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China and India?s rapid growth positive for Latin America and the Caribbean

China and India?s rapid growth is positive for Latin America and the Caribbean (LAC) as a whole, despite the adverse effects the Asian competition is having in some countries and industries, says a new World Bank report released today.

According to Latin America and the Caribbean?s Response to the Growth of China and India: Overview of Research Findings and Policy Implications, concerns that both countries are displacing Latin America in world markets for goods, services, foreign direct investment, and innovation are misleading.

?The robust growth of China and India is not a zero sum game for Latin America and the Caribbean,? said Guillermo Perry, World Bank Chief Economist for the Latin America and the Caribbean and one the authors of the report. ?The overall regional effects of the larger presence of the two Asian economies have been positive, but our countries have not taken full advantage of the rapidly growing markets in China and India, nor of the global opportunities generated by cheap intermediate inputs and new production networks.?

Today?s China and India?s share of world exports is 50 percent larger than that of LAC, whereas in 1990 the opposite was true. But contrary to what many believe, LAC?s exports of services to the United States --its main market-- are seven times larger than China?s and India?s combined.

The study, prepared by World Bank economists Daniel Lederman, Marcelo Olarreaga, and Guillermo Perry,includes as positive effects the higher commodity prices, driven by increased purchases from China and India, which benefit exporters of products like copper and soy in South America.

Other benefits range from growing opportunities for LAC exporters to Asian markets, to new production possibilities associated with cheaper intermediate inputs from China and India, growing investment and financial flows ?China has become a large net exporter of capital contributing to low global interest rates? and innovation spillovers.

On the other hand, the report says that the overall gains have been accompanied by some pain. Some industries, firms and sub-regions are being negatively affected by the rapid growth of China and India, particularly in Mexico and Central America. Some of these industries include industrial and electrical machinery, electronics, transport equipment, and textiles.

Nevertheless, the study stresses the diversity in the region. Some countries are responding to the Asian challenge by changing their specialization pattern in favor of natural resource and scientific-knowledge-intensive industries. In the case of the apparel industry, Costa Rica and the Dominican Republic are shifting to higher quality, higher price textiles and clothing, while others, such as Haiti and Nicaragua, are moving towards lower-wage, unskilled-labor intensive products.

In the case of Mexico, the report indicates this is the only Latin American country whose comparative advantage has been moving in the same direction as the two Asian economies and, therefore, has been one of the most affected by the emergence of China and India.

?Instead of responding with protectionist policies, the region should adopt offensive strategies to take advantage of the overall positive effects of high Chinese and Indian growth, to increase their share in world markets, and strengthen the development agenda,? said Perry. ?Countries need to focus on better innovation and education policies to help firms and workers increase their competitiveness and acquire the necessary skills to move towards higher quality and scientific-knowledge-intensive products.?

In addition to education and innovation, the report says that governments in LAC need to support policies that facilitate rural development and natural resource-based industries to help the economies respond well to higher demand and prices for commodities. The study also recommends the strengthening of export and investment promotion, in coordination with the business sector, in the two Asian markets, and helping LAC firms to better integrate into global production chains.