The Dragon in the Room: China and the Future of Latin American Industrialization [Paperback]

Kevin Gallagher and Roberto Porzecanski reveal to their audience that there exists much discomfort about the overdependence of Latin America and the Caribbean (LAC) on the exports of primary commodities to China (p. 14). Argentina, Brazil, Chile, Columbia, Mexico, and Peru exported together ten different commodities that represented almost 75% of total LAC exports to China in 2006 (pp. 17-24). China is not importing many manufactured goods, especially from LAC (p. 140). This uneasiness about the nature of LAC trade with China is nothing new. LAC was overreliant on primary-commodities exports in much of the nineteenth and twentieth centuries (pp. 139; 147).

Concern with this economic evolution in LAC is well-founded. Economies that are overdependent on the export of primary commodities suffer from what is alternatively called "Dutch disease," "resource curse." These economies tend to deindustrialize for the following reasons:
* Discoveries of these primary commodities and their subsequent export raise the value of a country's currency;
* Currency appreciation leads to a loss of competitiveness for domestic manufactured goods and services;
* This deteriorating competitiveness negatively impacts a country's balance-of-payment and results into poor economic performance (pp. 14; 24; 29-30; 35; 137).

The symptoms of this "disease" go hand in hand with environmental degradation and a decline in prices and demand for primary commodities in the long-run (pp. 29-32; 137; 140). This bleak panorama does not even account for the volatility of primary commodity trading as the current worldwide economic crisis clearly demonstrates (p. 13).

Interestingly, Messrs. Gallagher and Porzecanski note that the stabilization funds that Chile and a few other countries created as a sound macroeconomic management tool have not played a significant role in boosting economic diversification (pp. 13; 32-37).

In contrast, countries with a more diversified economy grow faster and are more stable (p. 147). This economic diversification away from an economy based on primary commodities towards a knowledge-based economy goes on until per capita gross domestic product exceeds $15,000 (p. 3).

Messrs. Gallagher and Porzecanski demonstrate with much evidence that China has increasingly outcompeted LAC manufacturing exporters both within and outside LAC. This development has been very pronounced since 2000 (pp. 81; 137). Both authors calculate that 94% of all LAC manufacturing exports are under some type of threat from China. These 94% manufacturing exports that are under threat represented 40% of all LAC exports in 2006 and added up to over $260 billion (pp. 39; 46-51; 54; 137). More worryingly, this declining competitiveness also has on impact on LAC's high-technology (HT) exports. China threatened over 95% of all LAC HT exports in 2006 (pp. 62-69; 138). Messrs. Gallagher and Porzecanski also show that LAC remains an insignificant player in the services export sector. OECD countries still dominate services exports (pp. 76-81).

Messrs. Gallagher and Porzecanski convincingly explain to their readers that this threat is especially grave for Mexico, despite its close proximity to the U.S. and favorable tariff access through NAFTA (pp. 51; 92-97; 111; 138). Both authors attribute this negative evolution to the following factors:
* Overreliance on the "Washington Consensus;"
* Lack of linkages between foreign firms and the domestic economy;
* Painfully low levels of technological capacity building;
* Low value added in exports of the maquiladora sector;
* Overdependence on the U.S. as a chief export market. 85% of Mexican exports are destined for the U.S.;
* Lack of competitiveness vis-à-vis China. 80% of Mexico's exports are under threat in the U.S. market (pp. 103; 115-116; 138).

In contrast, China has pursued a more gradual and experimental approach to integration, upgrading, and industrial development by adhering to the following policies:
* Government support;
* Indigenous R&D and innovation investment within individual firms;
* Creation of R&D institutions;
* Alliance among firms in an industry and their cooperation with research institutes, universities, and foreign firms;
* High level of support for tertiary education and training;
* Undervalued exchange rate and "forced technology transfers" that OECD governments and others rightly denounce (pp. 116; 118; 120; 124-126; 131-132).

Messrs. Gallagher and Porzecanski invite LAC decision-makers not to fall prey to China-bashing. Instead, both authors note that Brazil and Mexico have much to learn from China about how to further industrialize because of the size of their respective domestic market. The other LAC countries will get the most benefit from emulating other East Asian economies such as Malaysia, Thailand, and Taiwan. China and other East Asian countries have been the most successful industrializers and globalizers in the world economy (pp. 142-148).

In summary, Messrs. Gallagher and Porzecanski break new ground in exploring the future of LAC industrialization. The takeaways of this book are relevant to decision-makers not only in Latin America, but also elsewhere in the world. As a side note, either History or National Geographic could produce a DVD set on industrialization through the ages. To their credit, both organizations play a key role in making complex subjects accessible to a wide audience.

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