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New IDB study: Korea offers trade, investment and policy lessons for Latin America and the Caribbean

Report commissioned for Korea-LAC Business Forum describes opportunities for greater engagement

In recent years, China’s emergence as an economic power has overshadowed that of other dynamic Asian economies, such as Korea. However, a new study released today by the Inter-American Development Bank (IDB) argues that countries in Latin America and the Caribbean (LAC) should turn their attention to Korea, a fast-growing economy that offers numerous opportunities for bilateral trade and investment. 

Image removed.The study "Korea Breaking the Mold of the Asia-Latin America Relationship" was coordinated and written by Mauricio Mesquita Moreira, research coordinator for the IDB’s Integration and Trade Unit, along with research fellow Cecilia Heuser. It was prepared for the Korea-LAC Business Forum, a major international conference that is taking place Oct. 21-22 in Seoul, Korea. 

“Korea represents much more than just another attractive export market for Latin American countries, or a source of foreign investment,” says Moreira. “Korea is proof that developing countries are capable of climbing the economic ladder toward greater prosperity, if they follow prudent economic policies and devote ample resources to education and innovation.” 

In less than 30 years, Korea transformed its battered economy, which after the Korean War had just half the per capita income of the average developing country, into a highly sophisticated developed economy, exporter of a wide array of high-tech products, backed by a highly educated workforce and a world-class private sector. Today, Korean has a trillion-dollar economy and per capita income of around $20,000, and has averaged 7% annual growth since the early 1960s. 

Although resource-poor Korea, like China, imports large amounts of Latin America’s natural resources—minerals, oil, and agricultural products—manufactured goods account for nearly 30% of what Korea buys from LAC. That is in part because Korea has already upgraded beyond labor-intensive sectors, offering less of a competitive threat to most of LAC’s industries, according to the report. 

Korea also has sent three times as much foreign direct investment (FDI) to Latin America as China has over the past seven years, investing in mining as well as in factories manufacturing everything from garments to more sophisticated products such as TV, electronics and household appliances. Next year, Hyundai Motors will inaugurate an auto-assembly plant in Brazil to build flex-fuel cars for the fast-growing consumer market there. 

Over the past two decades, LAC-Korea bilateral trade has expanded rapidly, growing at an annual average rate of 16.1%, faster than trade grew with the U.S. (7.4%) or the European Union (7.4%). Only trade with China grew at a faster annual rate, 27.5%. Still, bilateral trade now totals just $44 billion, or only 2.5% of LAC’s trade, meaning there is ample room for growth. 

Part of the reason behind the fast expansion of trade is the profound economic reforms carried out in LAC since the mid-1980s, which reduced trade barriers with the rest of the world. Existing free trade agreements (FTAs) with Chile and Peru, and future FTAs under negotiation with Mexico and Colombia, will add to that dynamism. 

However, the study notes that trade remains heavily concentrated in just five countries in South America’s southern cone. Significant tariff and non-tariff barriers remain, as well as logistical bottlenecks that make the cost of transporting goods high. Also, few Latin American firms have ventured into Korea with investments of their own, and most have yet to tap that market. 

Still, governments from both regions are expanding South-South cooperation, sharing ideas and experiences on science and technological innovation, best practices in education, and clean energy technologies. 

“These initiatives just scratch the surface of a rich pool of opportunities that Korea and LAC have to learn from each other,” notes Moreira. 

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