Fighting the Routine and Thirsting for Innovation. The Economy of Latin American Countries

Latin America and the Caribbean (LAC) is a dynamically developing region that is full of contrasts. On the one hand, no other region in the world can boast such cultural unity, with a common language (with the exception of Brazil), a single faith and a shared colonial past. On the other hand, the LAC countries demonstrate significant variety regarding their economic development and the countries’ positions in the world.

Latin America and the Caribbean (LAC) is a dynamically developing region that is full of contrasts. On the one hand, no other region in the world can boast such cultural unity, with a common language (with the exception of Brazil), a single faith and a shared colonial past. On the other hand, the LAC countries demonstrate significant variety regarding their economic development and the countries’ positions in the world.

Latin America’s Placein Global Trade

The role of LAC in the global economy has evolved greatly over the past few decades. For a long time, the region, which accounts for 15 per cent of the earth’s land mass and is home to 9 per cent of the global population,[1] specialized in supplying raw materials and labour-intensive commodities. Although, according to UNCTAD, the turn of the 21^st century was characterized by an increase in capital- and knowledge-intensive products in the export portfolio of LAC countries, their primary export is still raw materials.

Another important new development in the region that shows LAC’s increasing economic power is the growing relative share of national capital and the emergence of relatively powerful local companies, which in some cases are pushing back foreign transnational corporations. These companies are called translatinas, and they feel more and more confident both on the regional and the global markets.[2] Translatinas have emerged in the oil and gas, mining, telecommunications, food processing and aerospace industries, as well as in metallurgy and in civil aviation. According to 2014 UNECLAC (United Nations Economic Commission for Latin America and the Caribbean) data, 16 of the 50 largest translatinas are Mexican; 14 are Brazilian; 11 are Chilean; 6 are Colombian; 2 are Argentinean; and 1 is Venezuelan.[3] Data on sales volumes and areas of specialization economic sector of the five largest translatinas are given in the table below.

The LAC countries have become more active in global trade: between 1990 and 2015, the LAC’s share in global export grew from 4.1 per cent to 5.6 per cent; in some years, it reached 6 per cent (in 2011 and 2012).[4] The drop in the share of LAC countries in global export between 2013 and 2015 can be explained by: falling prices for raw materials; the economic slowdown in China, the largest market for the LAC countries; the weak recovery of the Eurozone; and the slowdown of business activity in LAC, particularly in South America.[5] Mexico and Central American countries demonstrated positive export growth, since they mostly trade with the United States.[6]

As of 2014, the LAC countries mostly export: oil (14%, LAC countries are among the net exporters of energy);[7] motor vehicles (4 %), oil-bearing crops (3 per cent); copper (2.7%); animal feed (2.4%); gold (2%t); computers (2%); telecommunication equipment (2%); and fruits and nuts (1.9%).[8]

Speaking about LAC, we should mention that virtually all of the region’s countries joined the “food race” in the early 21^st century, since today, the large players on the food markets (both exporters and importers) have the same opportunities to influence the global economy and politics as the producers and consumers of fuel and mineral resources.[9] Both traditional Latin American food exporters (Argentina, Brazil, Mexico, Uruguay and Ecuador, among others) and countries for whom it is a relatively new export (Bolivia, Paraguay, Peru and Chile) are participants in the “food race.”[10]

At the same time, manufactured goods are given priority in the region’s foreign trade, since many countries tend toward diversifying their exports.[11] Latin America still depends too strongly on the situation on the global raw materials market, and to decrease the dependence, the region pays special attention to integration processes. Latin American countries managed to achieve considerable progress in liberalizing intraregional trade, and with integration processes further picking up pace, the region’s exports may be greatly diversified. Thus, many small and medium business enterprises that are unable to export their goods will have their chance to enter the international market.[12] Overcoming the stagnation caused by the drop in raw materials prices appears to be impossible without strengthening intraregional trade. Even with many national currencies in Latin America having fallen significantly in relation to the U.S. dollar, the countries do not receive the necessary competitive edge on the global market due to their limited export basket.[13] All of this leads to the conclusion that the best development path for Latin America would be to deepen integration processes.

