This is a continuation of my previous post regarding an analysis of the coincidences and differences regarding economic development in Asia and Latin America. This second part focuses on the second narrative: the endowments and geography theory.
The literature and ongoing policy debates suggest that there are four main narratives that attempt to explain why Latin America is losing global competitiveness, specially against Asia: (I will elaborate on the four points on different posts due to time constraints)
- The unfinished transition story
- Endowments and geography
- Institutions and FDI
- Social cohesion and inequalities
There are two opposed versions within this story.
The pessimistic or “Dutch disease” version – according to this story Latin America has the wrong endowment to develop complex manufacturing activities.
Critique of this story: one can hardly dispute the fact the region is natural-intensive and that this may affect manufacturing competitiveness (for instance, by leading to relatively higher wages), but if this restriction were really binding countries such as Mexico, Brazil, Vietnam and Indonesia would not be significant exporters of manufacturing goods. Moreover, countries such as Canada, Finland and Sweden seem to have shrugged off the “natural resource curse” to become important exporters of complex manufacturing goods.
The optimistic version – according to this story, resource endowments can be a blessing. Agriculture and mining are increasingly technology-intensive activities that promise much for resource-based (RB) industries; they could also lead the way to growth of the “knowledge economy”, a function previously believed to be served only by manufacturing. From this perspective, the root of LA competitive and growth problems don’t lie in its endowments but in its long-standing policy bias against RB activities; the way forward is then to promote such activities.
Critique of this story: a “resource based” path to competitiveness and growth can have two important limitations. First, the diversification from primary to RB manufacturing activities is not automatic. Middle East countries and Venezuela are a powerful reminders that the “Dutch disease” can be a real threat and that Canada and Finland might be exceptions to the rule. Second, RB activities might be an obstacle rather than a path to building a knowledge society as investment concentrates in land, permanent crops and extractive equipment and very little in human capital.
I will continue with the second narrative "Insitutions and FDI" in a future post, hopefully next week