The Growth Markets’ Potential: What their emergence means for the future
The general questions to be discussed on the panel are:
1. Much of the growth in exports in developing countries has been due to greater demand for raw materials and the increase in commodity prices. What are the governments and companies in these countries doing, and what do they need to do to increase their production capacity to be able to meet the market’s new demand in their own regions and in other emerging markets, while decreasing their dependence on raw materials markets?
As IMF and WB has predicted, economic growth will shrink 0.4% this year and growth slightly in 2013. We will see a reduction in aggregate demand and a strong contraction in developed economies that will be felt in emerging countries affecting the small and developing economies.
Nonetheless, the developing countries continue to lead the recovery in external demand; these changing trade patterns are associated with the rapid industrial growth in the South East Asian countries, China and other developing countries. Between 1995 and 2011, South-South trade grew at an annual rate of 13.7 percent, well above the global average of 8.7 percent.
As a net exporter of raw materials, Latin America and South America in particular has benefited significantly from the boom in prices seen in recent years. However, the uncertainty about the global economic outlook raises questions about the region’s vulnerability to a sharp drop in the prices of raw materials and policies that can protect it from such a shock. It is clear that is key for emerging economies, to take advantage of their natural resources in a way that incorporates value added to its riches, based on innovation. That’s necessary for sustainable growth, development, job creation, exports and wealth for their people.
In Latin America: Colombia, Brazil, Peru, Costa Rica and Mexico, among others, have specific characteristics that make them possible to take advantage of their abundance of natural resources: political stability in almost all of them; the enlargement of medium class and the increase of the local demand, the improving of conditions for investment (local and international investment) through legal stability measures, are good conditions to generate manufacturing and agro-industrial projects that incorporates the natural resources.
State support should coordinate public policies to promote: i) more private investment, ii) financial support that stimulates research in science and technology, iii) the incorporation of a virtuous working cycle among universities, business owners and government; iv.) The regulations to avoid anticompetitive measures, v.) The negotiation of trade agreements that provide market access to larger economies VI.) The development of transparency rules in government procurement and policies to develop small and medium companies as suppliers in government procurement, help to develop domestic markets and keep domestic production in a good shape to sustain economic growth.
In assessing Latin America’s historical trend since the decades of the 1970s-1980s, it can be seen that South America is the sub-region that is most dependent on raw materials exports, and we know that this creates few jobs. This feature has deepened over time (net exports of raw materials accounted for 11 percent of GDP in 2011, compared with 6 percent in 1970).
For example, Colombia has experienced a change in its foreign trade structure in the past four decades. At the end of the 90’s there was a positive change in our trend of non-traditional exports over traditional exports. In that moment I was a Minister of Foreign Trade an we develop under President Pastrami Administration a policy of competitiveness, export and markets diversification and we achieved an increase in exports of non-traditional products, going to 54.1% of total exports in where manufactured goods mounted 46% in 2002. Agricultural exports (which amounted to more than 50 percent of total exports in 1970-80), now account for only 4.5 percent, similar trend that all Latin America which agricultural exports accounted for 36 per cent between 1970-80 and in 2011 they contributed only with 12 of GDP.
However, we in Colombia have been victims of our own success, “quote” because the improvement in the security front has attracted new foreign direct investment to our country which is focus in energy that Colombia has: Oil. Gas, hydro electricity and mining. This reverses our trend for non-traditional exports. Currently 71 % of our exports are traditional which means oil, nickel, coal, gas, mining and coffee. It is a concern for some people in our country the reprimarization of the economy. The opportunity of high prices in our exports of commodities must be used in the development of i) infrastructure and logistics, ii) strength of institutions, iii) education, iv) science, technology and innovation, among others. These are clear core elements of a competitiveness agenda that is needed in every country in emerging markets, mostly in Latin America where inequality is still too high.
