Latin America

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Latin America

• Week 10

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Are Latin American economies Emerging?

• Emerging economies are low-income, rapid-growth
  countries using economic liberalization as their
  primary engine of growth.
• They fall into two groups
• Developing countries in Asia, Latin America,
  Africa and the Middle East and
• Transition economies of the former Soviet Union
  and China
• Strategy in Emerging Economies (Hoskisson et al
  2000)

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Some comparison

• FDI as of GDP (1997) GDP Growth 90-97
• Argentina 1.8 5.4
• Brazil 2.0 3.4
• Chile 4.0 8.3
• Colombia 2.5 4.4
• Ecuador 1.0 3.1
• Jamaica 2.2 0.4
• Mexico 1.6 2.2
• Peru 1.8 6.2
• Trinidad 3.6 1.2
• Venezuela 2.9 2.2
• Average 2.3 3.7
• Europe Avg 3.1 4.4
• Asia Avg 0.9 6.6
• M-East/Africa 1.2 3.5
• USA 2.9 3.0

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The general opening position

• General economic position was state controlled
  and inward oriented
• The Change
• Beginning in Chile in mid 1970s and spreading
  across the region toward
• Free market model
• Promotion of regional and international economic
  integration

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Why a change?

• Sparked by internal economic crises
• Promoted through international influences
• US political and economic pressure
• Globalization of capital and product markets

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What have been the effects?

• Movement from (often military backed)
  dictatorships toward democratically elected
  representatives
• We see increasing liberalization and
  privatization
• Is this political expediency?
• Reforms translated to success at elections

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Downsides

• Those lacking income cease to be consumers in the
  market place
• rising inequality and poverty
• As trade liberalization is seen as advantageous
  to politicians other aspects are neglected
• Eg
• Privatization of public enterprises and services
• Deregulation of consumer and financial markets

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Downsides

• Particularly as electorate consider the effects
  of this could be
• Foreign buyouts
• Unemployment
• Higher prices
• In the 25 years since liberalization began Latin
  America has become a patchwork of varying
  political shapes with greater or lesser amounts
  of success.
• The interplay between government policy, economic
  success/failure and civil opposition has resulted
  in a region which cannot be defined in terms of
  one economic/political approach.

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By way of example

• Venezuela began vigorous liberalization in 1989
  leading to riots and military repression. The
  country now has the most non-liberalized system
  outside of Cuba.
• Ecuador has seen governments voted to power
  intending liberal reforms. These reforms have
  then failed because of civil opposition.

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Is the reform process in Latin America
TRANSITION?

• I think so for several reasons
• The countries that began their reforms in the
  1990s (Argentina, Brazil, Colombia and Peru) have
  not had enough time to consolidate a new economic
  model, so investment decisions were made in the
  context of great uncertainty.
• The reforms did not begin simultaneously on all
  fronts. In general, trade liberalization was the
  first measure, while labour reform and the
  privatization of public utilities were among the
  last to be adopted.

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Is the reform process in Latin America TRANSITION?

• In some countries all reforms were undertaken
  simultaneously (Argentina and Peru, beginning in
  1990), in others the process developed slowly and
  in a different sequence, which prevented the
  reforms from maturing fully (Bolivia, Brazil and
  Costa Rica are good examples in this regard)
• The reforms did not proceed in linear fashion,
  which meant that economic actors were exposed to
  changing rules of the game.
• For example, the tariff surcharges and other
  obstacles to international trade that cropped up
  in these countries after each balance-of-payments
  crisis

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Is the reform process in Latin America TRANSITION?

• The consolidation of the new market-oriented
  model defined as the point at which new
  institutions have taken shape has been hindered
  by crises resulting from the internal and
  external imbalances that have continued to plague
  these countries in the period following the
  reforms

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As an Example

• Brazil
• Decade of New Economic Model
• 1940 to 1989 a form of nationalist mercantilism
  operated through state controls of commerce and
  credit
• Centrally directed state enterprises provided
  infrastructure and services, while highly
  protected and subsidized industries and
  agriculture made up a dependent private sector
• Capitalist in principle but with more state
  control than in any other non-communist country
• Old model
• Industrial development based on the country's
  large internal market
• Produced some significant strategic advances in
  oil, energy, and agriculture
• Economic growth averaged more than six percent a
  year over three decades

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As an Example

• 1980s
• Bouts of inflation
• Unpayable foreign debt
• Endemic corruption
• Waste of capital

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As an Example

• New Model
• The role of the state in a free market is being
  redefined
• Shifts the emphasis in public spending toward
  improving education and health services and
  alleviating poverty
• The state still
• Retains control of macroeconomic policy
• Operates important public credit facilities
• Produces oil and electric power
• Regulates public services
• But regulators acknowledge that private investors
  must be able to make profits if they are going to
  expand the supply of goods and services in a
  fast-growing market

