Latin America’s exports fell for the third year in a row in 2015, drawing new attention to a problem that explains much of the region’s economic problems: lack of export diversification.
This year, exports from the region fell by 14 per cent, mainly because of the steep decline in commodity prices, according to a new report by the Inter-American Development Bank (IDB). What’s worse, the region’s exports are likely to continue falling in 2016, the bank says.
One of the key problems is that many Latin American countries are exporting only a handful of products, in some cases the same raw materials that they have been shipping abroad for a century. And when international prices for these exports fall, the region goes bust.
Consider some of these chilling figures that were given to me by IDB principal trade economist Paolo Giordano last week: Venezuela relies on only one product — oil — for 96 per cent of its export income, and Ecuador relies on just four products for 75 per cent of its exports.
Colombia, Bolivia and Paraguay depend on fewer than 10 products for 75 per cent of their exports, while Chile, Peru and Panama depend on 23 goods to reach that 75 percentage, and Argentina on 50 products.
The exception to the rule is Mexico, a once oil-dependent country that nowadays relies on 132 products for 75 per cent of its export income. That’s not too far behind South Korea, an export giant where 142 goods account for 75 per cent of exports, according to IDB figures.
To make things worse, the bulk of Latin American exports continue to be commodities, which are declining in value. If you exclude Mexico, 81 per cent of Latin America’s exports are commodities.
By comparison, only a small percentage of the region’s exports are services, and even fewer are knowledge-intensive services, such as medical or computer software services, which are increasingly lucrative in today’s global economy.
What should Latin America do? It wouldn’t make sense for the region to stop producing commodities, or discouraging their exports. Instead, the region should expand its export base by exploring new products and services, as well as by adding value to its traditional exports.
There is a big opportunity for many Latin American countries to export knowledge-intensive services, which currently account for only 0.7 per cent of Latin America’s GDP, according to the IDB’s “Integration and Trade Monitor 2015.”
Costa Rica, for instance, has growing numbers of doctors reading X-rays for US hospitals, and Argentina and Brazil have rapidly growing “orange economy” audiovisual, music and digital industries, Giordano says.
Also, Latin American countries should have state policies that encourage innovation in industries where they already have competitive advantages. Chile, for instance, has been exporting salmon for many years and has a lot of technology associated with the salmon industry. It should focus on exporting that technology across the world, Giordano said.
Likewise, Ecuador and Costa Rica export bananas, but they should focus on exporting fruit juice. If they exported fruit juices to top US supermarkets, that could make a huge difference, he said.
My opinion: The fact that the IDB study has drawn little attention in Latin America is worrisome because it suggests that the region is not paying enough attention to its risky concentration of exports.
Most countries blame this year’s estimated 0.3 per cent contraction in the region’s GDP to China’s economic slowdown and the resulting decline in commodity prices, but very few are focusing on the fact that much of the region’s economic problem is that many countries export only a handful of products.
Unless they put innovation and export diversification at the top of their political agendas, they will continue suffering the commodity boom and bust cycles that have prevented them from growing faster and reducing poverty.
And the time to do it is now, before there is another commodity boom that brings about a new climate of complacency.
