Is there an Indo-LAC trade gap? Prof Jorge Heine responds to an IADB paper

by Dave

Welcome to the new kid on the block in Latin America. India has dramatically increased its presence in the Western hemisphere, as shown in a recent report from the Inter-American Development Bank, India: Latin America’s Next Big Thing? by Mauricio Mesquita Moreira ( A Special Report on Integration and Trade, Washington D.C., July 2010). This is the first time an international financial institution has produced a major report specifically on Indo-LAC trade and investment links. Until now, the latter lived under the shadow of China-LAC links, which have tended to monopolise the attention of IFIs, experts and the media.

The rise of the Asian giants, — China and India — has been a defining factor in the first decade of the 21st century, changing the world’s geopolitics and geo-economics. For Latin America, especially for South America, this has increased the demand for the region’s exports, particularly of commodities, whose export volume has risen dramatically. Second, it has contributed to the rise in the prices of the region’s main exports, thus benefiting it further. Third, it has allowed the region to diversify its export markets, traditionally confined to the United States and western Europe. Fourth, it has widened the region’s foreign policy options. Much of the region’s increasingly assertive foreign policy derives from this. It is projected that emerging market economies will grow 6.9 per cent this year and 6.2 per cent next year, vis-à-vis 2.4 per cent and 1.9 per cent for northern ones. The BRIC’s growth rate will be even higher, at 9 per cent. The writing is on the wall.

In sync with the enormous rise in intra-emerging markets trade from 2000 to 2008, which rose 18 per cent a year, from 2000 to 2009, Indo-LAC trade increased eightfold, reaching $17 billion. Private Indian companies, from Tata Motors to Ranbaxy and Infosys are all over, with $11 billion in FDI, in areas as varied as pharma, IT and cars. In Bolivia, Jindal Steel and Power has committed $2.3 billion to the El Mutún iron ore mine on the border with Brazil, Bolivia’s largest FDI project ever and India’s largest one in the region. Essar is building a 2.5-million tonne steel plant in Trinidad and Tobago, to be launched in 2012. In 2002, the Tata Consultancy Services (TCS) software and BPO project in Uruguay brought in a larger amount in FDI than all the FDIs from the rest of the world combined. It now employs several thousand professionals with high quality jobs. Other Indian companies from the IT and IT-enabled services sector have established similar ventures in seven other countries in the region, with a total of 11,000 employees.

The IDB report argues that Latin America does not produce sufficient engineers and this would be a major obstacle to the full development of the Indian-led, IT-enabled services sector in the region. Needless to say, this is not something that can be remedied in the short term. Yet, many of these jobs do not demand engineers — other professionals will do as well. A more critical issue may be lack of English language skills, something that can be addressed more easily. A study by Chile’s National Innovation Commission in 2006 concluded that the establishment of BPO and KPO centres should be one of the country’s highest priorities to foster innovation. They not only create good jobs but also transfer technology in a cutting-edge sector of the world economy. The presence in Chile of both TCS and Evalueserve is highly appreciated.

These projects make a huge difference in small countries like Bolivia. Trinidad and Uruguay. But this holds for the larger ones as well, especially in South America. Faced with a shortfall in local production, India recently bought sugar worth $1 billion from Brazil. This may repeat itself soon. Chile’s exports to India increased tenfold from 2003 to 2007, to $2.2 billion, a year in which India displaced Germany as Chile’s tenth largest export market. Venezuela’s exports to India have also increased dramatically over the past few years.

Still, given that these numbers look small within the context of the total intra-emerging markets trade of $2.8 trillion, Latin America’s $1.7 trillion foreign trade, and the $140 billion in China-LAC trade, the IDB report argues that there is a “trade gap” between India and Latin America. As the report puts is, “Why hasn’t trade happened yet?”

The argument is that whereas till 1999 trade between both Asian giants with LAC was almost flat, since then Chinese trade has increased exponentially, and the one with India much less so. The authors of the report conclude that high tariffs, high transport costs and closed labour markets are the main causes for this gap. India’s high tariffs on agricultural products are singled out as especially obnoxious, embodying a major obstacle to Latin American food exports. The policy proposals thus entail lowering tariffs, cutting transport costs and opening labour markets.

It would be a good thing for these policy proposals to be enacted. Should we hold our breath for it to happen anytime soon? Not really. Should therefore Latin Americans be “Indo-pessimists,” and continue to put all their eggs in the Chinese basket? The answer is ‘no’.

Banks must be cautious — although it could be argued that many bankers were anything but that in the run-up to the 2008-2009 Great Recession. It is also true that geographically, culturally and historically India and Latin America have been as far apart as any two regions in the world. They will never be the first or second priority to each other. Yet, in the course of the past decade, there has been a sea change in Indo-LAC links. The challenge before us is to read well the evidence of what is happening, to understand the dynamics and the potential of what is going on, and to project it into the next 20 or 30 years, hand in hand with the actions needed to make it happen.

If we look at Indo-LAC links through those lenses, we will realise that the so-called Indo-Latin American “trade gap” is no such thing. What we do have is a “trade lag.” As my colleague Manmohan Agarwal points out, if we allow for the 13-year difference at which the Chinese and Indian economies opened up and initiated the reform process, in terms of per capita income growth, FDI as a share of GDP, and exports of goods and services as a share of GDP, the rise that we have seen in India in all these indicators closely parallels that of China. In the latter’s case, exports of goods and services rose from 6 per cent of GDP in 1979 to 20 per cent in 1995; in India, from 7 per cent in 1990 to 20 per cent in 2005. Given that China-LAC trade in 2000 was $12 billion, a much lower figure than today’s fast-growing Indo-LAC trade, there is no reason not to think that the latter will soon be in the hundreds of billions as well.

Prof. Jorge Heine, also ex-Chilean ambassador to India, is spot commenting on the ‘trade lag’ and not ‘trade gap’. He also mentions key Indian companies making LatAm investments. What is missing from this list is Indian consumer food companies that should look at LatAm in earnest to backward integrate their supply chain. This should happen in the next decade.

Also, he is right to mention LatAm leaders and businessment needing to remove their China blinders and look at India seriously. It is foolhardy to rely on a single buyer for your commodities, and India can provide a counterweight in many cases – as the Argentines have found out with their recent spat with China over soy oil. Chile has smartly diversified their exports to Asia Pacific from N. America and W. Europe over the last decade – more countries should follow in their example.