WorldCity Business Magazine

Latin America's Golden Era

by Mary Dempsey

Calendar year 2006 marks the fourth consecutive year that Latin America and the Caribbean
have enjoyed notable economic growth. Latin American currencies are strong. The region’s
stock markets are expanding. Countries have paid down their foreign debts.
The region’s GDP growth rate from 2004 to 2005 surpassed the world average for the first time
in 25 years, according to the United Nations Conference on Trade and Development, UNCTAD.
At the same time, interest rates are down. Inflation once a bane of the region is under control.
And democratic elections have become commonplace, meaning political upheaval has not disrupted
the business sector.
WORLDCITY’S CEO survey released at the Americas
Conference in September found that executives were
overwhelmingly optimistic about their companies’
continuing growth in the region.
“This is the first time our business in Latin America
has been up for this long three years,” said Tom
Gales, vice president of the Latin American division
at Caterpillar and a participant in the CEO survey.
Richard Hartzell, MasterCard’s president for Latin
America and the Caribbean, said the region has been
the credit card company’s fastest growing for the past
five years.
Latin American companies involved in exporting
commodities like copper, soybeans and steel to China
are seeing unprecedented expansion. U.S. companies
sending the region construction equipment and materials
for infrastructure development are, likewise,
posting at double-digit percentage growth each year.
But Latin America is known for its volatility and
some industry watchers are getting nervous about
how long Latin America’s current Golden Era can
continue. Even as the region continues to grow, economists
are cautioning that the biggest countries
powerhouses Brazil and Mexico are not growing
fast enough given market conditions.
The region as a whole is expected to end the year
with economic growth of about 5 percent. The
International Monetary Fund projected that Mexico’s
GDP will grow less than 4 percent. In late November,
Brazilian economists cut their growth projections for
2006 to 2.95 percent. Much of the slowing in Brazil
stems from a stronger real, which has made the country’s
exports more expensive while sparking a surge
in cheaper imported goods. That combination will
hand Brazil a smaller trade surplus than expected.
Should South Florida, with an economy so dependent
on Latin America, start to worry?
“I think the region from a micro-economic perspective
is better managed than ever,” Eugenio Beaufrand,
Microsoft’s CEO for Latin America, has said. “I think
there is a new level of shared risk. I am confident we
can continue to see growth.”
There have been developments in Latin America
that have fostered confidence. For one thing, bilateral
free trade agreements have helped stabilize the business
landscape, providing clear rules for dispute resolution
and ending troublesome tariffs and taxes. But
the trade bandwagon at least for the United States
has rolled to a stop. Sought after agreements for Peru
and Colombia have been stalled and now appear
unlikely to see approval before the new Democratcontrolled
Congress takes power.
Latin America’s deep-seated problems, including a
crime rate that is twice the global average, continue to
plague the region. And at a time when unemployment
is high in the region, jobs are left unfilled because
workers do not have appropriate skill levels. Gales at
Caterpillar said a shortage of mechanics in Latin
America to repair Caterpillar equipment has forced his
company to open its own school for mechanics in Peru.
Jerry Haar, a professor of international business at
Florida International University, said 5 percent GDP
growth in Latin America “doesn’t mean much” and
better indicators of the region’s future are job creation,
productivity, educational achievement, savings
level and the quality and accessibility of healthcare.
“There is no job creation at all,” he said. “There is
too much red tape to create jobs, too many labor rules.
The cost of hiring is high, the cost of firing is high.
Latin America is choking in bureaucracy.”
Roberto Artavia, rector of the INCAE School of
Business in Costa Rica, said huge swaths of the population
in Central America still struggle to meet basic
needs. These people are not thinking of how to take
advantage of the U.S.-Central America Free Trade
Agreement or how much the local economy will
expand in 2007.
“They don’t have adequate health care, basic social
conditions, or education. And they have to compete
with China? They have to compete with Brazil and
