Latin America and the Rising South Changing World, Changing Priorities Augusto de latorre, Tatjana Didier, Alain Ize, Daniel Lederman, and Sergio L. Schmukler WORLD BANK GROUP
Contents Foreword Acknowledgments Abbreviations Overview 1 Changes at the center of the world economy 2 How the rise of the South conditioned development in Latin America and the Caribbean: An Interpretation 13 Changing world, new priorities 31 Structure of the report 35 Annex OA 35 Notes 36 References 38 1. Three Global Trends That Shaped Latin American and Caribbean Development at the Dawn of the Twenty-First Century 41 Set of Facts 1: The weight of the South in the global economy has risen, particularly after 2000, but its rise has not been even across sectors or types of flows 42 Set of Facts 2: The rise of the South has had asymmetric effects on global trade and financial networks 50 Set of Facts 3: The structure of bilateral trade and financial connections of the South has been generally different from that of the North, with geography and endowments arguably shaping their evolving structure 58 Notes 68 References 70 2. The Structure of Trade Linkages and Economic Growth 73 Trade and economic growth 75 The nature of traded goods 81 The nature of trading partners 98 Potential frictions affecting trade and growth dynamics 106 Annex 2A 117 Notes 118 References 123 xi xiii xv
vi CONTENTS 3. Big Emerging Markets, Big Labor Market Dislocations? 133 The rise of the South and the restructuring of global markets in manufacturing, agriculture, and mining 1^5 A closer look at manufactures exports and the role of China through the lens of export similarity 1 Recent trends in manufacturing employment in Latin America and the Caribbean 142 Labor market adjustment paths in response to the rise of China 143 Potential distributional implications of China-induced labor market adjustments 148 Concluding remarks 1-50 Notes 151 References 152 4. The Changing Patterns of Financial Integration in Latin America and the Caribbean....153 The role of Latin America and the Caribbean in international financial transactions....156 Growth in the intensive and extensive margins 162 Financial flows and trade flows 176 Foreign direct Investment and GDP growth 181 Annex 4A 189 Notes 191 References 193 5. Ascending with the South Winds: Will Low Saving in Latin America and the Caribbean Be a Drag? 197 Concepts and literature review: When does saving matter for trend growth? 202 Looking back: Latin America and the Caribbean under the spell of the interest rate Channel 205 Looking ahead: Growth-impairing effects of low saving through the exchange rate Channel 214 Annex 5A The Benchmarking Approach 219 Annex 5B 224 Notes 225 References 228 Boxes 1.1 Differences in international trade Integration: The case of Latin America and the Caribbean and Fast Asia 65 2.1 Methodology of trade and growth regression estimations 78 2.2 What has driven the dispersion of production tasks away from the North toward the South? 39 2.3 Asymmetry in the use of temporary trade barriers 113 3.1 Construction of the China effect index 140 4.1 How do bilateral data compare with balance of payments data? 158 4.2 How did the global financial crisis affect Investment in and by the region? 165 4.3 Model setup and identification strategy Figures ^ 1 The rise of the South 2 The South's share of global trade flows 1
CONTENTS VÜ 0.3 The South's share of global capital inflows 4 0.4 The global trade network 5 0.5 Similarity and systemic importance in the global trade network 6 0.6 The global financial network for syndicated bank loans 7 0.7 Regional clustering in global value chains, 2011 8 0.8 Density maps of regional trade networks 10 0.9 Composition of foreign assets and liabilities in the South, by region 12 O.IO Saving, investment, and the current account 13 O.ll Real U.S. interest rates 14 0.12 Terms of trade within Latin America and the Caribbean 15 0.13 Export similarity Indexes in manufacturing in Brazil and Mexico 16 0.14 Effects of the rise of China on gross exports from Latin America and the Caribbean, by sector, 2001-11 average 17 0.15 Sectoral composition of cross-border flows in Latin America and the Caribbean, 