LATIN AMERICA: Region is losing ground to competitors

Analysis

Latin America's industrial performance has declined since the 1980s (see LATIN AMERICA: Output outstripped by East Asia - October 28, 2003).

Against predictions that a rebound effect would occur in the first half of the 2000s, the region has continued to suffer the loss of industrial competitiveness. In addition, strong competitive pressures from East Asia are contributing to Latin America's further marginalisation in the international industrial scene:

• Latin America's manufacturing value-added (MVA) declined from 316.6 billion dollars in 2000 to 285.7 billion in 2004, with the contribution to GDP also contracting from 17.2% to 16.6%.
• Latin America's manufactured exports for the same period grew by only 5.1% per annum, well below the world average of 8.8%. As a result, its regional share of world manufactures trade plunged from 4.0% in 2000 to 3.5% in 2004.
• In medium- and high-technology exports, the fastest growing and highest value-added end of trade, Latin America's world market share dropped from 3.8% in 2000 to 3.2% in 2004.
• The regional share of manufactured exports as a percentage of total exports has declined from 49.2% to 48.2%, which shows an increasing trend towards low value-added commodity trade.

Competitive industrial performance index. The competitive industrial performance (CIP) index combines several dimensions of industrial competitiveness to assess Latin America's performance at the country level. It includes variables such as manufactured exports and MVA per capita, the share of MVA in GDP, the share of manufactures in total exports, the share of medium- and high-technology products both in manufactured exports and manufacturing value-added, and the world market share of manufactured trade and MVA.

Mexico led the CIP index in 2004 in Latin America, followed by Costa Rica, Chile and Argentina. Chile leaped two places in only four years, overtaking Argentina and Brazil. El Salvador also gained two ranking places, surpassing Uruguay and Venezuela. Bolivia lost four places between 2000 and 2004 and closes the ranking as the worst industrial performer in the region. Chile was by far the best industrial performer between 2000 and 2004, with Venezuela at the other end of the spectrum.

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Industrial and manufactured export capacity. MVA and manufactured trade are the key indicators for industrial competitiveness. While the former indicates the country's capacity to add value in the manufacturing process, the latter shows the country's capacity to meet global demands for manufactured goods in a highly competitive and changing environment:

• What makes Mexico the best industrial performer in the region is its ability produce and export competitively. Mexico alone accounts for 40% and 54% of Latin America's total MVA and manufactured trade respectively. In per capita terms, Mexico is well ahead of its regional competitors, with manufactured exports per capita reaching 1,516 dollars in 2004, far above the regional average of 363 dollars.
• Costa Rica and Chile are also strong both in the production and export of manufactures. Interestingly, they have followed a different industrial model, with Costa Rica boosting high-technology activities through its IT education focus and the attraction of high-technology-related foreign direct investment (the most obvious example of which is INTEL), and Chile exploiting, processing and trading competitively its resource-based sectors. Manufactured exports per capita reached 1,068 and 953 dollars in 2004, respectively.
• Argentina and Uruguay also have an industrial and manufactured export capacity above the regional average, with manufactured exports per capita of 485 and 408 dollars, respectively, though they both experienced a significant slowdown in industrial production in the first half of the 2000s.
• Brazil's manufactured exports per capita reached 382 dollars in 2004, up from 250 in 2000, yet MVA only grew at 3.2% per annum between 2000 and 2004, which made Brazil's manufacturing value-added per capita fall below Latin America's average.

Most Latin American countries have limited industrial and manufactured export capacity -- Bolivia, Nicaragua, Paraguay, Ecuador, Honduras, Guatemala, Panama, Peru and Colombia have manufactured exports per capita of less than 200 dollars annually.

Intensity of the industrialisation process. The intensity of industrialisation is measured by the simple average of the share of MVA in GDP and the share of medium and high technology activities in MVA. The former captures the role of manufacturing in the economy and the latter the technological complexity of manufacturing. The latter variable gives a positive weight to complex activities on the grounds that these are desirable for competitive performance: a more complex structure denotes industrial maturity, flexibility and the ability to move into faster growing activities:

• Argentina and El Salvador had the highest share of MVA as a contribution to GDP in the region in 2004 -- 24.1% in both cases.
• By contrast, Panama's MVA contribution to GDP was only 8.3% in 2004, making it the least manufacturing-oriented country in the region.
• Ecuador, Guatemala and Bolivia have experienced a drop in their MVA contribution to GDP in recent years, although in the case of Guatemala this is balanced out by the relative sophistication of its MVA structure, with medium- and high-technology products accounting for nearly 35% of total MVA.

Mexico and Brazil have the most sophisticated industrial structures in the region (although MVA's contribution to GDP reached only 18.1% and 10.7%, respectively, in 2004), mainly due to their strong automotive sectors. Brazil also has strong industrial weight in the aerospace sector. Other automotive assemblers such as Argentina, Chile and Venezuela also have a relatively sophisticated production structure. Bolivia's industrial structure is the least technologically complex in the region, with medium- and high-technology activities only accounting for 7.4% of total MVA.

