MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | HIROSHI MATSUMURA
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | HIROSHI MATSUMURA
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Mr. Hiroshi Matsumura
I am very happy to be here today and have the opportunity to speak about today's theme "Building Bridges between Asia and Latin America". In order to expand and diversify the economic relationship between Asia and Latin America, bridges have to be built and strengthened, especially with the larger economies of Latin America; Mexico, Chile, Peru and non-PBEC member Brazil. I believe there are various ways to expand trade and investment between Asia and Latin America. Here I would like to explain what I think is necessary for this to happen. 1. The current Asian perception: Latin America's market is remote First, let me review the current condition of trade and investment between Japan and Latin America. In 2000 exports from Japan to Latin America totaled $21 billion and imports to Japan from Latin American countries was $11 billion, a double digit percentage increase from the year before in both cases. However, the share of Japan's exports to Latin America to Japan's total exports is only 4% and Japan's imports from the region account for only 3% of Japan's total imports, relatively low totals given Latin America's size. As far as investment is concerned, direct investment from Japan in the most targeted economies of Mexico, Peru, Chile and Brazil, came to $2.2 billion in 1999, still a relatively weak 4% of all Japanese foreign direct investment worldwide. In recent years, the countries of Latin America have made solid advances in the development of their economies. This is reflected in the surge of trade and investment with the U.S. and Europe. Unfortunately, Japan has stayed out of this current. The main reason for this lag is the insufficient risk taking capacity of Japan's side. As you know, the Japanese economy in the 1990's has fared poorly with 10 years of sluggishness, due to the corporate bad debt and long standing asset deflation. The results was that the ability of Japanese companies to take on risk has substantially eroded, and has put the squeeze on their investments in various regions and industries. Most Japanese companies concentrated their investment and loan in the manufacturing in Asia, which was in an extended period of high growth and where they have had relatively easy access to information. Furthermore, Latin America's debt crisis in the 1980's was still fresh in their minds during the 1990s. This has all served to put a damper on investment in Latin America by Japanese business. However, from now on, in order to pursue further the globalization and diversify the markets, it has become increasingly imperative for Japan to increase its trade and investment in Latin America. There is little room for argument about this. The pattern of entry by U.S. and European companies into Latin America is either by single companies in the service industry, for example, finance or telecommunications, aimed at domestic demand or by manufacturers on an intra-company trade basis. Japanese manufacturers' pattern of entry is different, in that it usually brings a broader spectrum of companies across an industry or industries with it, which I believe often creates a ripple effect throughout the local economy. 2. Possibilities for Japanese companies: strengthening Latin America's small and medium size enterprise (SMEs) sector I would like to move on to what it will take to enlarge the trade and investment pipeline between Japan and Latin America looking at it from Japan's perspective. Specifically, I want to talk about three particular ideas. The first idea has to do with Latin America's export structure. In looking at Japan's past experience in Asia, Japan's investment should be increased toward small and medium size businesses in Latin America. Let me introduce the cases of Brazil and Mexico as examples. First the case of Brazil, exports as a percentage of GDP in 1999 were only 9%, a relatively low total for a country. Moreover, 45% of Brazil's exports come from either foreign companies or nationalized Brazilian companies handling natural gas. For the most part private domestic companies in Brazil, with its large domestic market, are seemingly not thinking about exporting, which is another way of saying they lack international competitiveness. However, the Brazilian automobile and mobile phone sectors have been doing aggressive capital spending and technological transfer from overseas recently. If products become internationally competitive their reputation rises and domestic sales also go up, reinforcing capital spending by business and giving rise to a kind of virtuous cycle. Brazil, in order to continue its growth and become an affluent country, must increase the number of companies that have the potential to export. Taking Japan's past experience into account, Brazil's small and medium businesses should be targeted to export. In the case of Mexico, exports make up a full 28% of GDP. This is a reasonably high figure for a country. The problem though, is that most of these exports need imports of intermediate goods, which is the cause of Mexico's trade and current account deficit. Mexico's export model is anchored in the assembly processing industry. They have not sufficient parts manufacturing and supply industry. The gap between the development of the assembly processing industry and the parts manufacturing industry in Mexico is evident in the fact that Mexico has increasingly become an assembly base for the IT industry. In the mid-1990s in various countries in ASEAN a large gap became evident between the competitive major companies with new equipment and technology and the lagging small and medium size companies. In this type of industrial structure major companies rely on imports for their supply of parts, which leads to greatly expanded trade deficits. Four years ago, finally, exchange rates in these countries plunged and a serious economic crisis ensued. What we have learned from this is the importance of a healthy and active small and medium size business sector that can also export, or whose goods are of export quality. This is a necessary ingredient for continued economic growth. Japan can assist Latin America toward the goal of strengthening small and