The process of transitioning from an emerging market economy to a high-income nation is complicated. Even within distinct economic regions, some countries seem to advance and others continuously lag behind. When it comes to economic development, what separates the wheat from the chaff?
There are many factors. But one of the most essential components of this transition is the development of integrated supply chains. By creating solutions for domestic value-added production, emerging economies are able to preserve more wealth, create a more specialized workforce, and invite more investment into the country.
Accessing Global Value Chains
The rise of China is a prime example of just how profound an impact value-added production can have on a nation. Chinese GDP has increased over 18-fold since 1995, and the country’s meteoric rise is intrinsically linked to the increase in value-added production as a proportion of global commerce. Readily available access to GVCs allows for robust specialization that easily scales for low- and middle-income nations.
There exists a clear correlation between value-added production and income. Before the 1940s, nations would manufacture the entirety of a good within its borders. But with globalization came the development of global value chains, complex international trade networks that made various levels of import and export not only possible but economically advantageous.
Due to these developments, the value-added process has become increasingly diversified on a global scale. This diversification has allowed middle-income nations unprecedented access to global supply chains and, consequently, the ability to increase their participation in value-added manufacturing without having to host the entire manufacturing process for a specific good or service in-house.
Value-Added Processing in Latin America
Latin America is well-positioned to experience a manufacturing boom thanks to this international market access and increasing regional cooperation efforts. Latin American trade organizations such as MERCOSUR have decreased tariffs among participating nations, leading to a more competitive economic environment. While Latin America as a region experiences heterogenous growth, value-added manufacturing declined as a share of overall GDP following the mid-1980s. With improved market access and a rapidly growing middle class, this trend is set to reverse and endow the various nations of the region with accelerated wage growth.
This specialization amplifies the benefit of comparative advantage—Latin America maintains a unique position given the region’s wealth of raw resources and agricultural industry. While replacing essential components of a finished product with in-house alternatives presents a net-negative in many cases, the nations of Latin America can take advantage of nature’s endowments. High-quality timber is one example of an abundant resource that the countries of Latin America can refine into a variety of finished products.
Foreign direct investment (FDI) is one of the most straightforward ways to participate in the Latin American economic boom. Fortunately, the region’s nations have some of the most favorable frameworks for FDI in the world. With a population of over 600 million people, Latin America’s investment environment has primed the region to experience rapid growth, similar to China. By thoughtfully approaching the process of FDI and value-added manufacturing, Latin America will continue to host the most attractive FDI environment in the world.
Domestic Value-Added Processing
In Latin America and other regions, value-added processing offers a multitude of benefits. Firstly, it can increase logistical efficiencies in certain sectors. For example, the lack of in-country primary transformation for timber can reduce efficiencies by up to 20% in some cases, as raw logs are shipped to the target country with excess bark and limbs that are later discarded.
Another benefit of in-country processing is that it opens up new markets for export. Especially in the agricultural sector, Latin America and other regions enjoy a wealth of natural resources, but these resources are often limited to domestic sale. Complying with international export standards is difficult – each market demands highly specific protocols and characteristics, especially in agriculture. Often, significant investment is needed to help developing countries access more lucrative markets
There exists a significant opportunity for Latin America in the face of increasing onshoring by high-income economies. Comparative advantages in the form of low-cost, low-skill labor are steadily replaced by automation. The comparative advantage of geography, however, cannot be easily replicated. With an established agricultural industry, an abundance of raw resources, and thriving demography, value-added manufacturing will flourish. The simultaneously increasing economic integration and favorable FDI environment present a ground floor opportunity in the region.