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Trade and Competitiveness in Argentina, Brazil and Chile

Not as easy as A-B-C

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Joint work of the OECD Economics Department

Directorate for Food, Agriculture and FisheriesDirectorate for Financial, Fiscal and Enterprise

AffairsDevelopment Centre

Ch 1: Anne-Laure Baldi and Nanno Mulder

Ch 2: Joaquim Oliveira Martins and Tristan Price

Ch 3: Andrea Goldstein

Ch 4: Jonathan Brooks and Sabrina Lucatelli

Ch 5: Carlos Winograd, Marcelo Celani and Jae-Woo Kim

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GDP

TradablesNon-Tradables

Manufacturing Agro-Food

Real Exchange Rate (I)

Which barriers? (II)

Upgrading potential (IV)

Need for competition policy (V)

FDI may help (III)

Roadmap…

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Key insights

Ch. 1: Fixed exchange rate regimes distorted relative prices of tradables vs. non-tradables

Ch. 2: Development of tradable sector is hindered by endogenous market barriers and trade policy

Ch. 3: FDI could help overcome market barriers, though most FDI occurred in primary and service sectors

Ch. 4: Agro-food sector still has large potential, but stronger framework conditions are needed

Ch. 5: Competition policy in non-tradables has positive spillovers for international competitiveness

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Ch. I: Fixed exchange rate regimes distorted relative prices of tradables vs. non-tradables…

Argentina

Brazil

Chile

Mexico90

140

190

240

290

340

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

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… accelerating the declining share of tradables in employment (and GDP)

Argentina

Brazil

Chile

Mexico

20

25

30

35

40

45

1990

/1

1991

/1

1992

/1

1993

/1

1994

/1

1995

/1

1996

/1

1997

/1

1998

/1

1999

/1

2000

/1

2001

/1

2002

/1

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Our model ‘explaining’ relative prices shows: Fixed regimes distorted relative prices in A-B-M Portfolio inflows exacerbated the price distortion in A-B (other determinants: Balassa-Samuelson, government

expenditure, terms of trade)

In Chile, the frequently adapted ‘crawling peg’ and smaller short-term capital inflows helped to avoid relative price distortions

Today’s flexible regimes in A-B-C-M support the

development of the tradable sector

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Ch II: A-B-C’s primary specialisation is less dynamic in world trade…

Based on RCA 1970 and weighted by export structure Based on RCA 2000 and weighted by export structure

40

50

60

70

80

90

100

110

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Chile

30

40

50

60

70

80

90

100

110

120

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Brazil

30

50

70

90

110

130

150

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Argentina

40

60

80

100

120

140

160

180

200

1967

1985

80

100

120

140

160

180

200

1967

1985

30

40

50

60

70

80

90

100

110

120

1967

1985

90

100

110

120

130

140

150

1967

1985

80

85

90

95

100

105

110

115

120

125

130

1967

1985

1970

2000

1970

2000

2000

1970

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… compared with that of Ireland, Korea and Mexico Based on RCA 1970 and weighted by export structure Based on RCA 2000 and weighted by export structure

60

80

100

120

140

160

180

200

220

240

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Ireland

70

90

110

130

150

170

190

210

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Korea

40

60

80

100

120

140

160

180

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Mexico

1970

20002000

1970

2000

1970

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Why did I-K-M better succeed than A-B-C in changing their trade specialisation?

I-K-M benefited from regional integration, while A-B-C face tariff peaks and high non-tariff barriers in OECD;

I-K-M benefited from more FDI in manufacturing, overcoming ‘market’ barriers (prohibitive costs of R&D and advertising) for differentiated products.

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Ch. III: Most FDI in primary and service sectors

Argentina Brazil Chile Mexico Primary sector 33 3 25 1 Manufacturing 31 21 11 62 Food 7 4 4 16 Chemicals, paper 7 4 6 9 Electronic eq. 1 13 Motor vehicles 4 5 9 Other 13 8 1 11

Services 36 76 64 37 Commerce 4 8 12 Infrastructure 12 12 27 Transport /comm. 9 22 7 7 Banking/finance 11 14 20 9 Other 20 10 9

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A-B-C are relatively friendly to FDI: Surge mid-1990s, mostly linked to privatisation MNCs increased more their share in M than in X Some supply linkages (car manufacturing, mining,

retail trade)

But: Framework conditions can be further improved Better target MNC location decisions, without

resorting to preferential treatment

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Ch. IV: Upgrading agro-food potential

Share of Agro-food is large in output and employment 40-50% of Exports, 15-30% of Employment, 10-15% of

GDP Primary products continue to account for lion share

But international competition is evolving Not only depends on prices and quantities, but also on

logistics In food industry: product differentiation, key role of FDI Competitiveness depends on entire food chain Shift to higher value-added products:

– Reduce tariffs and NTBs in EU and United States, see graph (note FTAs of Chile)

– Domestic policies: framework conditions for FDI, coordination within the food chain, investment in branding

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High producer support in the OECD…(as percentage of the value of production, 2000-02)

0

20

40

60

80

100

Wheat Maize Rice Oilseeds Sugar Milk Beef andVeal

Pigmeat Poultry

European Union United States Japan

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Ch. V: Need for competition policy=> Competition in non-tradables makes tradable sector

more competitiveArgentina’s experience: Infrastructure sectors were privatised in early 1990s, but

regulatory frameworks remained deficient Currency board distorted relative prices, which called for

larger role of competition policy the late 1990s Competition institutions were reinforced and policy

moved from anti-trust to competition advocacy in regulatory reforms

Several case studies illustrate that competition policy helped to reduce entry barriers, increase transparency, and foster best-practices