April 16, 2013

THE LATIN AMERICAN BUSINESS THE LATIN AMERICAN BUSINESS ENVIRONMENT: ENVIRONMENT:

PRESENT, PAST AND FUTUREPRESENT, PAST AND FUTURE

Purdue CIBERPurdue CIBER

Terry L. McCoytlmccoy@latam.ufl.edu

PresentationPresentation

Current Environment for Business and Investment

•Regional profile

Past Environments

•History of shifting policy paradigms

•Market reforms of 1990s and populist pushback

Current Country Breakdown

•Attractive, problematic and mixed environments

•Short-term outlook

•Longer term outlook

Conclusions

•Latin America is an attractive, business-friendly environment

•Is it sustainable?

•And not all countries are business friendly

•Moving to the next stage the region has significant assets but confronts serious structural obstacles

Components of theComponents of theLatin American Business EnvironmentLatin American Business Environment

Economic

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Financial

Social

Political Policy

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Legal

Global

Regional

Domestic Environment

Latin American Business

Environment Report

Countries

http://www.latam.ufl.edu/labe/publications.stm

MERCOSUR

NAFTA

ANDEAN COMMUNITY

DR-CAFTAVenezuela

Colombia

Brazil

Ecuador

Peru

Bolivia

Argentina

Chile

Uruguay

Paraguay

PanamaCosta Rica

Mexico

El Salvador

Guatemala Nicaragua

Honduras

DominicanRepublic

Regional Profile:Regional Profile:Sustained GrowthSustained Growth

With Moderate InflationWith Moderate Inflation

Increased TradeIncreased Trade

In Favorable External Environment:In Favorable External Environment:Strong Commodity PricesStrong Commodity Prices

And Surging Capital FlowsAnd Surging Capital Flows

Prudent Debt ManagementPrudent Debt Management

And Improved Fiscal ManagementAnd Improved Fiscal Management

Bottom Line: Rising Standards of LivingBottom Line: Rising Standards of Living

What Happened?What Happened?New Economic Model (NEM)New Economic Model (NEM)

Macroeconomic Stabilization• Policy measures to control inflation and stabilize Economic Liberalization• Structural reforms to open the economiesComplementary Components• Free trade and regional integration • Democratic governanceLogic of Reform• Restore economic efficiency to promote growth by relying on

market forces to shape business and investment decisions• Governments maintain stability and set rules; individuals and

companies allocate resources

Market Reforms of 1990sMarket Reforms of 1990s

Policy Arena → Output → OutcomeFiscal Deficit 1-2%/GDP Lower inflationSpending Priorities Subsidies→capital ≥Pub. Invest.Tax Reform VAT ≥RevenueFin. Liberalization Free interest rates ≥Savings&Invesv.Exchange Rate Floating Competitive FXTrade Liberalization Lower tariffs Comp. Advan.For Investment Open regime ≥FDIPrivatization Sell off SOEs ≥CompetitionDeregulation Roll back ≤Transaction

cost

ButBut History of Shifting ParadigmsHistory of Shifting Paradigms(Adapted from Bulmer-Thomas, 2003)

Reform 2001- 02 Downturn2003-08 Sustained

Growth2008-09 Crisis

2009-10 Recovery2011-13 Softening

Export-led Growth(1850-1914)

Inward-looking DevelopmentWith ISI (1945-1980)

New Economic Model(1990-present)

Reform RI

RI

Inward-looking Development

Export-led Growth

Early Performance of the NEM: Early Performance of the NEM: Disappointment and PushbackDisappointment and Pushback

• Reduced inflation • Increased trade but persistent balance of payments and current

account deficits• Unstable k flows • Increased external vulnerability • Low, uneven and volatile GDP growth • High unemployment, persistent poverty, stagnant standards of

living• Uneven performance across countries• Emerging consensus: NEM under-performed, not lived up to

predicted outcomes, time to re-assess

Regional GDP Growth during Decade of Regional GDP Growth during Decade of ReformReform

(Source: CEPAL 2002)

