The Hindu : Towards export-oriented growth

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Friday, Apr 02, 2004

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Towards export-oriented growth

By Jorge Heine

The abysmally low volumes of trade and investment extant between South Asia and Latin America cry out for action. The time is now.

ON APRIL 1, 2004, a Free Trade Agreement (FTA) between South Korea and Chile came into effect, the first between an Asian and a Latin American country. This is the culmination of a highly productive economic relationship, that has increased bilateral trade almost fourfold between 1991 and 2003, from $431 million to $1.5 billion, making Korea Chile's sixth largest trading partner.

This shows the enormous potential for trade and investment between Asia and Latin America. Yet until now, trade of goods and services between both regions has had a much stronger expression in the East than in South Asia. China is actually Chile's second largest trading partner — after the United States — with a total trade of $3.1 billion in 2003 (a figure 18 times that of 1991) and Japan is its third largest, with $2.9 billion. In 2003, Chile had more trade with Asia ($9.1 billion) than with either NAFTA ($8.4 billion) or Europe ($8.2 billion). Of all the Latin American countries, Chile is the one with the highest share of foreign trade with Asia, close to 30 per cent. How come?

Chile's relatively small internal market (with a population of 15 million, although a per capita income close to $5000) means that Chile, to be competitive, has to reach out to the broader world. For long highly dependent on copper (the red metal made up to 70 per cent of Chile's exports until the early 1970s, as opposed to some 40 per cent today), the opening of the economy that took place in the 1970s and 1980s added fresh fruit (today Chile is the largest Southern Hemisphere exporter), fish and fish meal and wood and wood products to Chile's export offer, which increased rapidly. This trend accelerated in the 1990s, as Chile doubled its exports from $9 billion in 1990 to $18 billion in 1997 (they are projected to reach $24 billion this year).

Blessed with many natural resources (not just copper — of which Chile has a fourth of the world's reserves and is by far the largest producer and exporter — but also gold and silver, iron, a fertile soil free from many of the plagues that haunt other parts of the world, and a climate in which trees grow faster and vines better than elsewhere), Chile placed its bets on becoming one of the leading "commodity providers" to the world. The country went for an export-led (as opposed to the previous import-substitution industrialisation, ISI) approach to economic development. This emphasised Chile's comparative advantage: its privileged natural resource base.

Mining was key, and much of the $45 billion in FDI that Chile attracted in the 1990s went into mining, but so was fishing (Chile is the second largest exporter of fish meal in the world, after Peru; it is also the second largest producer of farmed salmon, after Norway), fresh fruit, and forestry, as pines and eucalyptus grow much faster there than in the Northern Hemisphere. Wine, of course, with some $650 million in exports a year, has become Chile's best-known export product. This was not a painless or easy process, but it has served Chile well, leading to an average yearly growth of 7 per cent between 1987 and 1997, the doubling of its GDP, and the stabilising of its economy (inflation last year was 1per cent).

Chile realised that being dependent on exporting natural resources puts a premium on market diversification. It is bad enough to depend on commodities for much of your export earnings; if those go to only a few countries, the downward phase of the business cycle can kill you. And although Chile had historically depended heavily on the U.S. and the European markets, a conscious effort was made to target Asia. This also fit in nicely with Chile's long-standing "Pacific vocation", only natural in a country with a 5000 km coastline. In 1993, Chile became the second Latin American country (after Mexico) to join the Asia Pacific Economic Council (APEC); and this year, Chile chairs and hosts APEC, whose November summit will be attended by the leaders of 21 countries, including China, Russia, Japan and the United States.

Not without reason, some argue that Chile ought to kickstart the "second phase of its export-led development," adding more value to the commodities it sells. Some of it is being done. But the fact is that those commodities are in brisk demand, much of which comes from Asia, which takes me to India. Trade has been increasing quite rapidly. Chile's exports to India have increased some four-and-a-half times since 1998, and total bilateral trade is approaching $300 million. Were this trend to continue unabated, yearly trade would reach $1 billion before the decade is out. Yet even this is quite below the actual trade potential, and India is still only Chile's trading partner number 22.

Chile in itself, and the fact that it has unrestricted access to the U.S. and the E.U. markets through the FTAs it has signed, provides an ideal platform for Indian companies wishing to establish a foothold in the Americas. Textiles, pharmaceutical products, IT and cars are some of the things Indian companies are already selling in Chile, albeit still in small quantities. On the other hand, Chile should diversify its exports to this country, (91 per cent of which is copper and copper-related) to its many agricultural, fishing and forestry products.

India's enormous infrastructure needs will continue to gobble up large amounts of imported raw materials, many of which can be sourced in Latin America. Its burgeoning industrial and services sector, on the other hand, can find ready, as yet mostly untapped, markets in that part of the world. In the past, South-South trade was hampered by the lack of complementarity of Southern economies. Yet today, the economy of India and that of most Latin American countries complement one another rather well. Nature abhors a vacuum, and the abysmally low volumes of trade and investment extant between South Asia and Latin America (so different from those between East Asia and the latter) cry out for action. The time is now.

(Dr. Jorge Heine is the Ambassador of Chile to India.)

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