World Development Vol. 35, No. 3, pp.

355–376, 2007
Ó 2006 Elsevier Ltd. All rights reserved
0305-750X/$ - see front matter
www.elsevier.com/locate/worlddev
doi:10.1016/j.worlddev.2006.11.001

Fear of China: Is There a Future for Manufacturing

in Latin America?
MAURICIO MESQUITA MOREIRA *
Inter-American Development Bank, Washington, DC, USA
Summary. — China’s emergence has raised pointed questions about the future of manufacturing in
Latin America. This paper looks at this challenge and its implications. It begins by asking: Does
manufacturing still matter for Latin America? It argues that the region cannot afford to turn its
back to a well-proven road to development. It then moves on to show that endowments, produc-
tivity, scale and the government’s role, all work together to make China a formidable competitor.
The importance of this challenge is confirmed by an analysis of the trade data, which suggests a
small impact so far, but a disquieting trend.
Ó 2006 Elsevier Ltd. All rights reserved.

Key words — economic development, trade, Latin America, China, manufacturing

1. INTRODUCTION competitor. Section 4, using correlations and

China’s emergence in world markets raises
pointed questions about the future of Latin
America and the Caribbean (LAC) in the
world’s division of labor. The once dominant
view that the economic future of the region
was in manufacturing has long been challenged
by traditional trade theory and in practical
terms by at least three generations of Asian Ti-
gers (e.g., Japan, Korea, Malaysia). China and
its ‘‘unlimited supply of labor,’’ rapid produc-
tivity growth, and highly interventionist state
has brought the practical challenge to unprece-
dented levels. This paper, using mainly descrip-
tive production and trade statistics, looks at the
nature of this challenge and its implications.
It is divided into five sections, including this
introduction. Section 2 revisits a time-old ques-
tion: Does manufacturing really matter for
LAC’s development? It argues that even though
geography and endowments are not favorable,
the risks and limits involved in natural resource
specialization, the size of manufacturing in
the region and the opportunities for policy
improvement, all suggest that yes, manufactur-
ing still matters. Section 3 takes on the compet-
itive challenges posed by China to LAC’s
manufacturers. It shows that endowments, pro-
ductivity, scale, and the role of government, all
work together to make China a formidable
355
standard shift-flow analysis, looks at the trade
impacts for LAC of China’s growing presence
in the world markets. The results point to
limited but increasing market share losses for
producers in the region, a trend that seems to
confirm the severity of the Chinese challenge.
The last section concludes by discussing, in gen-
eral terms, the (difficult) options available to
policymakers.
2. MANUFACTURING?
Whether an analysts rates China’s emergence
as a positive or negative shock to LAC depends
to a great extent on his views about the
importance of manufacturing for the growth
prospects of the region. It seems, then, appro-
priate to begin this paper by arguing that
LAC cannot afford to turn its back to a well-
proven road to prosperity.
One could reasonably expect that, after more
than half a century after Prebisch (1950)
* I am grateful to Robert Devlin, Marcelo de Paiva
Abreu, Andrés Rodrı́guez-Clare, Elio Londero, and
Jorge Chami Batista and the anonymous referees for
their comments. None of them though should be held
responsible for the views expressed here.
356 WORLD DEVELOPMENT
published ‘‘The Economic Development of
Latin America and its Principal Problems,’’
the issue of whether manufacturing matters
would have been settled. Yet, the debate in
the region seems to go on fuelled, first, by
LAC’s poor industrial performance and second
by the fact that economists have yet to agree on
the relevance of the ‘‘natural resource curse.’’
Among those that are, explicitly or implicitly,
pessimistic about the future of manufacturing
in the region, the main argument remains
rooted in the logic of comparative advantages.
Yet, they do not always agree on the con-
sequences of this pessimism. For instance, De
Ferranti, Perry, Lederman, and Maloney
(2002), relying on the history of successful nat-
ural-resource abundant countries such as Can-
ada, Australia, Sweden, and Finland, are very
enthusiastic about deepening the region’s spe-
cialization in natural resources, seen as a path-
way to a ‘‘knowledge economy.’’
Blum and Leamer (2004), though, offer a dif-
ferent perspective. They share the manufactur-
ing pessimism on the grounds of geography
and endowment, but unlike De Ferranti et al.
(2002), they see it as more of a curse than a
blessing: ‘‘Natural-resource-rich communities
invest their resources in land, permanent crops,
and extractive equipment and very little in hu-
man capital, which has a very low return on a
coffee plantation or the equivalent.’’ (p. 547).
They also dismiss the natural resource suc-
cess stories as ‘‘not completely meaningful’’ to
Latin America, inter alia, because countries like
Canada, Finland, and Sweden ‘‘may have made
a commitment to broad human capital accumu-
lation for non-economic reasons prior to the
period when the private return to human capi-
tal exceeded the private return to physical cap-
ital.’’ (p. 5).
Although influential, both strands of this
manufacturing pessimism seem to stand on
shaky grounds. The bulk of the empirical
growth literature, at the very least, does not
support the natural-resources enthusiasm of
the first strand (see e.g., Easterly & Levine,
2003; Gylfason & Zoega, 2002; Isham, Wool-
cock, & Busby, 2003), and the few papers that
reject the natural resource curse (e.g., Leder-
man & Maloney, 2003) confirm the benefits of
diversification. The well-known success cases
of resource-based development strike more as
exceptions than rule. In all of them, transition
into manufacturing was a crucial element of
their story, and they made this transition count-
ing on a human capital base that preceded the
natural-resource development and in a global
environment where fragmentation of the pro-
duction processes was still incipient, hampered
by transport costs and tariff and non-tariff bar-
riers. In other words, they were in better condi-
tions to explore linkages and diversify into
manufacturing.
Sure, Chile of the 1990s is a ‘‘domestic’’ suc-
cess story. Yet, Chile’s success (which, by the
way, still has close to 40% of its exports linked
to one single product—copper) is dwarfed by
the growth, diversification, and technological
sophistication of the more manufacturing-ori-
ented East Asia (Mesquita-Moreira & Blyde,
2006). Moreover, its accomplishments are
matched by the problems of Peru, Bolivia,
Ecuador, and Venezuela’s, some of which bear
clear symptoms of Dutch Disease. 1
Likewise, the argument that LAC’s manufac-
turing is doomed by geography and endow-
ments seems to overlook both important
pieces of theory and facts. The ‘‘new’’ theories
of endogenous growth, for instance, emphasize
the importance of innovation and learning,
which, in turn, depend fundamentally on the
accumulation of human capital (which, by the
way, takes place in ‘‘manufacturing’’ rather
than in ‘‘agriculture’’ in the canonical model).
That is, they give pride of place to a type of
endowment that might be influenced by the
complex interplay of geography and institu-
tions, but that also respond to policy. One
way of reading these theories is to argue that
accumulation of human capital and the ensuing
process of learning and innovation can change
a country’s destiny beyond its geography and
natural endowments. 2
One cannot also ignore the fact that after
more than a decade of trade liberalization, an
average of approximately 15% of the region’s
GDP is still produced in the manufacturing sec-
tor (see Figure 1) and that countries such as
Mexico and Brazil are significant exporters of
manufacturing goods. True, the manufacturing
share of GDP has been declining rapidly; out-
put and exports of manufactured goods are still
dominated by ‘‘mundane’’ resource and labor
intensive goods or are concentrated in the
labor-intensive links of the value chain; and
the region has been having difficulties to increase
its limited share of the world market, being thor-
oughly outperformed by East Asia (see Lall,
Albaladejo, & Mesquita-Moreira, 2004).
Yet, there seems to be more to LAC’s manu-
facturing tribulations than endowments and
geography. The declining share of the GDP
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA? 357

