The Latin American Economic Outlook analyses issues related to Latin America’s economic and social development. Ever since the first edition was launched at the 17th Ibero-American Summit of Heads of State and Government in November 2007 in Santiago (Chile), the report has offered a comparison of Latin American performance with that of other countries and regions in the world, sharing experiences and good practices with the region’s public officials.

After a full decade of convergence with advanced economies and important progress in addressing inequality, Latin America’s average growth will fall below the average of OECD countries in 2015 for a second consecutive year. Medium-term prospects are not encouraging either. These developments reflect well-known domestic weaknesses, illustrated by below par productivity and investment growth paired with the external environment’s deterioration and key social challenges. Latin America remains the world’s most unequal region; poverty still affects 28% of its population and labour informality persists. The consolidation of the US economy has been positive for a few economies in Latin America but the medium-term effects are still not visible, particularly as the ensuing monetary retrenchment leads to tighter financial conditions. Economic activity is also recovering but at a slower pace than expected in Europe and Japan.

The Latin American Economic Outlook 2016 explores how Latin America should deepen and improve its partnership with China as part of its development agenda. China has been – and will continue to be – a game changer for the region. The world’s economic centre of gravity has shifted away from OECD economies towards emerging economies during the past two decades, a phenomenon called “shifting wealth”. Ties between Latin America and China are now evolving well beyond just trade, challenging Latin American countries to adopt specific reforms to boost inclusive growth and build a mutually beneficial partnership with China.

The Latin American Economic Outlook 2016 explores the evolving relationship between Latin America and China. This chapter provides an overview of recent and future economic links, covering key issues from trade and finance to skills and productive development policies. It identifies strategies and policy responses for Latin America to address its development challenges, both in the short and medium term, some of them in partnership with China.

The high economic growth rates of the 2000s experienced in Latin America fuelled by favourable external conditions are over. Instead, the region continues to deal with a deteriorating external environment that, without experiencing any major internal crises, is leading to modest growth rates. Medium-term growth projections, however, show further downward revisions. This suggests that potential output growth is less robust than expected, which could present a risk to recent socioeconomic achievements. This chapter assesses Latin America’s growth prospects in the challenging international environment and explores how vulnerable the region is to further adverse changes in external conditions. The domestic outlook focuses on the need to stabilise and increase investment rates and productivity. The external outlook focuses on the effect of China’s “new normal” and looks at how slower growth and structural change in China is altering the Latin American landscape, as well. It then discusses how these factors influence the main real and financial indicators in the region, and will shape the external environment for decades to come. The chapter ends with shortand long-term proposals for economic policy, highlighting the diverse socio-economic landscapes in Latin American countries.

This chapter analyses the role of China and Latin America in the process of shifting wealth. The first section discusses how the integration of China into the global economy shaped the initial phase of shifting wealth, in which Latin America was mostly a spectator. The second section analyses the foreseeable evolution of this process, namely shifting wealth II, in light of several structural and policy trends unfolding in China (e.g. demographic ageing, the rise of the middle class and the structural transformation process). The third section explores the relationship of both China and Latin America with the “middle-income trap”, through a discriminant analysis that highlights the characteristics that separates them from the countries that escaped the trap. The chapter concludes with a summary of key findings.

The recent trade boom favoured commodity exporters in Latin America and resulted in a strong concentration of exports to China in a few products, relative to trade with the world overall. Imports from China also increased considerably, and import penetration and competition with regional manufacturing producers grew in certain markets. The impact of imports remains mixed. In some cases, growth in Chinese imports boosted competitiveness and productivity in the region, through the supply of cheaper and more efficient intermediate inputs for its firms. Trade in intermediate goods and through global value chains (GVCs) also expanded considerably between the two regions. Nevertheless, the dynamics appear to be changing. After strong growth in trade between the region and China for the last decade and a half – which increased the value of trade 20 times between 2000 and 2014, versus 3 times with the rest of the world – trade has weakened recently owing to the slacking off in Chinese demand. This decrease in demand signals the importance of re-evaluating the opportunities that trade with China offers the region, such as increasing demand for agricultural products, as well as presenting challenges for diversification. To increase gains, Latin American countries could deepen regional value chains to take advantage of diverse opportunities globally, particularly in stronger integration in services sectors.

This chapter lays the ground work for discussing trends in the relationship between China and Latin America, given the changing patterns of China’s development strategy. Based on the analysis of potential transmission channels created by China’s transformation to the region, including the trade, finance and structural challenges that this may trigger, the chapter identifies strategies and policy responses for Latin America to make the most of this partnership.