A Review of The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean

by | Apr 8, 2007

The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean Edited by R. Devlin, A. Estevadeorda and A. Rodriguez-Clare. Washington, DC: Inter-American Development Bank & David Rockefeller Center for Latin American Studies, Harvard University, 2006

The vast majority of people in power in Latin America today—in business, government, labor unions, political parties and academia—entered professional life in the late 1960s and early 1970s. Regardless of national experiences, in the span of their careers, they have seen Latin America go from the region most like the developed North, comfortably ahead of the Communist block and the Third World, to a spectator in the slow lane watching the blur left by a resurgent Eastern Europe and an Asia on steroids. When they first went to work as young men and women, the idea that one day Buenos Aires, Rio, Mexico City and Sao Paulo might look provincial in comparison to cities in China was so absurd as to be unthinkable. Accordingly, it is a surprise that, from the banks of the Rio Grande to the tip of Patagonia, one question is not posed more often and more loudly: how could this have happened?

To begin formulating the answer, the leaders of Latin America now have an essential starting block. The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean, edited by Robert Devlin, Antonio Estevadeordal and Andrés Rodríguez-Clare, brings together in one volume a wealth of key statistical information, together with concise descriptions of the major reforms that have resulted in the growth machine that China is today. It does so while comparing and contrasting the same information for Latin America, paying special attention to key regional nations (Mexico, Chile, Brazil and Argentina).

This work is all the more important because for the majority of those immersed in Latin America, either as professionals, residents or both, the mental picture of China, significantly as it may have changed, is likely to be lagging woefully behind. Too many Latin American leaders still believe that China’s key advantage lies in an inexhaustible supply of cheap labor. Next to preconceptions, misconceptions and outdated notions, The Emergence of China sets a prodigious amount of well-selected facts, figures and tables, culled from an impressive collection of sources and bibliography. Consequently, the bookis a major contribution to serious readers attempting to understand how China, from so far behind, positioned herself to play a role in the global economy that by and large continues to elude Latin America. The Emergence of China is the reference manual to go to after being awakened by Argentine journalist Andrés Oppenheimer, whose Cuentos Chinos begins famously by reporting on how serious analysts project the future irrelevance of Latin America.

Accordingly, the most valuable part of the book is in its overview of the Chinese economy, its summary of how the country underwent a “triple transformation” (from a centrally planned to a market economy, from a rural agriculturally based activity to manufacturing and services, and from an extremely closed to a relatively open economy), and its analysis of China’s trade. In chapter 4, “Why China’s Trade is So Exceptional”, the book provides a particularly valuable analysis of factor endowments (in which education is prominently singled out and “cheap labor” is placed in context), the importance of geographical distance (explaining why miles can be offset by other considerations) and the role of the size of the national market. These initial chapters also include annexes with highly useful and illuminating information, such as those that deal with export promotion policies, pro-competitiveness institutions and China’s WTO accession commitments.

The book is not the product of named authors but the collaboration of two Inter-American Development Bank departments, Integration and Regional Programs and Research. In the compilation of key comparative data and the concise explanation of the road taken by China which constitutes the first part of the book, this collaborative effort is at its best. But as it moves into the second part, in which the book assesses China’s competition with Latin America for the global marketplace and foreign direct investment, the need to draw conclusions pertaining to the region challenges the limits of consensus writing. The discussion becomes a series of technical analyses of data. While it is indeed of enormous value just to set forth what is actually happening, by being heavily bound by current conditions, the book incurs its major weakness. It assumes that current conditions reflect the equilibrium of the system, and then goes to draw its future implications on that basis in a rather formulaic and static process.

However, equilibrium in economic systems exists only in textbooks. The objective of much of public policy, and all of business, is to constantly upset that equilibrium and the first part of the book is actually a demonstration of that process. Everything in those chapters illustrate the extraordinary pace and breadth of the changes underway in China, and suggests that this will not abate for some time. Accordingly, it seems difficult to accept that the current relationships between China and Latin America and the Caribbean (LAC) represent the steady state for the future. Conclusions based on such an assumption then become necessarily suspect. This affects the four major questions that the book considers in the later sections: to what extent do Chinese and Latin American products overlap in given target export markets (e.g. USA), to what extent the Chinese market represents an opportunity for LAC, to what extent do the two geographies share the same investors by national origin, and to what extent China may be an investor in LAC.

To illustrate, The Emergence of China points out that currently there is no major overlap in the product mix that China and the LAC (except Mexico) sends to the United States, leading to the conclusion that China may not represent such a threat to the region. But this begs the key strategic question. The fundamental implication for the future may be not what is happening in today’s commercial trade accounts, but that LAC is being displaced as a future potential exporter of all those products that China so effectively sends to the United States—including now such items as PCs and laptops. What if LAC can maintain its export market share in developed markets only through its present product mix? With China in the picture, has something fundamental changed to LAC’s potential to be the kind of region its leaders and peoples hope to be in the twenty-first century?

The focus on equilibrium economic theory without incorporating business and policy analytical frameworks also affects the section on foreign direct investment. Judged on reported national origins, the national sources of foreign direct investments going into China and LAC are quite different, and so the book concludes that the two regions are not really competing for the same capital flows. But a major source of the foreign direct investment in China comes from multinational corporations. To the extent that these multinational corporations operate in both China and LAC, and actually even if they do not, the choice between China and LAC is being made on a continuous basis by the multinational’s capital allocation process. In this regard, the competition between China and LAC has always been present. Indeed, today’s snapshot showing a lack of competition may actually be the expression of one region having lost the contest. Beyond what is occurring today, the real question is not where capital is coming from but whether the advantage that one region has over the other in accessing more efficient and larger capital pools will continue. This will certainly have an imprint on how each will end up in the global economy ten years from now.

But pointing out the shortcomings of The Emergence of China should not overshadow the enormous value of the book in helping us understand one of the signal events shaping our century. In addition, the book provides an excellent base of facts from which to begin to unravel the deep implications that the rise of China will have on Latin America’s own destiny. The leaders of Latin America would do well to have this book on their night tables. One of the obstacles to achieving the region’s potential is that so few will.

Spring 2007Volume VI, Number 3

Michael Chu is a Senior Lecturer at Harvard Business School and a Senior Partner of Pegasus Capital in Buenos Aires. Formerly, he was president and CEO of ACCION International and member of Kohlberg Kravis Roberts & Co.

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