35
Latin America & Caribbean

30

25

20

15

10

5
1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004
Figure 1. Manufacturing value added (% of GDP). Source: World Development Indicators Database.

can be seen, at least in part, as an inexorable gone though a drastic process of adjustment
adjustment to the manufacturing overshooting to the ‘‘norm.’’ 3 That is, they have achieved
produced by import substitution policies in the 1960s and the 1970s a level of industrial-
(ISP). It might also reflect a fall in the relative ization, measured by the manufacturing share
price of manufacturing goods vis-à-vis services of GDP, higher than predicted by its per capita
driven by trade liberalization. As shown in income. Trade liberalization, mostly in the mid-
Figure 2, most Latin American countries have 1980s and 1990s, seems to have played a part in
Predicted and observed manufacturing share of GDP (in log)

ARGENTINA BRAZIL CHILE COLOMBIA

1.5 2 2.5 3 3.5

1.5 2 2.5 3 3.5

2 2.5 3 3.5
2 2.5 3 3.5 4

1965 1965 1965

2000 2000 1965 2000
2000

6 7 8 9 10 11 6 7 8 9 10 11 6 7 8 9 10 11 6 7 8 9 10 11

COSTA RICA MEXICO URUGUAY VENEZUELA

1.5 2 2.5 3 3.5

1.5 2 2.5 3 3.5

1.5 2 2.5 3 3.5

2000
1.5 2 2.5 3

2000 1975 1970

1965 1965 2000 2000

6 7 8 9 10 11 6 7 8 9 10 11 6 7 8 9 10 11 6 7 8 9 10 11

AUSTRALIA CANADA FINLAND SWEDEN

1.5 2 2.5 3 3.5

1.5 2 2.5 3 3.5

1.5 2 2.5 3 3.5

1970 2000 2000

1.5 2 2.5 3

1970 1970 2000

1970
2000

6 7 8 9 10 11 6 7 8 9 10 11 6 7 8 9 10 11 6 7 8 9 10 11

THAILAND
2000
2 2.5 3 3.5

Fixed effects regression

2
1965
y = 2.281x – 0.1348x – 6.8564
2
R = 0.06
Source:WDI and Penn World Tables 6.1
6 7 8 9 10 11

log real PPP per capita income

Figure 2. Predicted and observed manufacturing share of GDP: selected LAC and resource-intensive countries.
358 WORLD DEVELOPMENT

bringing the observed closer to the predicted a process of convergence that in the early 1990s
levels. was close to completion. However, since, as we
This performance would also be consistent have seen in Figure 1, the share of manufactur-
with a region that is living up to its geography ing in the GDP continued to fall significantly
and endowments. Yet, the performance of throughout the 1990s, it is possible that during
other natural-resource intensive countries such this period the region’s level of industrialization
as Canada, Finland, Sweden, and Thailand might have fallen below the ‘‘norm.’’ So, con-
suggest that there might be other factors at play vergence and overshooting might not tell the
in this convergence. Not only have these coun- whole story. Moreover, judging by the per-
tries maintained manufacturing shares system- formance resource-intensive countries such as
atically higher than predicted, but they also Thailand, one is also tempted to think that
show no strong signs of convergence, despite there is more than convergence behind this
their open trade regimes. The exception here deindustrialization.
is Australia, although its convergence seems In fact, there are least two important ‘‘omit-
to happen at much higher levels of per capita ted variables’’ in this story. The poor and vola-
income than in LAC. tile macroeconomic environment that prevailed
The simple exercise shown in Figure 2 could in most countries in the region throughout the
be more meaningful if the ‘‘norm’’ reflected 1980s and 1990s and a reform of the state
the countries’ size and factor endowments. An which has gone well beyond weeding out the
attempt in this direction is shown in Figure 3, excesses of the import substitution era. The first
which presents a measure of countries’ devia- variable requires little introduction. LAC has a
tion from the ‘‘norm,’’ taking into account their well-known long record of macroeconomic mis-
size (population), endowments of physical and management and fiscal irresponsibility, and has
human capital, energy and land (see Table 1 spent most of the last two decades coming to
for details). For lack of data, the exercise does terms with its troubled past. Important pro-
not cover the 1990s, a period where trade liber- gress has been made in this area, but not with-
alization was deepened in the region; yet, it still out costly mistakes, particularly in the choice of
produces some useful insights. At first sight, the exchange rate regimes. Long periods of over-
results are consistent with an overshooting and valued exchange rates in Brazil, Mexico, and

ARGENTINA BRAZIL CHILE

0 5 10 15

0 2 4 6 8 10

-4 -2 0 2 4

1970 1975 1980 1985 1990 1970 1975 1980 1985 1990 1970 1975 1980 1985 1990
Deviation from the norm. %

COLOMBIA COSTA RICA MEXICO

-4 -2 0 2

1 2 3 4 5

-4 -2 0 2 4

1970 19 75 1980 1985 1990 1970 1975 1980 1985 1990 1970 1975 1980 1985 1990

THAILAND URUGUAY VENEZUELA

0 5 10 15
0 2 4 6 8

0
-10 -5

1970 1975 1980 1985 1990 1970 1975 1980 1985 1990 1970 1975 1980 1985 1990

year

Figure 3. Manufacturing share of GDP. Deviations from the norm controlling for resource endowments (1970–91).
Median regression with pooled data: manufacturing share of GDP on per capita GDP controlling for capital stock,
size of labor force, land per capita, education and energy stock. Details available at request. Data on endowment
from Antweiler and Trefler (2002). Data on manufacturing share from the WDI and data on per capita income
from Penn World Tables 6.1.
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA? 359

Table 1. LAC’s world market losses to China by technology intensity (1990–2004)