During the recent crisis, the soundness of public finances in the region has been remarkable. The level of public debt in Latin America, for example, has been reduced (from a debt approaching 80 percent of GDP in the early nineties to amounts around 30 percent at present) due, in part, to increased revenue. In turn, public expenditures have become more efficient from the perspective of growth, poverty reduction and income redistribution, such as the cases of public investment and social spending, which have also increased.
Thus, while higher foreign investment flows and higher prices of commodities are, in principle, good for developing economies, they pose greater challenges such as exchange rate volatility and the phenomenon of the so-called “Dutch disease.” Faced with that, one must use the tools at their disposal to counter excessive volatility, currency appreciation pressure not based on economic reasons, and inflation. This calls for fiscal discipline to reduce external government debt, stabilization funds, and fiscal rules. Under special circumstances, the introduction of controls on capital flows or taxes on short-term financial transactions can be an effective tool to achieve this goal, especially if prudent financial regulation is insufficient to ensure financial stability. These measures not only make it possible to reduce the volatility of the economic cycle, but they also remove obstacles to diversifying the economy and provide some predictability to facilitate investment in new technologies and stability of public finances, elements that allow for implementing long-term policies to grow bigger and better.
Countries like China and the United States have created a revaluation trend in developing economies due to their currency fluctuations, leading to loss of competitiveness in manufactured goods, both for Colombian exports on the international market and for domestic manufacturers with regards to the advance of imported products in the growing domestic market. Meanwhile, economies with stronger checking accounts often obtain more favorable results.
In the case of Colombia, the international demand for some specific raw materials creates a lack of them for industry generating exports of raw material without value added, and latter the imports of finished products made from those same raw materials, often from China or other Asian countries. This is the case for products such as: scrap, raw hides, among others, hence, it is important to take clear measures, including reviewing the limitations of the WTO and impose duties on exports of scarce raw materials to discourage the exporting of raw materials and encourage the generation of added value, otherwise this trade boom will not be sustainable in the long term.
2. What investment and trade diversification policies have succeeded in emerging economies and what is the recipe that can be applied to developing countries and small economies?
According to the Economic Commission for Latin America (ECLA), the Latin American region has received more investment than ever, posting revenues of U.S. $153.0 billion in 2011; however, that only accounts for 10 percent of global cash flows. In 2010, Latin America had received U.S. $120.88 billion, while the previous year only U.S. $81.589 billion entered as a direct result of the international financial crisis. In the ranking, Brazil is the country where the most long-term capital was invested from abroad last year, with U.S. $66.0 billion. This figure represents 43.8 percent of the total. It is followed by Mexico (U.S. $19.44 billion), Chile (U.S. $17.299 billion) and Colombia, with U.S. $13.234 billion.
In the region, investment policies have been achieved under a framework of security, greater institutionalization, economic stability, development of value chains to stimulate investment, and in some cases tax incentives (Brazil).
It is not easy to set general policies for trade diversification, given that each emerging economy is different, the size is also different and some tends to specialize, exploiting its comparative advantages that end up becoming competitive advantages. These economies must diversify their production into the areas that domestic and global demand for goods and services requires.
On the one hand, they need to protect themselves from price volatility and external financial inflows, in some cases through more restrictive macroeconomic policies. On the other hand, they need to increase growth-oriented investment and the restructuring of their economies with an emphasis on developing their own production that involves them in international trade flows while meeting a significant portion of domestic demand to thereby generate more jobs, reduction of poverty and higher levels of wellbeing.
The first priority, as Paul Kurgan says, must be defined according to: “increasing public spending and providing liquidity to companies and families to boost demand and generate economic activity" in order to reduce unemployment, especially through public investment and more direct job creation.
Latin American countries must seize the opportunities to remove restrictions on development and take a quantitative and qualitative leap in the provision of public services. In natural resource-intensive economies, governments should consider using part of the associated incremental revenues to encourage the diversification and competitiveness of the rest of the economy by investing in education, infrastructure , innovation and strategic chains of value added in order to facilitate the income distribution and social inclusion.
