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What Can the Asian Tigers and Latin Pumas Learn From Each Other?

Danny Leipziger's picture
Also available in: Español

The global landscape these days is not a pretty one: collapsing commodity prices, weak demand in the OECD economies and a pronounced slowdown in many emerging markets, unpredictable capital flows affecting exchange rates, and a noticeable slump in world trade. This is clearly not a good time to be a Minister of Finance!
This is the panorama that surrounds the IMF World Bank Annual Meetings in Lima, October 8-10. The weak global picture is heavy on diagnostics of what is troubling many developing countries, but less robust on the side of policy solutions. In Lima, this will be one of the key topics of discussion during a high-level debate on “Balancing sustainable growth and social equity”.
The connections between Latin America and East Asia have mushroomed over the past decade and the correlation between their respective growth rates has now reached a record-high level. Of equal importance, perhaps, are the lessons that each region can glean from the experiences of the other, both in good times and bad.
Clearly, looking at East Asia, the highest growth region of the globe for many decades, one must marvel at the extensive investments in infrastructure and the export driven development strategies that have propelled growth in the early industrializers, like Korea and Singapore, the second generation fast-growers like Malaysia and Thailand, and the most recent spate of rapid growers, including China and Vietnam.
Lesson number one from East Asia is the extensive investment, led by government spending, on infrastructure that has led to low logistics costs and great levels of efficiency.
The contrast with much of Latin America is stark. Most economies of Latin America have seen their public expenditure dominated by social expenditures, and in some debt service, but few have put sufficient proportions of GDP into infrastructure, with the result that energy costs are relatively high, transport costs excessive, and port efficiency weak.
The results are less visible when commodity prices are high; however, as export prices have declined sharply, these inefficiencies are noticeable. Just looking at Brazil, the region’s largest economy, one sees public spending on infrastructure averaging less than two percent of GDP, a proportion totally inadequate for that economy and at level so low that private sector involvement is discouraged. Evidence shows that economies that fail to invest in infrastructure are unlikely to maintain international competitiveness, an over-riding lesson from East Asian export-driven economies.
The second lesson that East Asia provides is the importance of productivity gains. Productivity is clearly the key to major economic advances. Whether driven by capital investment, skilled labor or technological innovations, no economy grows rapidly without strong performance in terms of total factor productivity. Latin America lags in this respect. Despite gains in primary enrolments, there are questions about quality and the absorption of skills, and about limited innovation as compared to East Asia.
Asia has larger firms, is better connected to world markets, and hence faces more contestable markets. Firms need to reach global scale and global levels of efficiency in order to compete. Fewer Latin American firms fall into this category. The Hyundai and Samsung experience of Korea has not been replicated, and despite efforts in some Latin American countries to create world-class firms with subsidized credits, the results have not been encouraging. Instead, many countries have implicit import restrictions that impede competitiveness and subject domestic consumers to higher costs and lower quality products and services.
From the other side of the Pacific, there are lessons from Latin America that carry import for Asian economies. A number of Latin economies have seen gains in terms of income distribution and many millions have entered the new middle class. Some of these gains are due to employment and income gains, supported by some effective transfer programs. Thus the first lesson is not to ignore inequality and social concerns.
East Asia leads the globe in terms of manufacturing employment; yet, on many welfare measures the region lags behind. Learning from Latin America can help move people from the ranks of the just poor to the ranks of the new lower middle class, but this requires an investment shift to basic housing and consumer durables. In light of current low trade volumes, a shift in aggregate demand to domestic sources may be both inevitable and good policy for Asia.
Finally, many Latin American countries show excellent results with democracy and political accountability. While political pressures can add to the demand for current consumption at the expense of investment, transparency of public policy is a goal for most countries. Especially in a situation of less plentiful capital flowing towards emerging markets, governance distinction is a decided advantage and a prelude to better regulation and more predictable rule of law. A final lesson is that growth without accountability and political remedies is not sustainable.
Follow the debate here and share lessons on #amlatandasia 

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