Products % Millions of US$
High-Tech
752 Automatic data processing machines & units thereof 26.8 231.3
764 Telecommunications equipment and parts 21.9 188.9
778 Electrical machinery and apparatus, n.e.s. 16.3 140.5
771 Electric power machinery and parts thereof 11.3 97.1
759 Parts for office machines or automatic data processing machines 10.5 90.4
Medium-Tech
773 Equipment for distributing electricity 19.3 205.6
772 Electrical apparatus such as switches, relays, fusses, plugs, etc. 12.1 128.6
671 Pig iron, spiegeleisen, sponge iron, iron or steel 10.4 110.4
672 Ingots and other primary forms, of iron or steel 7.6 81.2
763 Gramophones, dictating, sound recorders, etc. 7.0 74.2
Low-Tech
851 Footwear 40.0 623.3
894 Baby carriages, toys, games, and supporting goods 12.2 189.9
821 Furniture and parts thereof 8.6 134.4
843 Outer garments, women’s, of textile fabrics 7.2 112.1
848 Art. of apparel & clothing accessories, no textile 6.7 104.6
Resource-based
058 Fruit, preserved, and fruit preparations 23.8 152.1
684 Aluminium 13.5 86.1
682 Refined copper 13.2 84.4
014 Meat & edib. offals, prep./pres., fish extracts 7.2 45.9
037 Fish, crustaceans and molluscs, prepar. or preserv. 5.6 35.7
Products (3 digit SITC Rev 2) with highest losses in each category (losses as % of each category and losses in millions
of US$).
Source: Comtrade with author’s own calculation.

Argentina have taken a heavy toll on tradables,
in general, and on manufacturing in particular.
The second variable is far from consensual
and has to do with the time-old polemic about
the government’s role in industrialization. Most
LAC governments—as a reaction to the
bloated, inefficient state of the years of import
substitution—have leaned toward an agenda
that demonized government intervention and,
as a result, exposed producers in the region to
damaging market failures. Economists are
generally comfortable with models that incor-
porate market imperfections driven by exter-
nalities, imperfect information, and economies
of scales and which are particularly relevant
for industrial development. Yet, they usually
balk at policy solutions mainly on political
economy grounds. Clearly, the record of gov-
ernment intervention in LAC has been particu-
larly poor and might justify this attitude. Yet,
this poor record has a lot to with a closed trade
regime and with the fragility of Latin American
institutions. As it is well known, much has
changed during the 1990s.
In any event, the bottom line is that LAC’s
firms suffer from several disadvantages. For
instance, they do not have access to sufficient
financing; they lack the incentives to invest in
human capital and technology; and most
importantly, they are up against competitors
that can count on generous government assis-
tance in all these areas, particularly in East
Asia. So the history of LAC manufacturing in
the last decades is the history of (i) an industry
that had to shrink and adjust to the realities of
an open economy and, in this process, faced
unfavorable geography and endowments; and
(ii) an industry which had to grapple with
an extremely inhospitable macroenvironment,
with a less than supportive government and
with competitors heavily supported by their
governments.
Against this background, an honest answer
to the issue of whether manufacturing matters
360 WORLD DEVELOPMENT
for LAC development is a qualified yes. It is
not a matter of biasing incentives against natu-
ral-resource activities. This would mean to go
back to the costly distortions of the import sub-
stitution industrialization (ISI) era. Yet, one
cannot ignore the risks in a pattern of special-
ization based on natural resources. The econo-
metric evidence, at the very least, does not rule
out those risks and it clearly underlines the
advantages of diversification. So there seems
to be enough evidence to urge LAC not to turn
its back on manufacturing, a sector, unlike nat-
ural-resources activities, where governments
have good reasons to be concerned about mar-
ket failures and foreign targeting. The emer-
gence of China in world markets, as discussed
in the next section, not only reinforces this
point, but also takes the already difficult chal-
lenge of developing a competitive manufactur-
ing sector in the region to a higher level.
3. THE CHINESE CHALLENGE
Before moving into the analysis of the trade
impacts, it is important to discuss what are
the main factors that may be driving these re-
sults. Or to put it in plain English, it is impor-
tant to understand why this paper argues that
China is a formidable challenge for LAC’s
manufacturers. To answer this question, this
section draws on the traditional and ‘‘new’’
trade theories, and argues that there are strong
12.00
Brazil Mexico
10.00
8.00
6.00
4.00
2.00
0.00
1996 1997 1998
Figure 4. Average nominal annual wages in manufacturing. China, Brazil, and Mexico (1000 current US$). Source:
NBS, IBGE, and INEGI annual industrial surveys International Financial Statistics (IMF).
Heckscher-Ohlian, Ricardian, and Krugma-
nian reasons behind the enormity of the Chi-
nese challenge. That is, it claims that factor
endowments, productivity, scale, and govern-
ment intervention, the latter reminiscent of
the strategic trade policies, all work together
to support China’s expansion in the world man-
ufacturing markets. Let us take each of these
factors in turn.
(a) Endowments
With a population of 1.3 billion and a labor
force of 640 million sitting on a limited amount
of natural resources, China has a huge compar-
ative advantage in labor-intensive goods. This
labor abundance translates into wages that
are well below the levels practiced throughout
most LAC. Figures 4 and 5 compare, res-
pectively, current and purchase-power-parity
(PPP) manufacturing wages among China,
Brazil, and Mexico. The figures for nominal
wages are heavily driven by movements in the
exchange rate: that is, Brazil’s mega devalua-
tions after 1999 and the appreciation of the
Mexican peso after the 1995 crisis. Yet, as it
can be seen, even at its most favorable year,
Brazil’s wages topped China’s by a factor 3
(2002) and in the case of Mexico by a factor
of 8 (1996).
The PPP data suggests that the wage gap be-
tween the Latin American countries and China
has been falling rapidly since the mid-1990s,
China
1999 2000 2001 2002 2003
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA? 361

6.00
Brazil Mexico

5.00

4.00

3.00

2.00

1.00

0.00
1996 1997 1998 1999 2000 2001 2002 2003

Figure 5. Manufacturing wage gap: Brazil, Mexico versus China. (PPP Current International US$). Source: NBS,
IBGE, and INEGI annual industrial surveys and Penn World Tables 6.2.

reflecting wage stagnation in the former and
their rapid growth in the latter. However, given
China’s present employment structure (Figure
6), it seems unlikely that the gap will continue
to fall at the same pace, erasing China’s wage
advantage in the near future. With 49% of its
labor force still in the primary sector, China
seems to be far from its ‘‘Lewisian point,’’ a
stage in which rapid manufacturing growth ex-
hausts the excess supply of labor in the primary
sector and wages start grow faster than produc-
tivity.
Even though labor abundance is clearly the
main driver of China’s competitive and compar-
ative advantages, it does not tell the whole
story. As the IDB (2006) points out, since the
distribution of factors among its regions is very
uneven, China is bound to have a very broad
spectrum of comparative advantages. The
combination of regions such as Shanghai