Export quality. The quality of exports is measured by the share of manufactured exports as a percentage of total exports and the share of medium- and high-technology products in total exports. The reasoning is similar to that of industrialisation intensity. The share of manufactures in total exports captures the role of manufacturing in export activity, its technological complexity, the ability to make more advanced products and move into more dynamic areas of export growth:

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• Mexico has the most sophisticated export structure in Latin America -- around 84.0% of its exports are manufactured, and 63.4% are medium- and high-technology manufactures.
• El Salvador is mainly a manufacturing exporter, although the share of technologically advanced exports is very low (only 19.3% of exports are medium- and high-technology manufactures). However, it is important to bear in mind that El Salvador, like many other Central American countries, are engaged in maquiladora assembly activities for export markets and therefore there is little domestic technological content.
• Costa Rica and Brazil are regional exporters of medium- and high-technology -- electronics, and automobiles and aircraft respectively.
• The oil-dependent countries in the region -- Venezuela and Ecuador -- have the least sophisticated export structure among Latin American countries. Venezuela's share of manufactured exports in total exports plummeted from 37.0% in 2000 to 12.5% in 2004. This relates to the sharp drop in processed petroleum exports to the United States and other key markets. Ecuador has a weak industrial sector unable to engage in simple manufacturing and oil-processing activities (see ECUADOR: Industry struggles with foreign competition - July 18, 2003).

The great challenge for other resource-rich countries such as Bolivia, Peru and Chile is to boost industrial activities in sophisticated and higher value-added sectors. For instance, in 2004, Peru's medium- and high-technology exports accounted for 2.9% of total exports, down from 3.0% in 2000. Chile has increased the share of manufactured exports in total exports over time, but the share of sophisticated exports remains very low -- 5.6% of the total.

Product and market diversification. In a region where intra-regional trade is limited and the United States is the predominant market for most countries, diversification is a key factor to industrial competitiveness in Latin America. Countries exporting a wider range of manufactured goods show their ability to compete internationally throughout the whole manufacturing spectrum. Market diversification makes countries less vulnerable to external shocks and demand slowdowns:

• Brazil, Argentina, Costa Rica and Uruguay are highly diversified both in products and markets and therefore face low vulnerability from sudden changes in market demand, price fluctuations, structural shocks and competition from third countries. Brazil is the regional role model as it sells its manufactured exports in several key markets -- 27.7% to Latin America, 25.6% to the United States, 19.3% to the EU, and 11.6% to East Asia -- and has a wide variety of competitive manufactured exports spanning a broad technological spectrum.
• Paraguay, Panama, Ecuador and Honduras face high vulnerability in both products and markets. Paraguay, for instance, concentrates 66.6% of all its manufactured exports in Latin America (primarily Mercosur), with vegetable oil alone accounting for 28.3% of its manufactured exports. While Honduras and Panama are more dependent on the US market, 50% of Ecuador's manufactured exports stay within the region.
• Mexico, Guatemala, El Salvador and Colombia are highly vulnerable with respect to markets but less so in terms of products. Mexico is extremely vulnerable to demand changes and outside competition in the United States as this market currently absorbs 90% of Mexican manufactured exports. Guatemala and El Salvador face a similar high dependency on the EU market while Colombia concentrates nearly 50% of its manufactured exports in Latin America.
• By contrast, Peru, Chile, Bolivia, Venezuela and Nicaragua are highly vulnerable in terms of products but not in markets. Chile, for instance, has a limited range of competitive manufactured export products but sells to a broad range of markets -- East Asia takes 32% of Chile's total manufactured exports, compared with 24% to Latin America, 20% to the EU and 14% to the United States.

Outlook. Latin America will continue to face strong competitive pressure from other developing countries, particularly in East Asia. The region's manufacturing presence in world markets is likely to decline further as the big industrial players -- Mexico, Brazil and Argentina -- do not have the capacity to trigger change in the region in the way China has done in East Asia. There are important intra-regional dynamics that need to be taken into account:

• Mexico will continue to lead the regional CIP ranking for many years, but its manufactured export dependency on the United States will become a much more serious concern as competition in the US market becomes stiffer.
• Venezuela will almost certainly continue to fall in the CIP ranking as processed oil-related exports to key markets continue to stagnate.

• Chile and Costa Rica will consolidate their competitive positions in the region as world-class performers in resourced-based manufactures and high-technology products, respectively.
• Bolivia, Panama, Ecuador and Paraguay do not show signs of the industrial dynamism needed to move up in the CIP ranking. Their dependency on primary exports and unsophisticated manufactures will be difficult to overcome in the near future.

At the same time, the impact in Latin America of increased trade with China will continue to be mixed. While the sharp rise in commodities exports to China has benefited regional players such as Brazil, Argentina and Peru, competition from China has been a major factor in Mexico's loss of market share in the United States. Moreover, countries in Central America and the Caribbean have not only lost US market share to China, but are finding it increasingly difficult to compete with Chinese imports in their domestic markets (see LATIN AMERICA/CHINA: Trade shows mixed outcomes - May 1, 2006).