EXCLUSIVE: Nearshoring Could Bring in US$70 Billion to Latin America: IDB President Mauricio Claver-Carone

The head of the bank was interviewed by Bloomberg Línea about the reforms required for such an opportunity.

Mauricio Claver-Carone, presidente del BID.
August 09, 2021 | 04:00 AM

Bogota, Colombia — Latin America is currently one of the least integrated regions in the world. Only 14% of its trade is intra-regional compared to 59% in Europe and 41% in East Asia. One of the reasons is that trade costs here are almost 60% higher than those of Asia, according to the Inter-American Development Bank (IDB), headed by Mauricio Claver-Carone .

Inefficient logistics and transportation have taken their toll on the region for years, and reforming what experts believe is an area of opportunity for Latin America can become a great source of resources due to the need to relocate global supply chains through nearshoring.

In the case of the U.S., the region can benefit in this area because it has similar time zones, geographical proximity, and greater cultural and language affinity than Asian suppliers, for example.

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Mauricio Claver-Carone, president of the IDB, said in an interview with Bloomberg Línea that Latin America could increase its sales to the United States by US$70 billion annually through nearshoring.

According to studies by the bank, he says that this could be achieved by replacing China with Latin America as the origin of exports of products that country and the region send to the US.

“If we simply replace 10% of the 10 products that we have identified that Latin America and the Caribbean and also China export (to the U.S.), and we just switch 10% of those products from China to the region, the effect would be an increase in Latin American exports of US$70 billion annually.”

For Claver, it is clear that if the region wants to take advantage of this relocation of chains, it must make adjustments to reduce the cost of transportation.

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To cite an example of the problem, Claver-Carone said that “it is more expensive to transport an agricultural product from Rosario, in Argentina, to the Port of Buenos Aires, than from the Port of Buenos Aires to Asia. It is illogical. Reforms (in transportation and logistics) are necessary to take advantage of these opportunities.”

Data from the bank also indicate that reducing international freight shipping costs in the region by 10% would boost the value of exports by an average of 30%.

Moreover, “harmonizing the complex network of more than 30 intra-hemispheric trade agreements could generate an increase of almost 12% in intra-regional trade, or about US$20 billion,” he said.

Other reforms required in Latin America

Overcoming the crisis and growing above pre-pandemic levels is one of the main challenges Latin America is facing and to achieve this, it requires reforms that go beyond the fiscal, labor, and pension reforms that are usually the focus of attention.

For Claver-Carone, reforms must be made in at least four sectors in order to move forward: the digital economy, support for small and medium-sized enterprises (SMEs), gender equality, and climate change.

In the case of the digitalization of the economy, he said that in the last 60 years the IDB has focused on the development of infrastructure projects in the countries of the region, building bridges and roads, “in old infrastructure, but we want to focus more on digital infrastructure.”

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Regarding the support of SMEs, the president stressed that we must do what is necessary to expedite the creation and formalization of these. “We must streamline the bureaucracy in the procedures for SMEs and improve their access to financing; this is key to the success of the region.”

On gender equality, he said that “if women participated in the labor sector at the average level of the OECD countries, it would increase the GDP of the countries of the region by 20%.”

He went on to say that “we must make the necessary reforms to speed up this and also the generation of companies led by women. Our data show us that women who own SMEs in the region have 10% higher incomes than those generated by men and, nevertheless, they have more barriers to access financing. It’s bad business for the region.

On actions against climate change, Claver said that the IDB is working on the creation of a framework for 21st century mining. The movement towards renewable energies is key for the region and the region has a high potential in this field. The executive said he likes to use the case of Brazil which, although it must work against deforestation, its energy matrix is 83% hydroelectric.

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“There is no wind turbine that is not made 90% in copper, the first and second copper producer in the world are Chile and Peru. There is no electric battery that does not need lithium,” and Latin America is a key player in this area. “There is a huge opportunity for the region,” the executive emphasized.

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Tax and social benefits

Claver was clear on this matter: “Countries have to focus on economic growth” and on making taxes more efficient, in addition to fighting tax evasion. On this point he applies the philosophy that more is not necessarily better.

“Let’s focus on economic growth that enlarges the tax base and from there we start (...) the issue is that structurally Latin America and the Caribbean have a very poor capacity for tax collection,” he added.

The key points for the above, according to the IDB president, are four: economic growth, better taxes, not allowing the upper echelons to dodge their tax commitments and broadening the tax base.

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“If we don’t change the formula, every day there are going to be fewer people who are going to pay taxes or one because they are going to dodge them and move somewhere else or two because there is no economic growth and we are not broadening the base. So let’s focus on better taxes.”

More: EXCLUSIVE: ‘Structural Reforms Are Always Attacked with Irrationality in Colombia’: Iván Duque

Faced with the move towards a basic income in the region, Claver said that the region “must be prepared because the eventuality of another crisis is there, but gradually we must give way to other recovery efforts such as job training and job generation so as not to create counter incentives.”

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For the president, employment generation is the central goal of his administration at the IDB, “it will not be a matter of measuring results in terms of GDP or any other formula, job creation is the priority. There are several things we want to do. I believe there are structural steps where we will help the countries, among which are increasing labor formality, investing in human capital and, within the 2025 vision, reducing gender inequality”.

Crypto world and new technologies

Latin America is one of the regions with the highest adoption of cryptocurrencies according to various analyses, which is why Claver was asked about how they are viewing this market and what they are doing, to which he responded that they are aligned with the international standards of regulators and other bodies.

However, he explained that “in terms of technical team we have one that is working on how to help countries from the point of view of public policies in managing the crypto phenomenon, but based on how to optimize its instrumentalization in favor of those that help to have development impact in financial inclusion, among others”.

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He also highlighted the LACChain initiative, a global alliance led by the Innovation Lab of the Inter-American Development Bank Group (IDB Lab) for the development of the blockchain ecosystem in Latin America and the Caribbean.

An example of the projects being developed there is the one in Colombia, which in mid-July led to the announcement that the Ministry of ICT was launching the first experimentation space to implement blockchain technology in the public sector.