From Windfall to Windmill: Harnessing Asia’s Dynamism for Latin America

IMF Blog, July 22, 2015

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Latin America’s recent economic fortunes reflect closer economic ties with Asia, particularly China.
China has become a crucial source of demand for Latin American commodities over the past two decades, delivering significant gains but also contributing to vulnerability as Chinese investment slows.
The central proposition: Asia could serve as a sustained engine of growth for Latin America—“like a windmill”—if deeper, long-term, mutually beneficial links are developed.

Trade:
- Gross trade flows between Latin America and Asia have grown tenfold since 2000.
- Trade linkages have spurred initiatives including bilateral trade agreements, the Trans-Pacific Partnership, and new multilateral development banks.
- The rise of China is an important driver but does not fully explain intensified links; Korea, India, and Japan have increased their roles as trading partners for several Latin American countries.
Finance and investment:
- Japanese foreign direct investment into Latin America exceeded $110 billion between 2005 and 2014.
- Chinese foreign direct investment to the region increased from a total of $6 billion during 1990–2009 to an average of $10 billion per year between 2010 and 2012.

Commodity dependence and composition of trade:
- Latin America’s exports remain dominated by raw materials, while imports from Asia are primarily manufactured goods.
- Despite some progress in higher-value added exports, Latin America’s economic structures remain relatively undiversified.
Limited knowledge spillovers and supply-chain integration:
- Knowledge spillovers and innovation effects from trade have been limited.
- Undiversified export baskets and limited economic complexity have constrained the emergence of intraregional supply chains, with Mexico a notable exception due to integration into the North American manufacturing complex.
Contrasts within Asia:
- Trade patterns within Asia changed dramatically over the past 20 years, with China as a linchpin for cross-border trade, technology upgrading, and global supply chains.
- Some Asian sub-regions remain relatively disconnected from regional trade integration; domestic hurdles such as weak business environments contribute to uneven outcomes.

Key domestic constraints to deeper integration and productivity:
- Weak education systems.
- Infrastructure gaps.
- Difficult business environments.
- Various trade barriers.
Strategic priorities and realism:
- Growth reality check:
- Lower commodity prices, tighter external financial conditions, and reduced macroeconomic policy space make achieving robust growth more challenging than over the previous decade.
- Prospects hinge on decisive efforts to address long-standing structural weaknesses that have held back investment and productivity.
- Realistic objectives for trade integration:
- Trade integration tends to have positive effects on productivity and knowledge transfer but is not a magic wand.
- Efforts to boost intraregional trade and stronger links with Asia must be underpinned by domestic reforms that promote entrepreneurial initiative, innovation, and diversification.
- Political economy considerations:
- Broad political backing is crucial because greater trade integration can have divergent effects across society.
- Managing distributional implications and ensuring shared gains in prosperity are critical to sustain political support for openness.
Practical actions highlighted:
- Reduce obstacles to trade, including high transport costs.
- Implement domestic reform agendas to improve conditions for investment, innovation, and structural diversification.

Latin America can transform its relationship with Asia from episodic windfall gains into a sustained source of growth and dynamism—“like a windmill”—but this requires:
- Clear and realistic objectives.
- A long-term strategy.
- Attention to political and social implications of deeper integration.
The current weak growth outlook and the prospect of China’s structural investment slowdown make it especially important to begin seizing these opportunities.

Andre Meier and Fabiano Rodrigues Bastos, July 22, 2015

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