100%
Tertiary
90%

80%

70%
Secondary
60%

50%

40% Primary

30%

20%

10%

0%
1978 1983 1988 1993 1998 2003

Figure 6. China’s employment structure: 1978–2003. Source: China Statistical Yearbook (2004).
362 WORLD DEVELOPMENT

municipality, with a per capita income of US$ Figure 8 shows that Brazil and Mexico, de-
5,600 and Gizhou, with a per capita income of spite the good results of the 1990s, were totally
US$ 435 (2003, NBS), has the potential to chal- outperformed by China, which has even in-
lenge LAC in the competition for both capital- creased its lead since the turn of the decade.
and labor-intensive goods. As shown in Section These results suffer little change when a more
4, this potential is already evident in the trade reliable ex-factory deflator (see Szirmai, Ren,
data. & Bai, 2005; Young, 2003) is used to calculate
China’s productivity growth. China’s superior
(b) Productivity productivity performance in the last decade is
also confirmed by firm level data (Figure 9),
The second challenge is of a ‘‘Ricardian’’ usually a more reliable source of information.
type, since it is related to productivity (technol- One might raise the issue that China’s
ogy) and not endowments. It could be argued impressive performance might be just the result
that China’s wage advantage, as we learn in of capital deepening (an increase in the number
the textbooks, reflects the low productivity of of machines per worker). This possibility is par-
its manufacturing sector and therefore would ticularly relevant for a country that has been
not be a competitive advantage. Hard facts investing close to 40% of its GDP. Yet, total
on productivity levels across countries, though, factor productivity estimates, notwithstanding
are difficult to find, not least because of the their huge variance and methodological flaws,
methodological difficulties involved. Mckinsey do not suggest that China is following in Soviet
(2003) is one of the rare attempts in this direc- Union’s footsteps. They tend to confirm
tion and the results do not offer LAC a great China’s edge over LAC, although the gap is
comfort. As shown in Figure 7, labor produc- not always as large as suggested by the labor
tivity is indeed lower in China than in Mexico productivity data.
and Brazil in most sectors, but the difference Young (2003), for instance, using official
is, generally, substantially lower than the wage national accounts data, estimates an impressive
gap. To make things even more complicated, 3% per year total factor productivity (TFP)
the evidence available indicates that labor growth in 1978–98. The author argues, though,
productivity has been growing much faster in that the use of alternative and arguably more
China than in LAC, which suggest that latter’s reliable deflators brings this result to a moder-
productivity edge will be wiped out sooner ate 1.4% per year. To put these figures into per-
rather than later. spective, some of the TFP estimates for Latin

120

US Korea Korea Korea Korea

100

80

Mexico
Mexico
60

Brazil Brazil
Brazil Brazil Mexico

40 Brazil India India

India China
Mexico China China
20
Mexico
China
China
India India
0
Auto Consumer Electronics WhiteGoods BrownGoods PCs

Figure 7. Labor productivity in China and selected countries, 2001. Source: McKinsey and Co. (2003).
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA? 363

800

700
China (Implicit Deflator)
China(Ex-Factory Deflator)
Brazil
600
Mexico

500

400

300

200

100

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Figure 8. Labor productivity in manufacturing: China, Brazil, and Mexico (value-added per worker, national accounts
data. 1990 = 100). Source: Statistical Offices and Szirmai et al. (2005) for manufacturing employment in China
(adjusted for changes in coverage and definition).

Mexico (1995-2000)

Brazil (1996-2000)

China (1995-99)

0 2 4 6 8 10 12

Figure 9. Labor productivity at the firm level: China, Brazil, and Mexico. Annual average (%). Source: López-Córdova
and Mesquita Moreira (2004) and Hu et al. (2003).

