Working Paper Number
In this paper we analyze the extent to which Chinese demand enhanced the performance of Latin American economies in the period of economic boom that took place from the turn of the century until the run up to the financial and economic crisis of 2008-2009. It has been argued that China’s rise has been a blessing for the region because Chinese demand boosted exports and in part caused a hike in commodities prices worldwide. We find that the direct impact on the region’s exports was much smaller than what was touted. What’s more, we find that there were signs that China demand was accentuating concerns about the “resource curse” and deindustrialization in the region. We come to these conclusions in the following manner. First, we calculate the fastest growing and largest exports in LAC in the run up to the crisis. To approximate the extent to which China demand propelled such exports, we calculate the percentage of global export growth in those LAC export growth sectors that was taken by China. We then examine bi-lateral trade with China, analyzing the total amount and sectoral composition of such trade, and the major countries involved in China LAC trade. We find that China had a significant direct and indirect impact on LAC exports, but only in a handful of countries and sectors. For those sectors, we show with the latest available projected data that despite pre-crisis projections to the contrary, the upward trend in prices clearly seems to have ended. We then address the question of whether the China-led boom and related price increases may have made these countries vulnerable to Dutch Disease, and finally whether the nations that benefited from China were equipped to fiscally reap transfer the benefits of the recent boom into diversified development for their populations. In sum, we find that China had a relatively small impact on the region except in a small handful of countries and sectors. We also find little concrete evidence for a resource curse, though this needs to be studied in more depth. We also find that contrary to past booms LAC has the mechanisms in place to transfer some of the rents from the boom period toward long run development. Unfortunately the current economic crisis will make addressing these issues even harder than before.