3.2

4.0

5.2

1.1

3.7

5.2

2.3

0.3

4.1

0.50.2

0

1

2

3

4

5

6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

An

nu

al P

erce

nta

ge

Gro

wth

Business Environments in 2000Business Environments in 2000

Attractive

•Mexico

•Dominican Republic

•Costa Rica

•Chile

Problematic•Colombia•Venezuela•Argentina•Paraguay

Mixed•Guatemala•El Salvador•Honduras•Nicaragua•Panama•Ecuador•Peru•Bolivia•Brazil•Uruguay

Future of NEM in DoubtFuture of NEM in Doubt

“Whether the NEM, however reformed, is the best way to achieve economic development in Latin America is a question that is increasingly moving to the forefront of economic debate in the region.” (Reinhardt and Peres, 2002)

Alternative Scenarios

• Recovery and continuation of NEM: Return to the path of the 1990’s

• Deepening of NEM: Chilean response

• Another Paradigm Shift: Abandon the NEM

• Accelerated country differentiation: Chile vs. Venezuela

““Pink Tide” Threat to NEMPink Tide” Threat to NEM

What Happened?What Happened?““Lula Effect”Lula Effect”

1. Election Outcomes, 2000-071. Election Outcomes, 2000-07

Populist Left Pragmatic Left Center Right

Bolivia Chile Mexico

Nicaragua Peru Colombia

Ecuador Costa Rica Honduras

Venezuela Brazil Argentina

Uruguay

2. Economic Recovery and Sustained Growth, 2003-08• Opposition to NEM declined• Social inclusion incorporated into model• Center-left political consensus and policy continuity took shape

3. Produced Two Models in the “New Latin America”• Dominant: Social Market • Dissident: Populist

2013 Business Environments:2013 Business Environments:Attractive (9)Attractive (9)

Defining Features

Sustained growth with moderate inflation

Diversified export base

Growing middle class

Centrist democratic politics and strong institutions

Social market policy consensus and continuity

Strong property rights

Transparency, accountability

Strong credit ratings and FDI

Countries Brazil*

Mexico*

Chile*

Peru*

Panama*

Colombia*

Uruguay*

Costa Rica

Dominican Republic

*Investment grade rating

Problematic Environments (4)Problematic Environments (4)

Defining Features

Growth (with inflation)

Energy export dependence

Significant poverty reduction

Populist politics, strong presidents, weak institutions

Interventionist states with mixed heterodox policies

Weak rule of law, corruption

Weak credit ratings and FDI

Increasingly dependent of China

Countries

Venezuela

Ecuador

Bolivia

----------------------------

Nicaragua

Mixed Environments (5)Mixed Environments (5)

Defining Features

Slowing growth with high inflation

Rich commodity base

Strong middle class

Increasing state control of economy and macroeconomic imbalances

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Slow growth

Weak terms of trade

Heavy US dependence

Widespread poverty

Drug-related violence

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Poor but growing

Countries

Argentina

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Guatemala

El Salvador

Honduras

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Paraguay

Outlook for 2013-14Outlook for 2013-14

Mild economic recovery

•Growth will increase (3.1 to 3.8%), in face of continuing global uncertainty

•Peru, Panama and Paraguay will achieve highest growth; Venezuela and El Salvador lowest

2013 Elections: Policy continuity regardless of outcomes

•Ecuador: Correa re-elected with congressional super majority)

•Paraguay (April)

•Chile (November): Bachlet favored

•Venezuela (Maduro):

Environments to Watch

•Attractive: Brazil and Mexico•Problematic: Venezuela and Ecuador•Mixed: Argentina

Longer Term Outlook: Longer Term Outlook: Middle to High-Income?Middle to High-Income?

Strengths (of social market economies)

•Natural resource endowments

•Stable, open economies

•Growing middle class, democratic politics

•Region at peace (except for drug-related violence)

Obstacles

•Over-dependence on commodities with low value-added

•Inadequate infrastructure

•Low savings, investment, innovation and productivity

•Persistent inequality in face of mobilizing civil society

•Weak education systems and inadequate human capital formation

•Organized crime and drug-related violence

•Rigid labor markets

•Intrusive bureaucracies

•Flawed legal systems and persistent corruption