America (e.g., IDB (2001); Loyaza, Fajnzylber,
& Calderón, 2002) point to an average negative
growth in the 1980s and 1990s, although with
a large variance among countries. The best
performers in the region, Chile and Argentina,
reached close to 2% TFP growth, but that
was only in the 1990s. Young’s 1.4% result
for China appears to be at the bottom of the
range of estimates available. Other authors
such as Wang and Wei (2004), also working
with national accounts data, estimate a 2.3%
TFP growth per year, which is a considerably
better result given that includes the pre-1978 re-
form years (1952–98). Li (2003), using both na-
tional and provincial data, finds an even higher
estimate, putting TFP growth at 3.4% in the
post-reform years. Heytens and Zebregs’s
(2003) estimates are in the 2.5–2.8% range for
364 WORLD DEVELOPMENT
1979–89 and within 2.6–4.0% for 1990–98. Un-
like Young, none of these authors try to adjust
the official data.
The estimates based on sectoral or firm level
data usually point to higher levels of TFP
growth. For instance, Jefferson, Singh, Xing,
and Zhang (1999) estimates a 2.5% TFP growth
per year for state and 3.4% for collective indus-
trial enterprises in 1980–92. Jefferson, Wang,
Li, and Yuxin (2000) and OECD (2005), also
using firm level data for manufacturing, esti-
mate a 2.8% (1980–96) and 3.7% (1978–2003)
annual TFP growth, respectively. Roughly
comparable estimates for Latin America
usually suggest, with a few exceptions, a more
modest performance. For Mexico, Tybout
and Westbrook (1995), covering the first period
of the trade liberalization (1986–90), put the
TFP annual growth at 1.8%. López-Córdova
and Mesquita Moreira (2004) put the same fig-
ure for the North American Free Trade Agree-
ment (NAFTA) period (1993–99) at 1.1%. On
Brazil, Muendler (2004) estimates a 0.4% of
TFP annual growth during 1986–98, and
López-Córdova and Mesquita Moreira (2004)
find annual increases of 2.7% for the second
half of the 1990s.
(c) Scale
Even though China is not (yet) a rich country
(its US$ 1,270 per capita income in 2004 puts
it among lower middle income countries), it
seems to conform to almost all definitions of
a large country. The population is the largest
in the world; it has an area that is roughly as
large as the United States and 15% larger than
Brazil; and has a US$ 2.3 billion economy
(2005), which is approximately the size of the
entire Latin American economy. Chinese ex-
ports, at US$ 762 billion, are already higher
than LAC’s as a whole (US$ 530 billion,
2005). The PPP figures are even more impres-
sive, putting the Chinese economy only behind
that of the United States.
Apart from the standard large country
advantages in areas such as public goods (see
Wacziarg, Spolaore, & Alesina, 2002), its sheer
scale gives China an important edge in capital
and technology intensive industries, because
of the possibility of (i) translating high fixed
costs (equipment or R&D) into low unitary
costs; (ii) benefiting from the increasing returns
associated with learning and the creation of
knowledge; and (iii) overcoming indivisibilities
or pecuniary externalities associated with
increasing return technology (Murphy, Shleifer,
& Vishny, 1989). The advantages of size, which
are maximized by the country’s exceptional
growth record, also operates as a magnet to
foreign direct investment (FDI), which boosts
investment, brings technology and therefore,
reduces China barrier to entry in capital inten-
sive and technologically sophisticated indus-
tries. Since the early 1990s, China has been
ranked as the first destination for FDI in the
developing world, with flows reaching US$ 61
billion in 2004 (NBS).
(d) The government role
The fourth and final challenge lies on the role
of government in the Chinese economy. While
LAC was busy dismantling the interventionist
apparatus of the ISI era, China was entering
the world market with a policy regime that bore
all the hallmarks of its East Asian neighbors,
notably Japan, Korea, and Taiwan. That is, a
policy regime that involves heavy government
intervention in the product and factor markets
to support industrialization and exports. The
fact, however, that the Chinese regime was built
on the foundations of a socialist economy has
taken the government role well beyond what
has ever been experienced anywhere else in East
Asia.
It is beyond the scope of this paper to make a
detailed analysis of China’s policy regime (for
that see, e.g., IDB, 2006) or to discuss its role
in China’s fast growth. The focus here is on
discussing the regime’s immediate competitive
implications for LAC’s manufacturers. The
first thing to note is that there is not one policy
regime, but a combination of regimes hinging
on firm ownership and markets.
Foreign firms, one of the main drivers of
China’s growth and export performance (as of
2003, they accounted for 55% of exports and
19% of industrial value-added—NBS) have
been the recipients of lavish, if intricate, fiscal
incentives, which often meant zero taxes for
many years (OECD, 2003). An unknown num-
ber of local firms have also benefited from this
regime thanks to ‘‘round-tripping,’’ that is,
local capital that goes abroad and then returns
disguised as foreign investment. Some estimates
put round-tripping accounting around 26–54%
of China’s FDI inflows (Xiao, 2004).
In most cases, fiscal incentives have been tied
to export or technological requirements (also
known as trade related investment measures—
TRIMs), a practice banned by the World Trade
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA?
Organization (WTO), very much in use in LAC
in the 1960s and 1970s, which despite being re-
garded as counter-productive by some analysts
(see, e.g., Moran, 2001), have not prevented
China from accumulating a huge stock of FDI.
As part of its accession commitments to the
WTO, the Chinese government has vowed to
eliminate TRIMs and tax preferences for for-
eign firms, yet, this is likely to be done at a
measured pace. For instance, according to gov-
ernment officials, the elimination of tax prefer-
ences will take at least 6–8 years (Taipei Times,
2005).
This is not exactly good news for LAC, where
most countries already discontinued (e.g., the
maquilas regime in Mexico) or are phasing
out their export processing zones as part of
commitments to regional and multilateral
agreements, and where most firms have to
operate with tax burdens as high as 36% of
GDP (e.g., Brazil in 2005).
Apart from the occasional round-tripping
benefits, local Chinese firms, which respond
for nearly half of total exports and nearly
80% of the industrial value-added (NBS), have
been favored by a number of government ini-
tiatives such as (a) an ‘‘unlimited’’ supply of
credit, provided by state banks, at rates likely
to be well below the opportunity cost of capital;
(b) a public funded national innovation system,
which contributes to diffuse knowledge and
reduce the costs and risks of R&D (Sigurdson,
2004); (c) a very lax regulation of intellectual
property rights, which has reduced the costs
of imitation and absorption of foreign know-
ledge; (d) a direct access to treasury coffers in
the case of state-owned enterprises (SOEs)
and; (e) even more generous financial, fiscal
and other unorthodox benefits to the ‘‘national
champions’’ (firms belonging to ‘‘pillar’’ indus-
tries). 4
True, SOEs and a selected number of private
firms are likely to account for the lion’s share of
those benefits and one can argue that the
average, small Chinese firm faces, for instance,
credit constraints as damaging as those in Latin
America. Yet, it is also true that Latin
American firms, more often than not, are up
against exactly those privileged SOEs or private
firms in their domestic and international
markets.
Hard facts about the share of those privileged
firms in China’s exports are difficult to find,
but, despite all the privatization, SOEs still ac-
counts for substantial share of the Chinese
industry. For instance, in 2004, they accounted
365
for 48% of the industrial value-added (2004
data, NBS), and were particularly dominant
in sectors such as steel, metallurgy, and trans-
port equipment (OECD, 2005), where countries
such as Brazil and Mexico have a considerable
stake.
Moreover, the line between state and private
ownership is often blurred, making it difficulty
to have a clear picture of the private sector bor-
ders. For instance, three of China’s self-pro-
claimed private sector ‘‘champions,’’ Huawei
(telecom equipment), Levono (computers),
and TCL CommunicationTechnology (TV sets)
are either majority owned by the government
(Lenovo and TCL) or have strong personal ties
with the government (Huawei) (OECD, 2005;
The Economist, 2005).
The policy regime is also nuanced in terms of
markets served by firms. Like their Koreans
and Taiwanese counterparts a few years earlier,
Chinese firms, both local and foreign, have
lived under a dual or selective trade regime that
would grant exporters free access to imported
inputs at international prices, but that would
severely restrict import competition in the
domestic market. Changes were made after
China’s WTO accession in 2001, but recent re-
ports by the United State Trade representative
(USTR, 2004) and European Union, which
has denied China the status of a market eco-
nomy (People’s Daily, 2004), suggest that
reforms, so far, has fallen well short of what
has been promised.
Whether or not these interventionist policies
are behind China’s takeoff or whether or not
they guarantee or compromise China’s long-
term growth is already the stuff of a prolific pol-
icy debate, which, as it happened to other East
Asian tigers, is bound to be inconclusive, not
least because economists have yet to find a sat-
isfactory way of dealing with the counterfac-
tual. Yet, from LAC manufacturers’ point of
view, the omnipresence and generosity of the
Chinese state has a very practical and immedi-
ate implication, that is to heavily tilt the playing
field in favor of their Chinese competitors,
either local or foreign affiliates, in a scenario
where they already face endowment, productiv-
ity, and scale disadvantages.
4. TRADE IMPACTS
Does trade data confirm the importance of
the Chinese challenge? The answer is a qualified
yes. Qualified because the assessment of trade
366 WORLD DEVELOPMENT