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Latin America and the Caribbean
Development Forecast until 2020

Integration Processes in Latin America: Main Groups, Tasks and Purposes of Regionalization

On the one hand, integration processes in Latin America are among the oldest in the world. On the other, they differ significantly from the European integration processes, which are currently the most productive.

Right now, LAC has several integration mechanisms intended both to stimulate the national development of its member economies and increase the economic significance of the region as a whole. The most glaring examples are UNASUR (Unión de Naciones Suramericanas, the Union of South American Nations), СELAC (Comunidad de Estados Latinoamericanos y Caribeños, the Community of Latin American and Caribbean States), MERCOSUR (Mercado Común del Sur, the Southern Common Market), ALBA (Alianza Bolivariana para los Pueblos de Nuestra América, the Bolivarian Alliance for the Peoples of Our America) and the Pacific Alliance.[14]

These unions show two types of country specialization. The first is the MERCOSUR model, where the first integration stage involves a sharp surge in competition between the bloc’s member countries, and the second stage determines the most efficient players, which serves as the basis for the growth of intra-sectoral trade and maximum diversification.[15] The model also involves a “centre – periphery” sub-model, which secures the specializations of the group’s more powerful countries in those sectoral products that demonstrate the greatest effect of large-scale manufacturing, relegating peripheral countries to the niches where the effect is smaller.

The second model is the Pacific Alliance model, whereby the Alliance channels all its efforts into conquering target foreign markets, but does not achieve the necessary volumes of labour division within the bloc.[16]

As regards the significance of integration blocs for the development of the member countries, MERCOSUR is justly considered to be the most successful, since 65 per cent of all regional trade carried out by the member countries is done within the bloc itself. MERCOSUR also shows a certain asymmetry in the countries’ involvement in intra-bloc trade. For instance, MERCOSUR member countries account for 49 per cent and 36 per cent of the regional export of Brazil and Argentina, respectively, while the intra-bloc exports of the peripheral countries (Paraguay, Uruguay and Venezuela) make up 8 per cent, 5 per cent and 2 per cent of their production.[17] Still, MERCOSUR successfully does what it was intended to do: it stimulates intraregional trade and decreases dependence on the United States (see Figure 1), with the exception of a series of crisis phenomena in the LAC countries in 1998–2008.

Figure 1. Intra-Bloc Trade to Trade with the United States Ratio

Source: compiled by the author based on UNCTAD data

All the successful integration blocs within LAC are another factor that attracts foreign investments into their member countries, since such blocs significantly improve the region’s investment climate.

The share of industries that attract foreign direct investment (FDI) into the LAC countries is as follows: agriculture and raw materials (17%); manufacturing (36%); and the services industry (47%).[18]

The Netherlands is the most active investor in the LAC countries (20 per cent of all FDI flows in 2014), with Brazil being the main recipient of Dutch investments. The United States is in the second place, accounting for 17 per cent of FDI flows; the United States invests in Central America, Mexico and Colombia. The third largest investor in the region is Spain, with 10 per cent. Spain also channels the greater share of its FDI into Mexico, Colombia and Central America.[19]

Improving the infrastructure needed for effective trans-border interaction will become a crucial step towards further deepening integration processes in the region.[20] Currently, the undeveloped infrastructure is a stumbling block for a number of economic processes in the LAC countries, including successful and developed countries such as Brazil and Argentina. First of all, the LAC countries have a significant problem in terms of logistics: railway communication is underdeveloped and many highways are not particularly functional, significantly impeding trade between the countries in the region. Maritime shipping remains the most successful method of moving cargo.

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Relations with Russia

The Ukrainian crisis and its consequences have left a serious imprint on the global market, primarily on food trade, as the established trade and economic ties were distorted in their wake. When Russia imposed its counter sanctions on major food exporters such as the United States, Canada, the European Union, Australia and Norway in August 2014, Latin American authors called it a window of opportunity comparable in scale and significance to the opening of the Chinese market for Latin American products in the early 2000s.[21]

Today, 27 LAC countries export products to Russia. The share of foods brought into Russia from the region is very large. Thus, Latin America accounts for 98 per cent of the bananas, 78 per cent of the cane sugar, 77 per cent of the beef, 74 per cent of the soya beans, 23 per cent of the pork and 10 per cent of the poultry imported into Russia.[22]

