instruments to do this are strong national innovation systems and development banks.
- Strengthen links with China
The second strategy is for Latin America to strengthen links with China to address the major asymmetries that currently characterize trade linkages between them. Thus, Latin America should diversify its exports to China and seek explicit agreements with the Chinese authorities on a path to redress trade imbalances.
- Greater focus on domestic markets, and a strengthening of regional integration processes
Governments should have active industrial sector policies with a focus on upgrading technology for existing and new industrial activities
Latin America needs to increase links with China, while redressing current trade imbalances and other asymmetries
Governments in Latin America should strengthen domestic markets and the regional integration processes
Domestically, governments—especially in Argentina , Brazil, and Colombia—should improve social conditions as a means to make domestic markets more dynamic. Regionally, strengthened integration should support the first strategy, as intraregional trade has a much larger share of manufactured goods with higher technological content. Regional integration also gives broader opportunities to small and medium-sized firms. It must be accompanied by improvements to infrastructure connecting Latin American countries. However, regional integration must overcome its strong cyclical nature as well as political divisions within the region.