impacts involves complex general equilibrium (iii) the growth differential between LAC’s and
issues as well as methodological problems the rest of the world’s exports. 5
stemming from aggregation bias and product In this framework, a market share loss for
differentiation, particularly in the case of man- LAC (in any product or market) is understood
ufacturing goods. Yet, with these limitations in as a reflection of the fact that its exports have
mind, the picture that emerges is not very com- grown less than world exports because
forting for Latin American producers. its exports were (i) less dynamic than those of
China and/or (ii) less dynamic than those of
(a) Shifting shares the rest of the world. Since the focus here is
on China, Figure 11 presents the losses due to
A simple way of approaching the issue is to (i), that is, market share losses that can be attri-
look at what happened to market shares of bute directly to China, measured as percentage
manufacturing exports in the last two decades. of total exports in 2004.
As shown in Figure 10, the 1980s were disas- The results suggest that LAC losses to China
trous to LAC, which eventually staged a recov- in the world markets in 1990–2004 were on the
ery in the 1990s, driven almost exclusively by whole relatively small, reaching 1.7% of the re-
Mexico. This unbalanced recovery, though, gion’s total manufacturing exports in 2004
was not enough to match China’s performance, (US$ 5.5 billion). 6 As expected, given the dif-
which by 2004 had roughly three times the mar- ferences in factor endowments, the highest
ket share of LAC. losses were in low-tech, labor-intensive goods,
An important issue, which cannot be an- which responded for nearly 30% of the total
swered by Figure 10, is the extent to which losses. Within those goods (see Table 1), foot-
China’s growing market share was built at wear explains 40% of the losses, followed by
LAC’s expense. One way to offer an approxi- toys, furniture, and apparel.
mated answer to this question is to use a varia- It is worth noting that the losses in the low-
tion of the constant market approach as tech category were likely to be much higher if
suggested by Batista (2005). The intuition be- it were not for distortions such as the Agree-
hind it is that the growth of LAC’s exports ment on Textiles and Clothing (ATC) and
can be decomposed into the sum of (i) the LAC’s protection of its own low-tech, labor-
growth of world exports, (ii) the growth differ- intensive industries. The evidence coming from
ential between China and LAC’s exports, and the US market after the end of the ATC in Jan-

12

10 LAC excl. Mexico

LAC
Mexico
China
8

0
1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Figure 10. World market shares for manufactured exports: selected countries and regions 1980–2004 (%). Source:
Comtrade note: manufacturing is defined as SITC 5–8 minus 68.
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA? 367

6000 3.0

Losses vto China US$ (left axis)

5000 2.5
Losses to China (millions of USD$)

Losses as % of category exports in 2004

% of Total Manuf Exports 2004

(right axis)

4000 2.0

3000 1.5

2000 1.0

1000 0.5

0 0.0
. .
High-tech Medium-tech Low-tech Resource-based Total exports

Figure 11. LAC’s world market losses to China by technology intensity (1990–2004). Source: Comtrade with author’s
own calculation.

uary 2005 tends to confirm this hypothesis. In shield against Chinese competition (see López-
the first six months of 2005, US apparel im- Córdova, 2004). Yet, annual data shows that
ports from China jumped by 64%, whereas Mexican and Central American losses, as with
LAC imports fell by 1.5% (USTIC). This jump LAC as whole, have been mounting particu-
in Chinese imports led the US government larly after 1999. As discussed later, for having
to reimpose quotas until 2008, giving apparel a substantial part of their exports concentrated
producers in the region some respite either on labor-intensive goods or on labor-
(www.ustr.gov). Yet, their medium- to long- intensive stages of the production cycle of
term prospects remain highly uncertain (see high-tech goods, these countries are more likely
e.g., Condo, 2004; Nordas, 2004). to bear the brunt of China’s competitive advan-
The losses seen in the other categories rein- tages.
force the earlier argument that LAC should Figure 14 shows that LAC’s most affected
be prepared to face competition from China markets were outside the region, particularly
on the whole factor-intensity spectrum, from in East Asia and to a much lesser extent in
high-tech to natural resource-based manufac- the United States and Europe, implying that
tured goods. it has yet to suffer the full-blown Chinese
Figure 11 does not show the trend behind the impact on its main markets, particularly
losses. This is shown in Figure 12 and it is obvi- on its domestic market. Reliable data on
ous that the trend suggests difficult days ahead market penetration for the entire region is
unless the region can find a quick and effective difficult to come by, but trade flows suggest
way of meeting this challenge. that China’s moderate presence in LAC’s
Figure 11 also blurs somewhat the picture domestic manufacturing market is changing
when it averages the performance of LAC’s di- rapidly.
verse countries and subregions. Figure 13 gives Figure 15 reveals a rapidly increasing Chi-
a more detailed account of these performances nese share of manufacturing imports in all of
and it is clear that the more resource-intensive LAC’s subregions, which, however, have still
countries in South America (i.e., Andean a long way to go to match the situation in
Community and MERCOSUR) have been the the US manufacturing market. Data on import
most affected. Central America (or the Central penetration for Brazil and Mexico (Figure 16)
America Common Market—CACM) and Mex- tends to confirm this picture of a small but
ico apparently used preferential agreements rapidly increasing participation of Chinese
and higher most favored nation (MFN) protec- imports on local markets. In case of Brazil,
tion for low-tech, labor-intensive industries as a whereas the country’s import penetration as
368 WORLD DEVELOPMENT

2.0

1.8

1.6

1.4

1.2
%

1.0

0.8

0.6

0.4

0.2

0.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 12. LAC’s annual world market losses to China in total manufactured exports (1990–2004, SITC 5 digits).
Source: Comtrade with author’s own calculation.

4.0

3.5

3.0

2.5
%

2.0

1.5

1.0

0.5

0.0
ANDEAN BRAZIL CACM CHILE MEXICO MERCOSUR

Figure 13. LAC’s world market losses to China by selected countries and sub-regions, as a percentage of 2004
manufacturing exports (1990–2004, SITC 5 digits). Source: Comtrade with author’s own calculation.

whole has been declining since the 1999 maxi-
devaluation, Chinese penetration has moved
in the other direction, increasing substantially,
although from a small base. In Mexico, the
growth of China’s imports has been outpacing
that of the rest of the world by a large margin
since 1999. It is not clear if the growing Chi-
nese participation in these two markets reflects
either the substitution of other importers or
the dislocation of local producers. Yet, the
increasingly vocal opposition of local manu-
facturers to Chinese imports suggests that
at least some dislocation may be occurring
(CNI, 2005).
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA? 369

18.0
16.0
14.0
12.0
10.0
%

8.0
6.0
4.0
2.0
0.0
ALL East Asia EU LAC Rest of the World USA

Figure 14. LAC’s world market losses to China by selected markets, as a percentage of 2004 manufacturing exports
(1990–2004, SITC 5 digits). Source: Comtrade with author’s own calculation.

Figure 15. China’s share of manufacturing imports in selected sub-regions and countries, 1990–2004 (%). Source:
Comtrade.