The embargo imposed on food imports from several countries has not had a particularly great effect on the volume of Latin American products supplied to the Russian market. This can be explained by the fact that regional products have not yet become competitive enough on the Russian market because the significant logistical expenses (compared to Russia’s traditional partners, those who have lost access to the Russian market after the embargo) make the prices excessively high.[23]

Yet there are several exceptions to this trend, with Argentina being the most striking. In 2014, Argentinean food exports to Russia grew nearly by 40 per cent compared to 2013, which made Russia the fourth-largest importer of Argentinean food products. Russia is the leading importer of beef, cheese, horse meat and tangerines from Argentina; the second-largest importer of Argentinean peanuts, apples and pears; the third-largest importer of lemons and grapes; and the fourth-largest importer of poultry. Russia is also among the ten largest importers of fish, oranges and dairy products. Argentina accounted for 7per cent of Russian meat imports in 2014.^[24]

Regarding other promising areas of cooperation in trade, economic relations and investments between Russia and the LAC countries, the principal areas are engineering and aircraft engineering, with Brazil being the leader in the region. Mexico and Ecuador specialize in the energy sector and cooperate with Russia in exchanging technologies.[25] Nuclear and hydropower prevails in joint Russia–Argentina projects, and Argentina also imports a large share of Russian fertilizers. Of course, the military and technical industry remains an area of interaction with the region.[26] Russian Mi-171 helicopters are constantly in demand by the governments of Peru, Venezuela, Brazil, Colombia and Mexico.[27] In 2013, Mexico purchased 20 Sukhoi Superjet 100 aircraft for its domestic air transportation.[28]

Russia signed a contract to build the Chihuido I Hydropower Plant in southwest Argentina, becoming one of the largest new joint projects between the two countries.[29] Since 2011, Russia is also building the Toachi-Pilaton Hydropower Plant in Ecuador.[30]

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The Region’s Development Prospects

The LAC countries can be expected to increase the research intensity of their agricultural production and the share of processed agricultural products, since unprocessed agricultural products have a tendency to become cheaper. Argentinean and Brazilian agriculture are leaders in introducing innovations and new technologies, both at home and internationally. Fertilizers, pesticides, animal feed and animal medications are constantly improved, as is agricultural equipment. And all the innovations are made within the above-mentioned countries.^[31] Thus, we can confidently state that agriculture of  the leading LAC countries will become both a resource- and knowledge-intensive sector.

Since prices for traditional energy sources are dropping, it should be expected that the share of biofuel will increase in the trade balance of its leading producers, Brazil and Argentina, which could also influence the knowledge-intensive export items of LAC countries.

At the same time, Brazil’s current situation is significantly worsened by political instability, the growth of unemployment and a drop in real income. The country should be expected to resume its economic growth in as little as three to four years.

The situation of Mexico and the Central American countries is particularly favourable, since their principal trade partner is the United States, and consequently, their export market is stable, which stimulates the countries’ production.

Latin America has transformed its position in the world significantly over the past few decades, thanks to a number of key changes: intraregional trade expanded noticeably due to deepened integration processes; trade and economic relations with Russia intensified against the background of its sanctions war with several countries; and the share of LAC countries in the global trade increased. In the nearest future, the role of the countries in the global division of labour should increase as a result of diversified exports and the increased share of high added-value products supplied to the global market. Without these changes in their export structure, these countries will most likely be unable to return to the growth that they experienced in the 2000s and which was broken so painfully and suddenly in 2014–2015.

^[1] Encyclopedia. Latin America. V. M. Davydov, ed. Economics NPO, Russian Academy of Sciences, Institute for Latin American Studies. Economics Press LLC, 2013. 950 pages (in Russian).

[2] Yakovlev P. P. Translatinas: New Players in the Global Economy // Perspektivy (“Prospects”), e-journal. March 19, 2013 (in Russian).

[3] Morales R. Lidera México ranking de empresas translatinas // El Economista, May 30, 2014 (in Spanish).

[4] Calculated by the author on the basis of WTO (World Trade Organization) data.

[5] United Nations Economic Commission for Latin America and the Caribbean (UNECLAC), Latin America and the Caribbean in the World Economy, 2015 (LC/G.2650-P), Santiago, Chile, 2015.