Mexico?” Artavia asked an audience at a recent forum
on competitiveness in Latin America sponsored by
the Center for Hemispheric Policy at the University of
Miami.
He said current conditions have allowed large
multinationals to grow, but they have not fostered
strong competition. He pointed to Wal-Mart, which
has acquired two large regional companies in Central
America and now represents such a large part of the
regional economy that other companies may be
unable to compete with it.
“We not only have to deal with old existing monopolies
but we’re creating new ones,” he said.
Preparing for the future?
The framework for the region’s future is being laid
now. And some of it is shaky.
For starters, Latin America is not drawing as much
foreign investment as it needs. A new UNCTAD
study found overall foreign direct investment in Latin
America and the Caribbean rose 12 percent in 2005 to
$67 billion. Asia, by comparison, received $165 billion
in FDI.
Investment to Colombia tripled, that to Venezuela
doubled and FDI to Uruguay rose 81 percent. But both
Brazil and Mexico, the region’s biggest economies,
saw declines. Foreign investment in Brazil dropped 17
percent. Inflows to Mexico fell 3 percent.
As Asian nations zoom ahead on the global front,
Latin America is showing a crucial failing: It has not
brought in value-added knowledge-based industries.
“It is critical for the region to invest in research and
development. It is highly underinvested,” said Eric
Farnsworth, vice president of the Council of the
Americas. “Latin American countries have to bring in
broad-based education, encourage entrepreneurial
skills.”
He singled out Chile as investing higher in this
arena than its neighbors. “Chile thinks strategically.
Copper prices have hit historic highs and Chile is taking
proceeds from the sale of copper and reinvesting it
in research and development,” he said.
INCAE’s Artavia said Central America in particular
will suffer from this lack of foresight. He noted that
Central America is filled with wealthy people who
made their riches on farms and plantations.
“But wealth is no longer created at the level of a
farm,” he said. “Now we generate more value sitting
at a desk and pushing computer keys. That’s what happens
pens
with a knowledge economy.
“But the problem with Central America is that if
you’re in downtown Panama, you’re pretty well
linked to the world economy. If you move 20 miles
away, you fall completely out of it,” he added.
Signs of hope
Manuel Lasaga, the president of Miami-based
Strategic Information Analysis Inc., noted that Latin
America’s current bounty is a combination of internal
and external factors.
“In 2006, economies of Latin American countries
depended on high commodity prices, especially
energy and copper. Economies in the region have
also been growing because of low interest rates in
global markets,” said Lasaga. “What happens next
will depend on the world economy and particularly
US exports.”
In 2007, the region’s GDP is expected to grow 4.5
percent, based on a small slowdown in the global
economy. The U.N. Economic Commission for Latin
America has concluded that positive changes in the
region’s macroeconomic policies in recent years will
provide for a “safety margin” in the event of moderate
external changes.
That means Latin America may be spared the dramatic
economic upheavals that coined terms like “Tequila
Effect” to describe how Mexico’s peso crisis in 1994
affected the region or corralito, referring to Argentina’s
drastic economic measures at the end of 2001.
In part, Latin American growth will depend on the
performance of the U.S. economy. Mexico’s Finance
Minister Francisco Gil Diaz has publicly said his
country’s economy is prepared to weather a projected
U.S. slowdown in 2007. He cited higher-value exports
and booming housing construction as the buffers.
“We are in much better shape than we were six
years ago,” Gil Diaz announced. “We are no longer
making the lower end products, our companies have
invested in technology and that makes us less vulnerable
to downturns.”
Still, analysts say countries in the region should use
this moment of prosperity to lay the groundwork for
long-term economic growth.
“Reforms are needed to encourage the type of
growth that Mexico and Brazil should be striving for,”
said Manuel Suarez-Mier, professor of economics and
finance at American University in Washington D.C.
He said he remained hopeful that leaders in Latin
America wanted to keep the good times rolling.
“I’m never optimistic. I’m gloomy all the time,” he
said. “But this time I’m optimistic they’ll work toward
reforms.”