(b) Bilateral trade For the purposes of the present discussion,

Another way of looking at trade impacts is
to assess the volume and composition of
bilateral trade between China and LAC.
LAC’s exports and imports to China boomed
since the early 1990s, reflecting the market
oriented reforms in China and in the region.
Yet, exports lagged behind imports, produc-
ing an increasing trade deficit, which reached
US$ 12 billion in 2004, despite China’s con-
siderably faster growth. This figure hides,
though, considerable differences among coun-
tries in the region, with resource-intensive
countries such as Brazil, Chile, Peru, and
Argentina showing sizeable surpluses after
2001.
the composition of the bilateral trade is partic-
ularly revealing. Figure 17 shows that primary
products have been the only relevant LAC net
exports to China. Since 2002, manufactured
goods intensive in natural resources have been
gaining importance, but their growth has been
dwarfed by booming net imports in all other
categories of manufacturing goods. So, unlike
China’s trade with other developing countries
in Asia, which is marked by an intensive
intra-industrial trade (see Ahearne, Fernald,
Lougani, & Schindle, 2003; Lall & Albaladejo,
2003), its trade with LAC is heavily based on
traditional comparative advantages, reinfor-
cing a pattern of specialization, which, as dis-
cussed before, might not be growth enhancing.
370 WORLD DEVELOPMENT

40 1.4
1.3
Brazil-World Mexico-World
35 1.2
Brazil-China Mexico-China
1.1
30
1.0
0.9
25
0.8
World %

China%
20 0.7
0.6
15 0.5
0.4
10
0.3
0.2
5
0.1
0 0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 16. Brazil’s and Mexico import penetration (import divided by apparent consumption. Brazil’s and Mexico’s
output data converted to US$ using, respectively, 1998 and 1994 real exchange rate. Mexico data only available until
2002) in Manufacturing goods. World and China (1996–2005). Source: own calculation based on IBGE, SECEX and
INEGI data.

8.000

6.000

4.000

2.000

0
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004
-2.000

-4.000

-6.000

-8.000

High Tech Low Tech

-10.000
Medium Tech Other Products
Primary Products Resource Based
-12.000

-14.000

Figure 17. LAC NET exports to China by factor intensity (US$ millions, 1980–2004). Source: Comtrade.