2003-2011 average 18 0.16 Exports of intermediate goods as share of total exports in three global value chains 19 0.17 Backward and forward participation in global value chains, 2011 21 0.18 Employment shares in the formal and informal manufacturing sectors of Argentina, Brazil, and Mexico 22 0.19 Evolution of wages in Brazil relative to wages in Mexico 23 0.20 Responses to a positive global supply shock in Latin America and the Caribbean and other emerging market regions 23 0.21 Responses to a global monetary easing in Latin America and the Caribbean and other emerging market regions 24 0.22 Domestic saving, real exchange rates, and sovereign risk ratings, 1990-2012 average 25 0.23 Saving and real exchange rate gaps for higher-income countries in Latin America and the Caribbean 26 0.24 Country ratings for selected country groups 27 0.25 Sovereign risk rating, growth, and investment gaps, 1990-2012 30 1.1 Rise of the South: Share of world GDP, trade, and capital flows 43 1.2 Sectoral composition of trade flows 45 1.3 Sectoral composition of financial flows across regions 46 1.4 Composition of global financial flows across sectors 47 1.5 Composition of foreign assets and liabilities in the South, by region 48 1.6 Patterns of net Integration into the global economy 50 1.7 Global trade and financial networks 51 1.8 Similarity in global trade networks 54 1.9 Structural equivalence of trade connections 55 1.10 Extensive margin of South-South connections 57 1.11 Regional composition of cross-border connections of countries in Latin America and the Caribbean 58 1.12 Clusters in the global trade network 60 1.13 Regional composition of cross-border Investments 61 1.14 Regional clustering in global value chains, 2011 63 1.15 Sectoral composition of bilateral cross-border flows 64
Viii CONTENTS Bl.1.1 Density maps of trade networks 66 1.16 Sectoral composition of cross-border flows for Latin America and the Caribbean 2.1 Intraindustry trade 2.2 Shares of traded goods of different factor intensities 85 2.3 Growth of global value chains 88 2.4 The rise of the South in selected global value chains 90 2.5 Technological composition of exports from the South, by region 92 2.6 Participation in global value chains 94 2.7 Growth effects of the stage of the participation in global value chains 97 2.8 The global trade network 2.9 Composition of trading partners 1 02 2.10 Average cost of trading in 2013 107 2.11 Land transportation, by region, 2011 108 2.12 Ship and port activity, second half of 2013 109 2.13 Liner shipping Connectivity index in selected countries, 2013 110 2.14 Share of world air freight transport by selected countries, 2013 111 B2.3.1 Foreign targets of temporary trade barriers imposed by selected countries in Latin America and the Caribbean 114 3.1 Global export market shares of selected large economies, by sector, 2001,2006, and 2011 136 3.2 Global import market shares of selected large economies, by sector, 2001,2006, and 2011 138 3.3 Export similarity Indexes in manufacturing for Argentina, Brazil, and Mexico, 1999-2011 139 3.4 Effects of the rise of China on gross exports of selected countries in Latin America and the Caribbean, by sector, 2001-11 141 3.5 Employment shares in the formal and informal manufacturing sectors of Argentina, Brazil, and Mexico, before and after 2000 143 3.6 Simulated short- and long-run impacts of the rise of China on wages in Argentina, Brazil, and Mexico, by sector 144 3.7 Simulated short- and long-run impacts of the rise of China on informal employment in Argentina, Brazil, and Mexico 145 3.8 Simulated short- and long-run impacts of the rise of China on the residual sector in Argentina, Brazil, and Mexico 146 3.9 Evolution of relative wages in Brazil to Mexico, 2001-09 147 B4.1.1 Comparison between bilateral and balance of payments account data on mergers and acquisitions and greenfield Investment, 2003-11 158 4.1 Cross-border Investment shares by Latin America and Caribbean (LAC) countries in North, South, and other LAC countries, by type of Investment, selected years 160 4.2 Cross-border Investment shares by North, South, and Latin America and Caribbean (LAC) countries, by type of Investment, selected years 161 4.3 Cross-border Investment to and from countries in Latin America and the Caribbean, selected years 153 4.4 Cross-border holdings of and extensive margin for portfolio Investments 2001-11 ' 166 4.5 Cross-border flows of and extensive margin for syndicated loans, 1996-2012....167 s of and extensive margin for mergers and acquisitions, 168
