WASHINGTON, United States (CMC) — A new International Monetary Fund (IMF) Working Paper finds that faltering growth after the global financial crisis has left many countries in Latin America and the Caribbean (LAC) still searching for “new drivers” of economic growth.
Written by Kimberly Beaton, Aliona Cebotari, Xiaodan Ding and Andras Komaromi, the paper says that weaknesses in both domestic demand and trade have been exacerbated by limited space for countercyclical policies in some countries, a waning pace of trade liberalisation and a decline in the growth of global value chains.
“Like other regions, LAC has struggled to overcome the economic fallout from the crisis, especially as it was followed by the end of the commodity super-cycle that fueled growth across most of the region before the crisis,” the paper stated.
As higher trade could still help increase economic efficiency, productivity and overall activity, the authors consider the extent to which LAC is integrated into global markets to determine the potential for further integration as a pillar of the region's growth strategy.
The paper says traditional measures of economic integration, such as trade openness, do not capture the complexity of interactions between trade partners and make it more difficult to parse various dimensions of connectivity.
The authors, therefore, turn to the rapidly developing literature on networks “to disentangle the sources of integration, explore their network and growth effects, and understand how central the region is in the growing world trade networks (WTN)”.
The paper states that network theory has been extensively employed in physics, biology, computer science and social networks, with researchers in some of these fields undertaking initial studies of the topological features and evolution of the WTN.
The application of network analysis indicators to study the extent of global economic integration is now increasingly being applied to economics, including for understanding trade integration at both regional and global levels, the paper says.
But it adds that these alternative measures of trade integration have yet to be considered in-depth for LAC.
The Working Paper assesses LAC's integration into the WTN, first assessing the extent of LAC's integration based on traditional measures of trade integration.
It then considers alternative measures of LAC's trade integration, based on network integration measures, including how this integration evolved over time, whether LAC's under-trading is primarily a result of the paucity of trade links or weak trade flows, and how central or important LAC countries are to the WTN.
The authors also compare LAC's integration in the WTN against fundamentals-based benchmark networks, estimating two models of trade network formation (binary and weighted), in both cases drawing on the gravity model, and compare the actual degree of integration to the predictions of these models.
The paper finds that, while LAC appears weakly connected into the WTN by traditional measures, like trade openness, “it is relatively well connected in terms of the number of trading partners, with the trading links of most countries in line or above what can be predicted based on country size or gravity models.
“Nevertheless, a number of countries remain under-connected due to the concentration of their exports to a few destinations, preventing the region from reaching a critical threshold of connectivity that would allow it to play a more central role in the WTN,” the paper says.
“LAC's integration in terms of the intensity of the trade flows is somewhat weaker.”
While the average size of the nominal trade flows is boosted by the strength of Mexico's integration in the US supply chains, the paper says many countries in the region have weaker nominal flows than could be predicted based on fundamentals.
In relative terms, however, the paper says such under-trading is more pronounced in smaller countries in the region; while, in larger countries, especially Brazil, “under-trading appears relatively small when the deviation of actual trade from the predictions of the gravity models is measured relative to the overall size of their trade flows.”
The authors say the strength of LAC's trade links is particularly weak within the region, reflecting the extra-regional concentration of its trade due in part to the large share of commodities in the exports of many LAC countries.
The authors note that the largest countries in the region (Mexico, Brazil) are not central to the LAC network, and play the role of only local hubs to their immediate neighbors or trade agreement partners.
“This leaves significant scope for larger countries to position themselves for a more central role in the regional sub network and boost regional integration,” the authors say.
On average, the paper says LAC is relatively well-connected in terms of market diversification, “although there is room for further integration.
“The connectivity of most countries in the region is in line or above what can be projected based on the size of their economies or gravity-based models, but many countries are still under-connected either due to the concentration of their exports geographically (Mexico) or in terms of composition (Venezuela),” the papers say.
“This, along with the region's relatively weak participation in global value chains, prevents it from reaching a critical threshold of connectivity that would allow it to play a more central role in the WTN,” it adds.
The paper says the strength of the trade links has generally been commensurate with the evolution of the regional economies, but appears to have slowed below these levels over the past few years.
It says the density of the LAC trade sub network is high due to the small number of countries in the region, but adds that the strength of these connections is weak.
“This reflects the extra-regional concentration of their trade, with the United States playing the role of the region's trade hub,” the paper says. “There is significant scope for larger countries to position themselves for a more central role in the regional sub network, but the factors that could facilitate such integration are left for future research.”