In fact, as of 2004, LAC’s share of China’s a much higher share of manufacturing goods,
total imports of manufacturing goods was a one should at least explore other possible
mere 1.1%, whereas ASEAN countries ac- explanations. For instance, both Chile and
counted for 10.9%. One could argue that this Brazil seem to face a more ‘‘visible hand’’
is the inexorable result of geography and when trying to export more industrialized
endowments, yet given the characteristic al- natural resource products. Chile’s has difficul-
ready described of China’s trade regime and ties in exporting refined copper (Claro, 2004)
taking into account that the composition of and Brazil, products such as soy oil and
LAC’s net exports to the rest of world shows leather shoes (Abreu, 2004). Likewise,
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA?
ASEAN success in exporting manufacturing
goods to China may be related to its engage-
ment in the multinationals’ global production
chain and, therefore, they face the more
liberal, export-processing, version of China’s
trade regime.
(c) Export similarity
Whereas shift-share analysis and descriptive
trade statistics reveal a great deal of informa-
tion, they do not say much about potential
trade impacts. Indices of export similarity
can be useful in this regard and reveal the rel-
ative vulnerability of countries in the region to
Chinese competition in third markets. Among
the several possible indices, we picked the
straightforward coefficient of correlation of
the export composition. The use of alternative
indices such as the Finger–Kreinin export sim-
ilarity index (Finger & Krenin, 1979) does not
change the main story. Figures 18 and 19
show the evolution of the coefficient of corre-
lation in 1992–2004 of the largest Latin Amer-
ican countries and sub-regions and China, for
exports to the United States and rest of the
world markets (6 digits of the Harmonized
System). 7
In both markets the story is very similar and
the main drivers of the change seem to be (a)
first and foremost, the rapid structural
change of the Chinese economy throughout
the 1990s—away from natural resources-,
labor-intensive and on to capital- and technol-
ogy-intensive goods, and its impact of the com-
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1992 1993 1994 1995 1996 1997
-0.05
Figure 18. Coefficient of correlation for exports composition LAC–China: US market (HS 6 digits). Source:
371
position of exports; (b) the relative dynamism
of the high-tech manufacturing sector in Mex-
ico and in the CACM, driven by preferential
trade agreements and; (c) little structural
change and a export composition heavily based
on natural resources or resource-based manu-
facturing goods in countries such a Chile, Bra-
zil, and in subregions such as the Andean
Community and MERCOSUR.
Looking in more detail at each sub-region,
the high share of oil in total Chinese exports
in the early 1990s is behind the relative high
initial correlation shown by Mexico and the
Andean Community. As China becomes a
net importer of oil along the decade and be-
comes heavily specialized in the exports of
manufacturing goods (initially labor-intensive,
low-tech goods but gradually shifted into
more capital-intensive, high-tech products),
this correlation shifts into a declining trend.
In the case of Mexico, the correlation starts
to rise again in the mid-1990s, mainly in the
US market, driven by the export boom and
the change in composition toward more
high-tech, capital-intensive goods associated
with NAFTA.
CACM experienced a more peculiar pattern
driven particularly by Intel’s decision to set
up a plant in Costa Rica in 1997 (Costa Rica
accounted for approximately 70% of CACM
manufacturing exports in the period). The
boom in semiconductor exports that followed
Intel’s decision led to a sharp increase in the
similarity index in both markets, but the drastic
fall in semiconductor exports after 1999,
MERCOSUR ANDEAN CACM CHILE MEXICO
1998 1999 2000 2001 2002 2003 2004
Comtrade.
372 WORLD DEVELOPMENT
0.45
MERCOSUR ANDEAN
0.40 CHILE MEXICO
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1992 1993 1994 1995 1996
-0.05
Figure 19. Coefficient of correlation for export composition LAC–China: Rest of the World (HS 6 digits). Source:
coupled by an increase in non-traditional agri-
cultural exports, reversed this trend, particu-
larly in the US market. In the rest of the
world the similarity index also fell after 1999,
but remained well above pre-1997 levels.
MEROSUR, driven by Brazil, starts with a
relatively high correlation in the US market,
based on the exports of resource-based and
low- to medium-tech goods, but since they do
not follow China’s move up the technology
and capital-intensity ladder, this correlation
falls sharply along the decade. Their index also
declined in the other markets, but given the
lower share of manufacturing goods in exports
to the rest of the world, the correlation was
consistently lower than in the US market
throughout the period. Finally, Chile’s heavy
reliance on natural resource-goods puts the
country among the least vulnerable to Chinese
competition in the region.
Overall, this evidence suggests that Mexico
and, to a lesser extent, CACM countries are
clearly on the way to a head-on collision with
Chinese exporters, particularly because they
rely heavily on industries such as apparel, tex-
tile, and electronics where China has huge com-
parative and competitive advantages. The more
so, as mentioned before, because they specialize
on the stages of the production chain that are
highly labor-intensive and can easily go east.
Their shallow network of suppliers and rela-
tively low technological capabilities add even
more credibility to this threat. However, the
position of the other countries does not look
comfortable either. If one accepts the premise
that diversification into human capital- and
technology-intensive industries is good for
CACM
1997 1998 1999 2000 2001 2002 2003 2004
Comtrade.
growth, what these countries are seeing is an
increasingly congested field ahead, which
blights their prospects of a more diversified
and dynamic economy.
5. CONCLUSIONS
Is there a future for manufacturing in Latin
America? One thing we can say for sure is that
China does not make this future any brighter.
The combination of endowments, scale, fast
productivity growth, and an omnipresent state
makes China a formidable competitor to Latin
American manufacturers and raises many ques-
tions about their future. This is particularly
true in a world market already overcrowded
by at least three generations of Asian Tigers
and facing the prospects of others, such as
India, to come. As Blum and Leamer (2004,
p. 569) put it ‘‘[. . .] the world is awash in coun-
tries competing to do mundane manufacturing
tasks and that route toward progress is fore-
closed by overcrowding.’’
This prospect would not be a reason for con-
cern if we could say, beyond any reasonable
doubt, that manufacturing does not really mat-
ter for LAC’s growth. Yet, both theory and evi-
dence seem to suggest otherwise, at the very
least, for the opportunities of diversification in-
volved. The risks of a pattern of specialization
based on natural resources are there for every-
one to see, and supported by very concrete
examples in the region. True, there are success
stories, but they seem to be exceptions based
on particular historical and institutional envi-
ronments. This does not mean that the region
 FEAR OF CHINA: IS THERE A FUTURE FOR MANUFACTURING IN LATIN AMERICA?
should ‘‘turn its back’’ to natural resources or
any policy of that sort. It just means that, on
the basis of the evidence available, the region
would be ill advised to renounce a well-proven
road to prosperity, regardless how treacherous
this road has become with the emergence of
China.
Even if we assume China away, the future
of manufacturing in LAC is usually seen with
pessimism on the grounds of geography and
endowments. The tribulations of the sector in
the last two decades seem to corroborate this
point of view. Yet, geography and endowments
do not tell the whole story. The ISI legacy,
macroeconomic volatility, and the overreaction
to the excesses of government intervention also
played a major role in the sector’s misfortunes.
These are all policy-related factors and both
theory and history give us hints that well-de-
signed policies, backed by strong institutions,
can overcome the restrictions imposed by
endowments and geography. To put it differ-
ently, policies might change the endowments
that matter for industrialization and growth,
such as human capital and technological cap-
abilities.
If seen through this lens, the Chinese chal-
lenge might still look daunting, but not in-
surmountable. It all depends on the region’s
ability to pursue a policy agenda, which aims
at (a) improving the region’s ability to differen-
tiate and diversify its exports away from ‘‘mun-
dane,’’ labor-intensive tasks and products; (b)
exploiting the region’s geographical advanta-
ges, particularly its proximity to the US mar-
ket, by specializing in goods whose transport
NOTES
1. Hausman (2003), however, disputes this view. How-
ever, it seems hard to rule out the Dutch Disease
hypotheses altogether in a country where oil related
exports (SITC 3) account for 80% of total exports (2003
data).
2. History has a number of examples of this hap-
pening, but one of the most telling episodes happened
in South Korea. After the Korean War, the United
Nations (UN) hired specialists to consider South
Korea’s future economic prospects. The so-called
Nathan group based their planning (which fortunately
was never implemented) on the assumption that South
Korea export prospects and comparative advantage
lied in agriculture and minerals! (Krueger, 1979, p.
77).
373
cost-to-price ratios are high and in ‘‘speed-to-
market’’ goods, whose constant changes in
demand ask for speed delivery (e.g., fashion
apparel, see IDB, 2006); and (c) boosting pro-
ductivity growth to reduce labor costs disad-
vantages.
To achieve those aims the region does not
need an intrusive, Chinese style state, whose
role in China’s success is still far from clear
and whose costs in terms of democracy cannot
be overestimated. Rather than risking misread-
ing policy lessons, LAC should concentrate on
its well-known weaknesses, particularly on (a)
strengthening its macroeconomic fundamen-
tals, which are still, with a few exceptions,
fragile; (b) overcoming excruciating credit-
constraints on local producers, which are up
against highly-leveraged Chinese firms; and (c)
boosting the frail local technological capabili-
ties (i.e., human capital and science and tech-
nology infrastructure).
Of course, this is easier said than done. As
Stiglitz (2002, p. 50) puts it, ‘‘Unfortunately,
we can say more about what is needed, than
we can about how to create what needs to be
created.’’ There seems to be no doubt, though,
that, to meet this challenge, the region will need
a more pragmatic approach to government,
than it had during the 1990s. It is also clear that
for a region with such diversity of country size,
endowments, and institutions, there must be, as
Rodrik (2004) argues, a fair amount of ‘‘self-
discovery’’ in policy-making. That is, policy-
makers, to a large extent, are out there on their
own. Finally, the region needs a greater sense of
urgency. Time is clearly running out.
3. There are arguably two factors behind the curvature
of the norm: faster productivity growth in manufactur-
ing than in services, which drives down the relative prices
and the Engel’s law which leads to a change in the
pattern of demand from agriculture to manufacturing
and services (see Rowthorn & Ramaswamy, 1997).
4. Nolan and Zhang (2002, p. 2090) presents a list of
those benefits: ‘‘tariffs, non-tariff barriers, including
limitations on access to domestic marketing channels,
requirements for technology transfer and to subcontract
to selected domestic firms as the price for market access;
government procurement policy; government selection
of the partners for major international joint-ventures;
preferential loans from state banks; and privileged access
to listings on international stock markets.’’
374
5. Formally, LAC’s export growth, measured in terms
of 2004 exports, can be decomposed according to the
following expression:
    tween the periods 2004 and 1990, measured in own
X 1990 1
1  LAC
2004
¼ 1
X LAC 1 þ mWORLD
|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl}
World exports growth
 
X 2004 1 X 1990
þ CHINA
2004
  LAC
M 1 þ mCHINA X LAC
|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl
gains or losses to China
 
X 2004 1 X 1990
þ REST
2004
  LAC 2004
M 1 þ mREST X LAC
|fflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflfflffl
gains or losses to the rest of the world
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WORLD DEVELOPMENT
where, X ij are the exports of the country/region j in the
period i; Mi are the world exports in the period i; mj is
the growth rate for exports in the country/region j be-
1990 exports. The results shown in Figure 11 are given
by (b).
6. See, Lall (2000) for details of the classification.
2004
ffl}
7. Changes in the product classification along the
period and data availability prevented the use of a
lower level of aggregation.
ffl}
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