The configuration of Asia as the center of the new global order is an opportunity for Latin America. Beyond raw materials, China can become a major player in funding infrastructure, unlike Europe, which, due to its economic situation, has lagged in its presence in the region as strategic partner for achieve a more efficient productive sector, and the infrastructure that fosters development.
Beyond greater financial resources, governments must also be transformed to better meet the needs of their citizens and manage their resources in a more efficient, transparent and effective way. A better use of government procurement reinforce the efficiency of spending and serve to develop new suppliers critical for diminish unemployment. Special mention should be made of policies and actions to reduce corruption based on greater access to information and citizen participation in public policy. New technologies (for example, use of the Internet for e-government, or more recently the idea of “open data” available in public institutions) can help, but the public institutions themselves are the ones that have to change the way they operate and adapt to help national firms to take full advantage of their potential.
Governments should not limit themselves to improve what they have been doing so far, but rather they should take a big, bold leap and identify new strategies for defining and achieving more ambitious goals. There are three key areas for supporting sustainable and inclusive growth: i) education, ii) infrastructure, and iii) entrepreneurship, and innovation to create national value chains.
3. Most international trade is taking place within the global supply chains of multinational corporations. What threats and opportunities exist and what does this mean for exporters, particularly for SMEs?
The geographical fragmentation of production has created a new trade reality. This fragmentation, often given the names “global value chains” or “vertical specialization,” increases trade interdependence and has many implications for the way that we understand trade policy. The increasing fragmentation of value chains has led to an increase in trade flows of intermediate goods, especially in the manufacturing sector. In 2011, trade in these kinds of products was the most dynamic sector of international trade and it counted for more than 52 percent of global trade in goods excluding fuels. Trade in parts, components and accessories fosters the specialization of economies, which results in “trade in tasks,” which adds value along the production chain.
Specialization is no longer based on the overall balance of countries’ comparative advantages in the production of a final product, but rather on the comparative advantages of the “tasks” that these countries perform in a particular stage in the global value chain.
For example, in the case of Curitiba in Brazil, they tried to use a localization theory for the specific case of the automotive industry, which has some of the relevant features that serve as barriers to entry, such as economies of scale and agglomeration, and capital intensity and technology. It was noted that these features are critical factors that determine the location of investments by transnational corporations and the concentration of many of these companies that are generally grouped or clustered around specific geographical regions. These trends proof that in the automotive industry’s market structure, many of the suppliers are concentrated, led by a few transnational corporations that control global car manufacturing through their global production networks.
They reported that the major car producers are Japan, the United States and the European countries, while in Latin America leadership belongs to Mexico, which produces mainly for export, and Brazil, which produces for its domestic market. There are various factors that multinational companies can provide to national companies in order to improved their performance internationally, as becoming part of a global chain and managing strategies to be competitive, no matter the threat of new entrants, threat of substitution, bargaining power of suppliers and customers, as well as the intra industry competitiveness.
Intra industry performance when environment become unstable or unpredictable, is a strength that companies must develop in order to sustain the ability to learn and adapt to any situation in the market or in its own resources.
Global industry environment will likely be the most important aspect for small and medium size companies that participate with multinationals as suppliers or as customers, and the ability to stay global and yet be competitive locally, is a differentiating factor that makes multinationals and their suppliers, to sustain in hard competition.
Now days there are many Latin-American companies doing M & A in the region mainly in the banking services and pensions funds industry. Banking, insurance and others, are developing the so call “multilatinas ” which are not globally, but regionally oriented thanks to the advantages of the language and the knowledge of the regional market.
Headquarters of multinationals must be aware of the environment where they are having a significant impact in order to contribute not only to their direct allies or suppliers, but also to promote good practices and higher standards in the businesses environment. The creative cooperation in despite of the competition, can contribute to develop strong clusters in some specific industries.
