Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
The 1980s witnessed the beginning of changes that would forever alter the fortunes of the global economy. China at that time was entering an era of profound political and economic transformations and sought to attract foreign investment by taking advantage of the extraordinary amount of available and extremely cheap labor. It was also at that time that technological changes began to take off that would accelerate trade and investment, including digitization and the internet, logistical advances, such as the containerization of trade, integration of markets, adoption of standards and certifications, among many others.
American companies would soon realize the opportunity for efficiency gains and would promote offshoring, or the strategy of transferring industrial plants to China, a process that would expand and become more sophisticated, giving fulcrum to the formation of global value chains. This column is a very brief history of time, the time of globalization, as that set of changes would come to be known.
In fact, between 1990 and 2021, global exports accelerated and grew 6.5 times. The United States, Germany and Japan, then the three largest in the sector, saw their foreign sales increase 4.5, 5.1 and 2.8 times, respectively. But China's exports grew no less than 80 times. The country would become the biggest seller and would come to be known as the "factory of the world".
But time passed, a lot happened and, since the middle of the last decade, the concentration of production in China began to be questioned and showed excessive exposure to external factors such as populism, geopolitics and the pandemic, which would lead to the disruption of contracts and problems in the supply of inputs and products. To reduce dependence on China, western governments have started to promote strategies such as reshoring and nearshoring, which aim to bring industrial plants parked in that Asian country back home or close to home.
But many analysts and corporate strategists point out that this new strategy repeats the previous error of concentration. In addition, they point out that current times require a strategy adapted to new circumstances and conditions, including the increase in the cost of energy, the increase in the intensity and frequency of extreme natural events, the growing hardening of environmental compliance and the growing concerns about issues geopolitical events, such as the war in Europe and tensions between the United States and China.
As a consequence, the view has emerged that it is necessary to promote geographic diversification, and not the concentration of industrial plants and production chains, in such a way as to guarantee resilience and protect, in this way, the interests of businesses and consumers. Efficiency is gaining new contours. If, before, labor costs were the most critical factor for the geography of plants, now, it is energy that is gaining prominence in the competitiveness agenda of companies. After all, environmental compliance, energy costs and the changing profile of consumption are coming into play, influencing investments and the location of production. Green, safe, cheap and abundant energy is increasingly at the center of production location decisions.
Some analysts claim that globalization as we know it would have come to an end and that trade and the flow of capital and investment should even decrease. The hypothesis seems exaggerated, as it does not consider the interests of companies and markets. What we will probably see is a new stage of globalization, which will combine elements of resilience with the modern efficiency agenda, albeit with some political-regional contours and, perhaps, with a less ample scope. Powershoring is the most visible expression of this “neo-globalization”, since it is a strategy for locating industrial plants based on resilience and efficiency associated with green energy.
Due to its unique condition to produce clean and renewable energy, to already have a relatively clean energy matrix by world standards, to be developing ambitious project portfolios in the area, to already have ambitious plans and projects for the production of green hydrogen (H2V), leading the biofuels agenda and developing new business models and new technologies for the energy sector, the Latin American and Caribbean (LAC) region is emerging as one of the great potential participants in neo-globalization. In addition, LAC has a privileged geographic location, is far from geopolitical issues and has rulers who are increasingly aware of the strategic relevance of the environmental agenda for economic and social development.
Neo-globalization could be the spearhead of the region's industrialization, which could have four synergistic and complementary axes: the attraction of industrial plants due to powershoring; the attraction of new investments in renewable energies and H2V; host the formation of a global hub for the production of equipment, services and maintenance of renewable energy and H2V; and attracting investments aimed at the biofuels and new technologies agenda. Therefore, it is an industrialization process in which clean energy, green investments, comparative advantages, environmental compliance, foreign capital, exports, technology and innovation would play a decisive role, while combining the respect and protection of the environment with the development agenda.
Investments within the scope of neo-globalization could “drag” and give traction to businesses in many industrial and service sectors, financial and non-financial, and could be decisive for the generation of jobs and income and for regional development. To reap all these potential benefits, the region's governments will need to understand the opportunity at hand, prepare adequate strategies, define priorities, work closely with the private sector and set in motion an executive agenda that will enable the incorporation of benefits as quickly as possible from what could be the greatest and most potent source of transformation for the region's economies.