medium size enterprises by providing experience, capital and a large market. Japan experienced export driven high growth during the 1960s. The foundation of this export competitiveness was the high quality, low priced parts supplied to major companies by Japan's small and medium size enterprises. Latin America already possesses such valuable management resources as human capital and a raw materials supply network, but many SME's have limited technology and facilities. If these SMEs can acquire new technology and equipment together with participation from Japan, I think they can rise their competitiveness effectively. My company, Marubeni Corporation, is already active in Mexico, where we have a press part manufacturing operation for mid-size auto plants, and supply such major auto makers as Nissan of Japan and GM of the U.S. In addition, Japanese government and the Inter-American Development Bank might be able to take the initiative on this through their "Japan Program", which was created in recent years. This program is aimed at mutually sharing experience and knowledge between Asia and Latin America. In 1997 a meeting between the President of the Inter-American Development Bank, Mr. Iglesias, and the then Prime Minister of Japan, Mr. Hashimoto, triggered a plan for this "Japan Program". In 1999 Japan committed 30 million dollars to the program, and an office was set up in the Inter-American Development Bank with a 15-year time frame for the program. Besides strengthening small and medium size enterprises, the program has created data bases, carried out workshops and started a pilot project based on such themes as financial crises, environmental protection and promoting agricultural. This program should make a strong contribution to economic relations between Latin America and Asia. 3. Possibilities for Japanese business: export support systems, FTAs and export infrastructure The second idea or scheme is to promote an export support system and strengthen the infrastructure for exports from Latin America to Japan. For example, I think that Brazil, Peru and other countries with low export ratios have not yet set up an adequate export support framework or the necessary export related infrastructure. Here I would like to introduce two problems we face in Latin America in our business. The first is that there is lack of financing in support of exports. For example, in Japan, the International Cooperation Bank (formerly the Japan Ex-Im Bank) supports exports through its role in providing suppliers' credit to exporters. Even though Latin American countries may have an export promotion system, it is often not very user friendly, so exporters in many cases do not use them. The second problem is that many countries in Latin America, including Brazil do not provide export trade insurance. Without it companies must take on all the risk of exporting themselves. Japan has a trade insurance system and it plays a large role in promoting exports and direct investment. Next, the right infrastructure must be in place to encourage exports, which would include port facilities. For example, Asia has not only a very strong awareness of the importance of having good harbors and ports, but also an awareness of the advantages of becoming a trade hub. They are also fiercely competing with each other on price and service in order to become a trade hub. In Latin America's case, Chile, which has a high ratio of exports, still is lagging in terms of port facilities and that will be the next step in their trade development. Also, among the countries of Latin America the competition mechanism is lacking between ports. To develop this the government of each country should begin the process of deregulation, among other things. Japan can strengthen cooperation with Latin America in this regard by participating in terminal operations management. In fact, our corporation has invested in and manages a container terminal operation in Thailand. We are involved there in this port terminal with Evergreen Corporation of Taiwan and other major international companies, and are contributing to trade efficiency in Thailand through this competitive environment. The third, free trade tie-ups between countries in Latin America and Japan could be very key in expanding exports in Japan. Although, it is important to use the APEC framework to advance free trade, it tends to take a great deal of time to coordinate multilateral agreements, so I believe bilateral trade agreements would be one way of increasing trade and supplementing APEC. Already, Mexico has been aggressively moving forward on this point with Japan and Japan should make efforts to include it as a part of its domestic structural reform. 4. The necessity of direct links between Asia and Latin America In looking at the current map of the Pacific Rim in terms of economic relationships, thick investment and trade pipelines exist between the U.S. and Asia, and the U.S. and Latin America. From the beginning of this year there has been a great deal of concern and apprehension about the immediate future of the U.S. economy. The over-concentration of and over-independence on the U.S. economy brings with it the high risk of instability to the economies of Asia and Latin America. On the other hand, if Latin America and Asia can build this thick trade and investment pipeline between each other, both regions, the Pacific Rim and even the world economy would become much more stable for the effort. Finally, I would like to ad one very important point. In order to achieve the above target, I think it is indispensable to accumulate human exchanges between the two regions. With the development of information technologies, we are now living in a society where we can exchange comprehensive and miscellaneous information with people living all over the world instantly. But at the same time, we are in danger of relying too much on the virtual information without human contact. Therefore, I have taken various occasions to insist the importance of the efforts to increase the opportunities of human exchanges especially among business executives of both regions. From this point of view, I think this kind of international group meeting of PBEC is very precious and I hope for its prosperous and successful future. Thank you for your attention. |
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