Doing It Right

• Author: Augusto de la Torre, Daniel Lederman, and Samuel Pienknagura

Doing It Right Finance & Development, September 2015, Vol. 52, No. 3

Augusto de la Torre, Daniel Lederman, and Samuel Pienknagura

If Latin America is to rely on trade to enhance economic growth, it must find the correct approach

As the recent period of relatively high growth fades into memory, Latin America and the Caribbean is haunted again by the region’s long history of failure to approach the living standards of high-income countries.

Indeed, income per capita in the region (hereafter called Latin America for sake of simplicity) has hovered at about 30 percent of that of the United States for more than a century. It is not surprising, therefore, that the challenge of boosting growth-with social equity-has moved to center stage in the region’s policy discussions. It has led policymakers to pay increasing attention to international trade as a potentially powerful source of growth and, in particular, to the role that regional trade integration can play. For example, an objective of the Pacific Alliance-the 2012 integration agreement between Chile, Colombia, Mexico, and Peru-was “driving further growth, development and competitiveness of the economies of its members.”

In many ways, that push toward regional integration has been influenced by the success story of the east Asia and Pacific region (hereafter east Asia), where there is a close and positive association between rising intraregional trade, growing exports to the rest of the world, and convergence toward the living standards of high-income countries.

But we have found that regional integration by itself is not the crucial ingredient in the east Asian growth potion. Instead it is the way these countries go about it. The link between intraregional trade and growth observed in east Asia reflects two important trade patterns: a high incidence of intra-industry trade, that is, trade flows within narrowly defined sectors or industries, such as electronics and heavy machinery; and a high participation in global value chains, in which trade is associated with multicountry production operations. For example, an auto company may manufacture transmissions in one country, chassis in another, and export these to another country where they are assembled into a vehicle.

We found that once endemic structural factors-such as geography, economic size, and natural resource abundance-are taken into account, Latin America fares relatively well compared with east Asia merely in terms of intraregional trade volume and...