Economists measuring the economic relationships between trading partners use a variety of models. One of them is known as the ‘gravity’ model. This model takes into account both geographic location and economic output. When the model is applied to the United States and potential nearshore partner countries, it is clear to see that some of those partners are defying gravity. The question is, why?
The gravity model stipulates that the right combination of geography and economic output should facilitate greater trade between two partners. If the distance between partners is relatively short and their respective GDPs relatively strong, the flow of trade between them should be equally strong. Yet that is not always the case. The Caribbean, Central and South American Region (CCESAR) is an excellent example.
CCESAR Stronger Than Japan
Nearshore America’s Jonathan D’Oleo wrote a great piece back in June explaining how the CCESAR is defying the gravity model. He explained that the CCESAR is, at least in theory, a stronger trading partner for the U.S. than Japan. Yet reality favors Japan. D’Oleo cited the following:
- GDP – $9.5 trillion (CCESAR) vs. $5 trillion (Japan)
- Population – 550 million (CCESAR) vs. 127 million (Japan)
- Distance from the U.S. – 90 miles (CCESAR) vs. 6,200 miles (Japan)
- Time difference with the U.S. – 0-3 hours (CCESAR) vs. 13-16 hours (Japan).
The gravitational model of economics clearly dictates that the CCESAR should be a much stronger trading partner with the US. Yet that’s not the case. The total volume of exports from the CCESAR was only 10% greater than Japan’s total volume in 2016.
D’Oleo’s piece accounted for the total of all goods and services traded between the U.S. and its partners. We would expect proportional numbers relating to technology services like nearshore software development. The CCESAR, as well as most Latin American nearshore providers, are not providing software development services to U.S. clients commensurate with their potential.
Three Potential Reasons
There are three potential reasons for the gravitational disparity observed by D’Oleo. The first is a lack of institutional strength. In other words, the political and economic cultures of some countries are just not attractive to the nearshore mindset. This goes for everything from nearshore software development to outsourcing business solutions. Until institutional barriers are addressed, some countries with tremendous potential will never reach their potential.
A second reason is the lack of capital infrastructure. It takes money to develop nearshore services that would facilitate CCESAR and Latin American countries being more competitive. Capital infrastructure can be improved over time as more companies invest in countries with high potential, but it will not happen overnight.
Finally, the biggest challenge lies in the people who should be working hard to take advantage of economic gravity. Some of those people are government leaders so entrenched in economic patronage and politicking that they cannot see beyond the old ways of doing things. Others are business and educational leaders who do not seem to grasp the potential of nearshore economics.
A Proven Model
Hopefully, those countries now interfering with the nearshoring potential of Latin America and the CCESAR will see, sooner rather than later, that it actually does work. They could look to countries like Mexico to learn how to make it work.
Mexico is already a strong partner with the U.S. for nearshore software development. For example, iTexico is in Austin, Texas company with a nearshore partner in Guadalajara. Together they are advancing nearshore services via their unique extended teams as a service (eTaaS) development platform. iTexico has proven that nearshore is a model that works, and works well.