[6] Giordano, Paolo. La recaída: América Latina y el Caribe frente al retroceso del comercio mundial // Banco Interamericano de Desarrollo, 2015 (in Spanish).

[7] Key Statistics and Trends in International Trade 2014 // UNCTAD, United Nations, 2015.

[8] Calculated by the author on the basis of UNCTAD data.

[9] Chesnokov A. The Political Aspect of International Food Security // Mezhdunarodnye protsessy (“International Processes”), 2011 (3). (In Russian).

[10] Davydov V. M., Yakovlev P., Shcherbakova A. V. Semenov V., Razumovsky D., Dlougaya E. Latin America On the Global Food Market. Moscow: Institute of Latin American Studies of the Russian Academy of Sciences, 2015 (in Russian).

[11] Key Statistics and Trends in International Trade 2014 // UNCTAD, United Nations, 2015.

[12] United Nations Economic Commission for Latin America and the Caribbean (UNECLAC), Latin America and the Caribbean in the World Economy, 2015 (LC/G.2650-P), Santiago, Chile, 2015.

[13] Ibid.

^[14] Kuznetsov D.A. Current Latin American Integration and Sub-Regionalization: The Political and Ideological Dimension // Sravnitelnaya politika (“Comparative Politics), 3(20), 2015 (in Russian).

^[15] Razumovsky D.V. Strategies and Models of Intra-Sectoral Trade Specialization in South America’s Integration Blocs // Dissertation, Moscow: Institute of Latin American Studies of the Russian Academy of Sciences, 2016 (in Russian).

[16] Ibid.

[17] Estado actual del proceso de integración en America Latina y Caribe// XLI Reunión Ordinaria del Consejo Latinoamericano, Caracas, Venezuela, 25 al 27 de noviembre de 2015, SP/CL/XLI.O/Di Nº 15-15 (in Spanish).

[18] Comisión Económica para América Latina y el Caribe (CEPAL), La Inversión Extranjera Directa en América Latina y el Caribe, 2015 (LC/G.2641-P), Santiago de Chile, 2015 (in Spanish).

[19] Ibid.

[20] Estado actual del proceso de integración en América Latina y Caribe // XLI Reunión Ordinaria del Consejo Latinoamericano, Caracas, Venezuela, 25 al 27 de noviembre de 2015, SP/CL/XLI.O/Di Nº 15-15 (in Spanish).

[21] Russia and Argentina on the Path towards Mutual Rapprochement Track. In Honour of the 130th Anniversary of Russia–Argentina Diplomatic Relations [in Russian]. Moscow: Institute of Latin American Studies of the Russian Academy of Sciences, 2015 (in Russian).

[22] Customs statistics of the Russian Federation

^[23] Savelyeva A.V. The Role of Latin America in Ensuring Global Food Security (Round Table at the Institute of Latin American Studies of the Russian Academy of Sciences) // Latinskaya Amerika [Latin America]. 2014 (12), pp. 31–45 (in Russian).

[24] Por las sanciones comerciales a Rusia, Argentina aumentó los envíos de alimentos a ese destino // iProfesional, 29.01.2015 (in Spanish).

[25] Davydov V.M. We like Latin America More and More // Mezhdunarodnaya zhizn’ (“International Life”), September 01, 2014 (in Russian).

[26] Ibid.

[27] Chernyshov A. Rusia se abre paso en América Latina a través la cooperación//Russia beyond the headlines, October 1, 2015 (in Spanish).

[28] Aldamiz A. Los aviones Sukhoy Superjet 100 se presentan en Mexico//Russia beyond the headlines, August 24, 2013 (in Spanish).

[29] Rusia le ofrece a Argentina la financiación de la hidroeléctrica Chihuido//Spuntik Mundo, 11.02.2016 (in Spanish).

[30] Chernyshov A. Rusia se abre paso en América Latina a través la cooperación//Russia beyond the headlines, October 1, 2015.

[31] A Agricultura Brasilera: desempenho, desafios e perspectivas / organizadores: José Garcia Gasques, José Eustáguio Ribeiro Veira Filho, Zander Navarro. Brasilia: Ipea, 2010, p. 83 (in Portuguese).