Twenty-five percent of Chilean exports go to China. In Brazil and Peru the figure is 15% to 20%. Indonesia, Malaysia, the Philippines, Thailand, South Africa and Colombia have between 10% to 15% of their exports going to the Asian behemoth. Small wonder then that a slowdown in China has such an impact in Latin America and south-east Asia.
The above figures come from a table put together by Société Générale cross asset research (August 24 edition). The table also shows net exports of commodities as a percentage of gross domestic product (GDP) which gives another take on countries that will be hard hit by a China/commodities slowdown. On this list, Russia and Nigeria are vulnerable with between 10% and 20% of GDP accounted for by net exports of commodities.
While emerging markets can hardly be blamed for taking advantage of China’s strong growth over the past decade, the extent to which they have failed to move beyond commodity dependency is concerning.
The developing country malaise was always based round the fact that they exported raw commodities to the advanced countries that processed them and sold them back as manufactured goods. They therefore failed to gain the productivity and value-added advantages of a manufacturing-based economy. All that seems to have happened since this scenario of the 1960s and 1970s is that China has been substituted for the US as the export market.
Clearly the reality is more complex than this. Some emerging markets, especially those in south-east Asia, have made great strides in manufacturing, although sometimes they are part of a supply chain of which the final part is guess where? China.
But a downturn is when a country really tests out its economic model and finds out whether it is sustainable or not. By the same route, the eurozone has discovered that its model is deeply flawed.
Brazil and Russia are two countries that failed to take advantage of the boom times to carry out proper reforms and are now paying the price. Brazil failed to rein its bloated public sector and stamp out corruption, Russia has failed to diversify its economy away from oil. The moral of the story, which is almost never heeded, is – do reforms in good times.
Brian Caplen is the editor of The Banker.