CONTENTS ix 4.7 Cross-border flows of and extensive margin for greenfield investment, 2003-11 170 4.8 Extensive margin of cross-border financial flows within Latin America and the Caribbean, by type of investment, selected years 174 4.9 Extensive margin of cross-border financial flows from Latin America and the Caribbean to countries in other regions of the South, by type of investment, selected years 175 4.10 Sectoral composition of cross-border financial flows to and from Latin America and the Caribbean, by type of investment, selected years 177 4.11 Sectoral composition of cross-border financial flows to and from Latin America and the Caribbean, by type of investment, 2003-11 average 178 4A.1 Number of active cross-border connections, by type of investment and region....189 4A.2 Sectoral composition of cross-border financial flows to and from Latin America and the Caribbean, by type of investment and subregion, 2003-11 average 190 5.1 Growth paths of Latin America and the Southeast Asian Tigers, 1950-2014 198 5.2 Growth rates in selected emerging economies, 2003-14 198 5.3 Domestic saving rates in selected economies, adjusted for per capita GDP, 2012...199 5.4 External competitiveness (Big Mac index), adjusted for per capita GDP, 2012....200 5.5 The three Channels linking saving and growth 203 5.6 Saving rates of higher-income countries in Latin America and the Caribbean and middle-income countries in Southeast Asia 205 5.7 Domestic saving and real exchange rate gaps 206 5.8 Domestic saving and sovereign risk rating gaps 207 5.9 Real exchange rate and growth gaps in selected country groups 208 5.10 Saving and real exchange rate gaps for higher-income countries in Latin America and the Caribbean 209 5.11 Saving and real exchange rate gaps in selected country groups 210 5.12 Country ratings for selected country groups 210 5.13 Policy-adjusted gaps for high-saver and low-saver higher-income countries in Latin America and the Caribbean, 1981-2012 211 5.14 Real U.S. interest rate 212 5.15 Incidence of crises in Latin America and Southeast Asia, 1980-2010 212 5.16 Impulse responses in Latin America and the Caribbean and other emerging market economies to positive global demand shocks 213 5.17 Impulse responses in Latin America and the Caribbean and other emerging market economies to global monetary easing 214 5.18 Impulse responses in Latin America and the Caribbean and other emerging market economies to positive global supply shocks 215 5.19 Saving and exchange rate gaps for higher-income countries in Latin America and the Caribbean, 2011-12 averages 216 5.20 Composition of foreign assets and liabilities in selected countries in Latin America and the Caribbean, 1990-2011 217 Tables OA.l Country group composition 35 2.1 Regression results on the effect of the nature of traded goods on economic growth 80 2.2 Regression results on the effects of the composition of trading partners on economic growth 104 2A.1 Data description and sources 117
X CONTENTS 3.1 Percentage of workers in bottom 40 percent of income distribution in Argentina, Brazil, and Mexico, by sector 149 4.1 Cross-border Investment, by pairs of regions and type of investment (annual average, millions of 2011 U.S. dollars) 157 4.2 Shares of cross-border investment by source and receiver region, normalized by GDP of Latin America and the Caribbean (annual average, percent) 162 4.3 Intensive margin of financial connections across regions 171 4.4 Extensive margin of cross-border financial flows 172 4.5 Region-to-region financial flows 172 4.6 Global financial and trade flows 180 4.7 Foreign direct investment and labor productivity growth in the host country 187 5A.1 Country group composition 220 5A.2 Data description and sources 222 5A.3 Data definitions and sources 223 5A.4 Signs and length restrictions on global and domestic shocks 223