Threats and Opportunities for exporters:
Given the costs of entry, business opportunities are determined by increases in activity rather than by the actual size of the economies. For example, economic relations between Asia and Latin America have grown stronger. Trade flows between the two regions have increased nine fold in the past 20 years, but they have a marked asymmetry. Asian exports: high-value goods such as motor vehicles, communication devices and electronic devices; to lesser extent intermediate goods such as textiles, fabrics, iron and steel. Latin American exports: raw materials such as iron ore, soybeans, copper, paper, oil, coal. Therefore, we must pay appropriate attention to:
i) Infrastructure is a major bottleneck for sustainable growth, competitiveness and even equality in Latin America. The region has higher gaps (which, in some areas, such as access to broadband Internet, have increased in recent years) with respect not only to the OECD countries but also to emerging economies in Asia and other regions of the world.
ii) In the last decade, institutions for formulating innovation strategies have been strengthened, but policies aimed at strengthening national innovation systems and increased financial support are still weak to lead the innovation agendas. It is necessary to improve planning capacity and overcome the tendency to allocate resources based on short-term evaluations, and design policies focused on results to develop strong production chains with internal that become competitive in the global environment of globalization.
4. What have the main lessons from this period been, and what can other countries learn from Colombia’s experience?
Colombia’s growth path in recent decades has quickened and is greater than the region’s average; this growth is not only explained by the increase in consumption, but also investment. Between 2001 and 2011 public demand contributed 18 percent, private demand 69 percent, and exports 13 percent to the growth in Colombia. Foreign direct investment (FDI) grew 5.5 times in the last 12 years, reaching USD 13.3 billion in 2011. Additionally, there has been a decline in public and private external debt to 20.6 percent of GDP in 2011, as compared to 36.3 percent in 2000.
The dynamics of international trade have made it possible that in 2012, 62 percent of Colombian exports to its major trading partners are under trade agreements, there is also an enterprising business strategy that has been developed a new trade openness.
At the same time, it is clear that emerging countries and their exports, are contributing more and more to global growth and trade with other emerging countries (42%) and with developed countries (36%). Under this scenario, it is essential to promote a long-term strategy to allow Colombia’s enlarge the industrial exporting capacity as a sustainable source of growth.
On the other hand, it has recently been highlighted that South-South trade, led by China and the rest of emerging Asia, is currently the main driving force of global trade growth (ECLAC, 2011). According to ECLAC, “the volume of exports from developing countries grew by 17% in 2010, compared with 13% in industrialized countries. It is also expected that the value of goods exported from Latin America and the Caribbean will grow by 27% in 2011, which is a similar increase than the last year. This growth would result from a 9% increase in the volume of exports and an 18% rise in the price of products exported by the region.”
South-South trade represents a growing percentage of trade in Latin America and the Caribbean. Meanwhile, the share of North-North trade fell from 63 percent to 38 percent over the same period. If these trends continue, it is expected that South-South trade will replace North-North trade in importance by 2018.
“Over the last five years, exports from Latam to Asia-Pacific grew their annual rate tripled that of total exports (22% versus 7%). During the same period, imports from Asia-Pacific have also grown more quickly than total imports (annual rates of 15% versus 9%, respectively). Latin America has become China's most dynamic trading partner, with an annual growth of 31% in its exports to the region between 2005 and 2010, compared with 16% to the rest of the world.
For the period 2005-2010, the growth rates of Chinese exports to Latin America and the Caribbean and its imports from this region nearly doubled those of its total exports and imports. Thus, the region’s share in Chinese trade has gone from a very low percentage to 6% in 2010, both in imports and in exports.”
5. Colombia recently signed a free trade agreement with the U.S. What impact to you, this will have on domestic companies and on the Colombian economy in general?
Colombia has recently entered into a Free Trade Agreement not only with the United States but also with the European Union – which was first proposed when I was Minister of Foreign Trade for Colombia and Pascal Lamy was the European Commissioner for Trade. Other treaties that are currently being negotiated are with countries such as: Israel, Japan, Turkey, Costa Rica, Panama and the Pacific Alliance. Moreover, the agreements that have recently been signed are with Korea, the EU and the EFTA (Norway and Iceland).
