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The South American economies’ external constraints: a comparison with Australia and East Asian countries

The Latin American economies can be properly compared to countries that used to be poorer and then took off, or alternatively to resource-rich countries that have achieved economic development based on resource-intensive industries. In this order of ideas, the post will lay out a comparison between some South American countries, fast-growth East Asian countries, and a resource-rich country, namely Australia.

The South American countries’ sample is made up of Argentina, Bolivia, Brazil, Chile, Colombia, Paraguay, Peru, Uruguay, Venezuela. And Mexico is included due to its importance as a big Latin American economy.

The East Asian countries’ sample is made up of China, Japan, South Korea and, Singapore. In the 50s these economies used to be poorer than many South American countries but industrialized and become fast-growth economies. Next in order, as a developed economy, Australia is also included, given that it is a resource-rich economy comparable to Latin American ones. Last but not least, in the correlations, the United States is taken into account as the biggest worldwide economy disputing its position with China, although both can be considered as successful cases of resource-rich economies.


The East Asian investment rates

It is well known that investment rates are key in the developing process. The experiences of East Asian countries have illustrated that an underdeveloped economy must keep high investment rates over time and undergo a structural process characterized by the change of the traditional structure into a modern structure. Thus, Japan, South Korea, Singapore, and China, delivered investment rates over 30% on average as a share of their GDP  throughout the decades they were industrializing.

Table 1. Investment rates as a percentage of GDP

Source: own calculations with data from Feenstra, Inklaar, and Timmer (2015).

Developing countries suffer from a lack of capital (Lucas, 1990) and cope with structural conditions that forced them to import capital goods in order to build productive capacity (Abubaker & Ugurlu, 2020). Such dependence on imports is evidenced in the relationship between the growth rate of imports and the economic growth, analyzed by Mirakhor & Montiel (1987) using the concept of “import intensity of output growth”.

The countries that could hold relatively high investment rates sustained throughout decades had to overcome issues in their balance of payments once the imports of capital goods such as machinery and equipment, among others, raised as a result of the investments. China is a good example, the difficulties in the balance of payments was a matter the country coped with between 1949 and 1957 when the unbalanced Soviet model of industrialization was adopted (Chu-yuan, 1971). Even years later Deng Xiaoping explicitly pointed out such a hurdle in the economic development of China and the necessity to get foreign exchange (Deng, 1979B), without solving that matter China would never have held increasing and huge investment rates delivered since the 90s. Here it will be indicated that the dependency on imports is one of the problems Latin American countries as developing economies still have to overcome in order to reach their economic development.


Investments rates of South American countries and Australia

In the table below it can be seen that with the exception of Venezuela, any economy held an investment rate above 30% from 1950 to 2017. The case of Venezuela is a particular one, it is an oil country that used to have a huge flow of exchange rate, however, its investment rates could not be maintained from 1980 to 2017 and fell dramatically. In contrast, Australia kept relatively high investment rates throughout the time compared to the rest of the countries. Australia was overcome just by Venezuela, nevertheless from 1980 to 2017, the former was the country with the highest investment rate on average close to 30%. 

Table 2.  Investment rates as percentage of GDP

Source: own calculations with data from Feenstra, Inklaar and Timmer (2015).

As seen so far, the South American countries are characterized for having relatively low investment rates. This topic was analyzed in the post A brief comparison of Australia and South American countries as resource-rich economies.


How does investment correlate with imports? 

In this section, a very simple exercise was done using an array of correlations between the investment growth rates and the import growth rates in order to know how sensitive are the imports (as a response variable) to changes in investment (as an explanatory variable).

In the following charts, the average R2 (R-squared) of each country is laid out in order to know to what extent the variance of investment explains the variance of the imports. In this way, we can know how much imports the investment requires in each country. 

It is expected that the developing and resource-rich countries delivered higher correlations observed through their R2 than the developed or industrialized countries. The developing countries are forced to import capital goods such as machinery and equipment by virtue of their lack of capacity to produce them. 

Australia has strongly relied on resources (look the Observatory of Economic Complexity data or Parliament of Australia data ), a feature common in most of the South American countries, but contrary to those countries, Australia’s investment depended on average to a lower degree on imports from 1951 to 2017.  That is to say, that a speedup of investment rates in Australia does not translate into pressure on the balance of payments as much as in South America. These figures explain why while Australia can keep its investment rates over time (already shown above), Latin American countries reach a ceil fairly quickly and their investment rates press on the balance of payments.

Figure 1. Correlations between Investment and Imports 1951-2017

Source: own calculations with data from Feenstra, Inklaar, and Timmer (2015).

Singapore, South Korea and, Japan, seem to be in the middle of the sample, but China delivered the smallest correlation.

Looking into the years from 1951 to 1979, on average, the R2 of the correlations suggests that although Australian investment growth rates depended on a less extent of imports than most the South American countries, Argentina, Ecuador and Bolivia used to be even less dependent. Furthermore, the R2 of South Korea and Japan used to be among the South American countries, while China’s one was as low as Argentina’s.

Figure 2. Correlations between Investment and Imports 1951-1979

Source: own calculations with data from Feenstra, Inklaar, and Timmer (2015).

Now looking at the data from 1980 to 2017, it is clear that while Australia kept its import dependency relatively low, countries like Ecuador, Argentina, and Bolivia increased significantly their dependence on imports. Most of the Latin American economies delivered relatively high correlations implying that the dependency of their investments on imports increased, overtaking the East Asian countries’ correlations. Contrarily, China still showed a relatively low correlation.

Figure 3. Correlations between Investment and Imports 1980-1979

Source: own calculations with data from Feenstra, Inklaar, and Timmer (2015).

Catch the eye the cases of Paraguay and the United States. The former dropped its dependency quite dramatically and should be a case to be studied in greater depth. The latter raised up its dependence on imports, nevertheless, the United States enjoys wide monetary sovereignty (Kelton, 2020) as an issuer of a worldwide demanded currency and, therefore, has much more leeway to import. Conversely, the Latin American countries do not count on such monetary sovereignty given the low demand for their currencies (Aboobaker, & Ugurlu, 2020) and eventually have to rely on exports in order to import.


Some takeaways

This data shows that the Latin American countries still remain dependent on imports to invest and even has been strengthened judging by the increase in the correlations showed here.

Attract the attention the fact that although Australia is a resource-rich economy and has based its growth on the export of natural resources, from 1980 to 2017 the imports do not seem to be very sensitive to investment as it is in the South American countries. In other words, while Australia can speed up its investments to build a bigger capacity, in the Latin American economies, the rise of investments reaches a ceiling relatively quickly due to the high dependence on imported goods.



Aboobaker, Adam, & Ugurlu, Esra Nur (2020). Weaknesses of MMT as a Guide to Development Policy.

Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), «The Next Generation of the Penn World Table» American Economic Review, 105(10), 3150-3182

Kelton, Stephanie (2020). The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy. John Murray: London. 325p.

Lucas, Robert E. Why Doesn’t Capital Flow from Rich to Poor Countries? Author(s): Jr. Source: The American Economic Review, Vol. 80, No. 2. (May, 1990), pp. 92-96.

Mirakhor, Abbas, & Montiel, Peter (1987). Import Intensity of Output Growth in Developing Countries,1970-85

Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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