Latin America, India's next big thing?

Policy wonks in Latin America eagerly await the reports of the U.N.'s Economic Commission on Latin America and the Caribbean (ECLAC). Based in Santiago, with a history of leadership by heavyweights such as Raúl Prebisch, Enrique Iglesias and Gert Rosenthal, and known as “Latin America's think tank,” ECLAC pulls no punches. It is often able to identify emerging trends in the world political economy long before others. Uniquely for a U.N. agency, its peer-reviewed journal, ECLAC Review, edited by one of the region's most senior economists, Osvaldo Sunkel, is a prestigious outlet for path-breaking pieces on international political economy issues.

Much of the recent work of ECLAC's International Trade and Integration Division has been on Asia and its links with region. A few weeks ago, it released its first report on India and India-LAC links. Titled India and Latin America and the Caribbean: Opportunities and Challenges in Trade and Investment Relations (LC/L346, November 2011), it was just in time for a seminar organised by the Indian Embassy in Buenos Aires, “The New India and the New Latin America: Synergies and Complementarities,” in a joint venture with ECLAC. The report and the seminar's deliberations throw fresh light on one of the hottest topics going these days — the new impetus acquired by South-South trade and investment flows in the wake of the Great Financial Crisis (GFC). They complement last year's reports from the Inter-American Development Bank — India: Latin America's Next Big Thing? — and another study released by the Latin American and the Caribbean Economic System, officially known as Sistema Económico Latinoamericano y del Caribe (SELA), in Caracas on the same subject.

Latin America today

The underlying question is the following: is the glass half empty or half full?

By this I mean, do the relatively meagre absolute numbers of India-LAC trade (a little over $20 billion in 2010) or of Indian FDI in LAC (some $11 billion) tell the whole story? Do they merely confirm the long-standing suspicion that only incurable romantics could ever believe in serious economic exchanges between India and Latin America, given the sheer geographic and cultural distances between both? Or, as others would have it, do the ongoing trends and the enormous rise in trade and investment links over the past decade point in a different direction?

Much depends on our assessment of which side is right in this debate, and the jury is still out on this. Raúl Rivera, an innovation guru and author of a recent best-selling book, Nuestra hora, soon to be out in English, pointed out in Buenos Aires that, for a variety of reasons, Latin America has developed a reputation for being a small, fragmented region, racked by conflict and populist dictators. Nothing could be further from the truth. In terms of land mass, with some 20 million square kilometres, Latin America has a larger surface than either Russia or Canada, the two largest countries. It is the region with the largest bio-capacity and biodiversity, and the one with the biggest fresh water reserves anywhere. Almost all countries have now democratically elected governments. It is also a peaceful region, with few inter-state wars in the course of the past 100 years, and, accordingly, with the lowest defence expenditures. Its economy as a whole, measured in purchasing power parity (PPP) terms, is the fourth largest in the world — bigger than Japan's, and only behind the EU's, the U.S. and China's.

Over the course of the past decade, it has also become one of the growth poles of the world economy and thus a natural partner for India. With a population of 580 million, a GDP of $4.9 trillion (four times larger than that of India) and six per cent of the world's merchandise trade, it has shown remarkable resilience in the face of the GFC. Although its GDP fell by 1.7 per cent in 2009, its recovery was swift, growing at 6.1 per cent in 2010, and at a (projected) 4.5 per cent in 2011. This is in marked contrast to many European countries now on the verge of bankruptcy and a United States still in the throes of the recession.

This is, then, the New Latin America, open for business. Its solid macroeconomic and fiscal management, as well as prudent financial and banking supervisory practices, have put the economies of the region on a sound footing. The region grew at an average of five per cent from 2003 to 2008, its best performance in 40 years. Much progress has been made in lowering poverty. Expanded trade with Asia buttresses the commodities boom that undergirds its steady growth. This leads us to India's role in the region, or more precisely, that of the New India. The latter's gradual, but steady, opening to the world economy, its high savings and investment rate, and rapidly expanding middle class, whose demands for western consumer products is growing in leaps and bounds, offer enormous opportunities for expanded international trade.

The ECLAC report is emphatic: “The region's trade with India was negligible until the beginning of the past decade. Since then, trade with the Asian country has burgeoned.” U.S. $20 billion in India-LAC trade is not an insignificant sum, though it is highly concentrated, with Chile, Brazil, Argentina and Paraguay providing the bulk of the region's exports to India, and Brazil, Peru, Colombia and Nicaragua a significant amount of the imports. Preferential Trade Agreements (PTAs) with Chile and with Mercosur have boosted inter-regional trade.

Going through the trade data is revealing. Though Latin America's export basket to India is comparable to that of other Asian markets — being mostly composed of natural resources and products based on the latter, its imports from India are somewhat different, as “the import basket from India consists not only of manufactures, but also natural resource based manufactures.”

Three advantages

Latin America, and in particular South America, is becoming a significant source of natural resources for India — oil, copper, soya, and iron ore, among others. A number of economists have warned about the danger this entails, and how Chinese and Indian demand for commodities could push the region towards its de-industrialisation, and a narrow specialisation as agro-mineral exporting economies. Yet, this need not necessarily be the case. The demand for food will continue to expand exponentially in India. It is possible for Latin America to move up the value chain in this area, and start to export more sophisticated and elaborate farm products. Food security will emerge as a critical issue in years to come, and India-LAC partnerships in this area could be highly profitable. The Latin American industry also needs to get into the Asian value chains that have become such a critical part of international trade.

The report identifies some interesting differences between Chinese and Indian outward FDI. These show the special opportunities Indian capital offers to LAC. They are basically three: 1) Indian FDI is largely fuelled by supply and demand and private companies, whereas the Chinese one is mostly led by government 2) India's FDI goes mostly to the developed world and to manufacturing and services, whereas Chinese FDI is mainly geared to developing countries and mining, and 3) India's comparative advantages lie in its corporate governance and management, whereas China's are in government strategy and economic diplomacy.

India's IT and IT-enabled services industry have played a major role in India's outward expansion — and Latin America has benefited. TCS has established a presence in eight of the larger Latin American countries; Wipro and Evalueserve, among others, are also there. This implies significant technology transfer in a cutting-edge economic sector.

So, which is it? Is the glass half-empty or half-full?

The answer can be gleaned from what has happened in the past decade. A combination of government initiatives and private ventures opened new vistas in India-LAC trade and investment, leading to an eightfold expansion in interregional trade. A steady expansion of state visits in both directions (Luiz Lula, the former Brazilian President, visited India three times in eight years) gave the right signals to the private sector, which followed through in a variety of areas.

Yet, with this new decade come new challenges. One-off visits and a few trade agreements need to be taken to the next stage. If we want to realise the full potential of India-LAC ties, the density of these exchanges needs to be increased. This implies institutionalising them, making them part of the regular agenda of government and the private sector.

The ECLAC report suggests a number of steps. I would highlight three: 1) developing joint strategies for trade and investment promotion; 2) working together on infrastructure, competitiveness and innovation; and 3) launching a series of policy dialogues on inter-regional cooperation.

We have come a long way since the days when India and some Latin American countries championed the cause of what was then called the New International Economic Order (NIEO) in the late 1970s and early 1980s. But there is little doubt that the challenge of making South-South cooperation work is once again at the top of the policy agenda — though this time driven by sound economic opportunities rather than by wishful thinking.

(The writer is CIGI Professor of Global Governance at the Balsillie School of International Affairs, Wilfrid Laurier University in Waterloo, Ontario. His book The Dark Side of Globalization, co-authored with Ramesh Thakur, is published by United Nations University Press.)