Some (unexplored) effects of China on Latin America

Eduardo LoraChina and India: What’s in it for Africa

OECD Development CenterParis, March 17, 2006

Latin America is in a Unique Situation

• Growth without macro disequilibria (fiscal or external)

• Low inflation

• And this in the peak of the electoral cycle

These things not unrelated to China

• Directly through higher commodity prices• Indirectly mainly through a financial channel:

– China finances the US deficits (the increase of reserves represent 1/3 of the trade deficit, and 14% of the US treasuries are held by China)

• This implies higher exports from LAC to US (especially Mexico and Central America)

• Lower US interest rates (30-40 basis points)• Much lower debt spreads for LAC: now ~200

(because of lower financial needs)

Macro implications of ChinaFISCAL• Lower debt burden due to lower interest rates appreciated exchange

rates• Higher tax revenues due to exports and growth• LAC becoming genuinely more solvent• Better fiscal institutions have played a role

• INFLATION• Cheap China imports eased monetary policies under monetary

targeting– especially after the devaluations post Rusian crisis

MACRO STABILIZATION POLICIES MORE POLITICALLY PALATABLE (even by leftish leaders)

QUALIFICATIONS

• South American countries more benefited (commodity exporters, highly indebted)

• Mixed balance for Mexico and Central American (manufactures, less need/access to international finance)

• LAC not taking full advantage– Transportation and port efficiency limitations– High energy prices– High wages in very rigid labor markets

Average wages in China and minimum wages in Latin America

0 50 100 150 200

Uruguay

Argentina

Nicaragua

Brasil

Honduras

China

Salvador

Peru

Bolivia

Colombia

Mexico

Paraguay

Venezuela

Chile

Costa Rica

Panama

Source : Inter-American Development Bank (IDB) calculations based on official data.

Some implications

• LAC very sensitive to a slowdown in China (through its effects on USA interest rates and spreads)

• If US imposes import restrictions to China or forces an appreciation of the Yuan, financial effects could be more important than commercial ones

• Domestic financial stability in China potentially very damaging if savings or seignorage fall.