Current agreements: LAIA, CAN, CAN-MERCOSUR, Northern Triangle, Chile, USA, Canada, EFTA (Switzerland and Liechtenstein), Mexico, AAP-Caricom, APP-Cuba and APP-Venezuela.
With respect to the treaty with the United States, it is positive because USA is our larger market and investor and because the instability of the unilateral trade preferences, some investors choose other countries in the region rather than Colombia. So its is not predictable that we are going to increase very much our exports, but it is clear that we will increase machinery, technology and capital goods imports and mainly, we will improve the rule of law for trade and investment because of the treaty with the economic efficiency derived from it.
Besides being one of our major trading partners, it was essential to have a legal structure that would provide continuity and institutionalism to the more informal arrangements made between the two countries. It also would be very positive to eliminate governments’ discretionary power to set tariffs and return to unilateral trade protectionism.
Nonetheless it seems to me that Colombia has arrived so late to an FTA with USA because on the meantime, so many of our exports competitors, who negotiated with USA before us, are well positioned in the same target that Colombia lost during the last year without preferential access nor free trade.
However, it is important to note that the quality of the treaties is more important than the number of treaties that are consolidated in a country. Colombia is negotiating so many and so rapid Free Trade Agreements that could cause great harm to Colombian industry. That’s why people like me are advocating for a public policy that supports a better manufacturing performance and a more balanced economy.
The biggest challenge that Colombia faces with the FTA with the United States is the lack of adequate American market knowledge and the lack of infrastructure to be able to meet the requirements set in the FTA. We have to continue strengthening our institutions to oversee and monitor trade (although the current free trade agreement with the United States provides for an Agricultural Trade Committee, it would be important to organize an interdisciplinary Trade Committee responsible for monitoring and regulating the standards agreed by the parties.
A major challenge is the need for regional integration that would make it possible to increase production and competitiveness, managing to meet U.S. demand. Meanwhile, the challenge for Colombian entrepreneurs will tend towards improving their productivity, with strategies aimed at aspects such as technology, education, innovation, customer service and financial best practices, such as implementing value management models.
6. Are local businesses willing to take on the opportunities and programs and policies that are being put in place to take full advantage of them?
Yes, the local companies are committed to take advantage of the new opportunities that Colombian government is implementing because the bilateral FTA with USA, focus on the following programs:
a. Modernization Fund for SMEs: these provide incentives for programs, projects and activities aimed at technological development and at fostering and promoting the micro-, small- and medium-sized business sector.
b. Productive Transformation Program: this is a public-private partnership that promotes the productivity and competitiveness of sectors with high export potential, through more efficient coordination between the public and private sectors. It focuses on
c. Facilitation Law: this is a law that promotes protection and ensures the effectiveness of the rights of individuals and entities before the Government, in addition to generating a commitment by public institutions to be more efficient and effective.
d. Bancóldex Development Unit, Innpulsa: in order to stimulate s/m companies to associate and develop country’s productive sectors with more innovators and entrepreneurs to make high-impact in our businesses profile.
e. Government Online
f. Entrepreneurship
Better pace, more value added, better institutions that improve the linkages between the academy and private sector, better education, more innovation, and more multilateralism, are all necessary to promote a larger and fair participation of emerging Latin-American countries in the international trade.
We do have, like very few countries, an important agriculture, a considerable and very diversified manufactured industry, and a good services sector to promote in the international markets, but to protect against unfair practices or to become only a shelter that attracts because of the recession in so many economies.
Finally, it is important for you to understand that in the last 50 years, we have suffered with terrorism from guerrillas and paramilitary feed by narcotrafic. Of course not only good trade policy counts, but also good institutions, good rule of law, good governance, good fiscal policy, good education, a political commitment and, last but not least, fiscal discipline and a balanced exchange rate, counts in order to become an international oriented actor, and to be succeed internally. This is the process that Colombia has been developing during the last 15 years.