Asian Drivers and Emerging Countries

1. Asian Drivers and Emerging Countries Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre Standard Chartered London June 15th 2006

2. 1 The cognitive effect: new emerging capitalisms. 2 The trade effect: the dark side of the boom. 3 China and India as a wake up call.

3. Korea&Japan 12.7% US 29.6% EU 30.7% LatAm 4.8% The cognitive impact: The emergence of new capitalisms. Center and Periphery rebalanced… GDP share of world output (WEO, 2004) Emerging Asia 8.0% China 4.2% Asia represents more than one fifth of world output.

4. China has doubled its GDP in 8 years: a unique combination of economic pragmatism and catching up process…without the help of Money Doctors! PPP per capita GDP in constant prices (thousand of US$, 2004-5 estimate) Source: based on WEO and PWT Chinese growth rates has been higher than those observed in Brazil and Mexico during their glorious years.

5. Asia´s growth is based on an outward looking strategy: a development strategy to follow for Latin America and Africa. … and its share in world merchandise trade has duplicated in less than a decade. Source: IMF DOTS China’s trade openness surpasses that of all Latin American countries … Source: WTO, National Statistics

6. 1 The cognitive effect: new emerging capitalisms. 2 The trade effect: the dark side of the boom. 3 China and India as a wake up call.

7. Some findings: The Good, The Bad and the Ugly. • Countries specializing in the production and export of components, capital goods and raw materials feel positive effects from China’s growth while countries specialized in the production of consumer goods feel negative effects (Eichengreen & Tong, 2005). • The exchange rate issue maters: a 20% appreciation of the renmimbi reduces exports to the US by a fifth, while other regions will increase their sales to that market (0.5% for Latin America) (Lopez Cordoba, Micco and Molina, 2005). • Tout est pour le mieux dans meilleur des mondes? (Candide, Voltaire).

8. Source: BP Source: JP Morgan estimates China´s strong demand for energy and commodities: a bonanza or a threat? Source: BBVA, Cochilco

9. China’s demand for commodities: a bonanza or a threat? Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: Blázquez, Rodríguez and Santiso (2006)

10. Trade Balance with China 3000 US$ millions 2.385 2500 2000 1.729 1.694 1500 966 1000 574 500 0 2001 2002 2003 2004 2005p China has become a major destination of Brazilian exports: The bonanza. Major countries of destination of Brazilian exports 1999 2004 United States 22,6% 1º United States 21,1% Argentina 11,2% 2º Argentina 7,6% Netherlands 5,4% 3º Netherlands 6,1% 4º China 5,6% Germany 5,3% Japan 4,6% 5º Germany 4,2% Italy 3,8% 6º Mexico 4,1% Belgium 3,8% 7º Italy 3,0% United Kingdom 3,0% 8º Japan 2,9% France 2,5% 9º Chile 2,6% Spain 2,4% 10º France 2,3% Mexico 2,2% 11º United Kingdom 2,2% Chile 1,9% 12º Spain 2,1% Russia 1,6% 13º Belgium 2,0% Paraguay 1,6% 14º Russia 1,7% China 1,4% 15º Venezuela 1,5% Source: SECEX Source: BBVA

11. Herfindahl-Hirschmann Concentration Index of Herfindahl-Hirschmann Concentration Index of Brazilian exports by industry, 1990-2003 Brazilian exports by country of destination 0,20 0.12 0,18 0.11 0,16 concentration more +concentration 0.10 0,14 0,12 0.09 0,10 0.08 0,08 concentration less 0.07 0,06 0,04 +diversification 0.06 0,02 0.05 0,00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Source: WTO. Brazilian exports of primary products: more is not better (Dutch disease and monopsony power: issues to watch). Source: BBVA and Bradesco

12. 1 The cognitive effect: new emerging capitalisms. 2 The trade effect: the dark side of the boom. 3 China and India as a wake up call.

13. China competes intensively with Mexico on a global level Source: Blázquez, Rodríguez and Santiso (2006)

14. Mexico’s competitive advantage: proximity to export markets Mexico benefits from its geographic proximity to its major export markets: • Lower transport and communication costs • Access to FTA • Just-in-time delivery 24 Days 4 Days 160 Km 11,700 Km Shipping time Mexico is more competitive in manufacturing more sophisticated products which require frequent communication with the client or supplier and short reaction times.

15. Mexico’s competitive advantage: lower transport costs México vs. China at different oil prices * Total expenditure on freight as a share of total imports of commodity, average for all countries Source: US Census Bureau, CIBCWM (2005) Source: CIBCWM (2005) • US imports from China tend to be more transport sensitive than from Mexico. Could transport savings offset Chinese lower wages ?

16. Pending reforms : the upgrade of port facilities

17. Conclusions: A Watch List • Africa and Latin America: Out of the Value-Chain Game? • The share of China’s total exports produced by foreigners has risen sharply, from 32% to 60% between 2000 and 2005. • Foreign outsourcing is becoming a major driver of India’s and China’s high tech exports, both countries moving up quickly in the value added ladder. • In 2005 for example, of China’s top 100 exporters, 53 were foreign companies and all were electronics/information technology companies.