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As an Example

• Outcomes
• Sound money
• Trade liberalization
• Privatization
• Reduced state role in the productive sectors of
  the economy
• Strengthened private banking system

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The effect on company formation

• Firms have adapted to the changes in a variety of
  ways
• In most countries, the economy has evolved from a
  closed system of protection, with strong State
  intervention, to a system characterized by
  openness, deregulation and privatization
• Firms adapted to these changes to the extent they
  could
• depending on their strength and their other
  microeconomic characteristics
• It was much more difficult for small and
  medium-sized enterprises to respond to
  competition from imported goods in terms of
  quality and prices than it was for large
  enterprises or subsidiaries of transnational
  corporations

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Business Sector Reactions

• Reactions also differed among economic sectors
• In some countries opening up the economy
  strengthened sectors that were involved in
  processing natural resources
• In others it favoured the clothing, automotive
  and electronics sectors
• Companies with a long history in these industries
  took advantage of their knowledge of production
  processes and the market, which enabled them to
  grow and increase profitability
• The same policies depressed many other sectors,
  such as machine tools, electric machinery
  manufacturing and the textile and clothing
  industries

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What is the outlook?

• Improvements seem to be occurring but there are
  certain unstable factors which need to be
  overcome before progress in reform can become
  permanent.
• These are

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Great vulnerability

• The globalization of finance and the fact that
  economies have no protection against the
  volatility of international capital flows or the
  fragility of the regional financial system create
  an atmosphere of vulnerability.
• These factors do not create a macroeconomic
  context that favours productive investment in
  expanding capacity, when such investment is
  irreversible
• National firms tend to respond by concentrating
  investment in sectors with very high profits

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Less public investment in infrastructure

• Historically the public sector invested in basic
  services in order to create positive
  externalities
• Privatization of these sectors was accompanied by
  greater demands for profitability
• Incorporation of risk costs
• Aversion to macroeconomic and microeconomic
  uncertainty
• So we can guess
• if the State does not intervene to offset these
  factors
• then there is no reason to expect investment to
  be higher than in the past, especially in energy
  sectors transport infrastructure, water and
  sanitation.

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New firms and business strategies

• This could be the most positive development for
  the future
• Disinvestment of FDI in 70s and 80s
• FDI returned in the 90s attracted by
• Stabilization of the Latin American economies
• Liberalization and deregulation of markets
• The question that arises is whether this movement
  will spur a new cycle of investment in new
  sectors and new areas of business
• So far there are good signs in certain
  infrastructure sectors
• But they have not spread to the productive sectors

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How does this affect local development?

• With the developed world markets becoming
  increasingly saturated, MNCs have turned to
  emerging markets such as India, Indonesia,
  Brazil, China and Mexico as key locations for
  future growth.
• Reinventing strategies for emerging markets
  (London Hart 2004)

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MNC review of strategy

• London Hart argue that MNCs often target the
  top of the economic pyramid
• Reviewed MNC strategy (success failure)
• Results suggest that the success of initiatives
  targeting low-income markets is enhanced by
  recognizing that Western-style patterns of
  economic development may not occur in these
  business environments.
• Business strategies that rely on leveraging the
  strengths of the existing market environment
  outperform those that focus on overcoming
  weaknesses.
• These strategies include
• developing relationships with non-traditional
  partners, co-inventing custom solutions, and
  building local capacity.

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Corporatism in Brazil

• In considering the development of the business
  environment
• Need to consider the close relationship of state
  corporations
• In key industries (eg automotive)
• Development of industries aided by state
  institutions (Sectoral Chamber of Automotive
  Industry) to provide greater investor confidence
• State policy is to large extent dictated by needs
  of key corporations
• For MNCs/investors to deal with business
  environments in Latin America
• They need to appreciate the individual
  development paths of the countries

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Local Strategy Development

• State/Corporate roles historical development
• Determine indigenous business strategy
• As MNCs need to adjust their entry strategies to
  different markets
• Also must determine local competition policy
• Local Strategies
• The Full Line
• The Industrial Emporium
• The Kept Woman
• The we can make anything Strategy
• The Fortress
• (Is there a strategy in Brazil? R Nelson 1990)

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Outlook Latin America Business Environment
Report (Sept 2003)

• External environment
• Global
• US led global recovery promises to produce higher
  rates of growth through increased trade and
  easier access to capital markets.
• Regional
• Region stands to benefit from increased progress
  in Brazil and Argentina while it would suffer
  from a breakdown in Venezuela

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Outlook Latin America Business Environment
Report (Sept 2003)

• Domestic Environment
• Current forecasts call for Latin America to grow
  by 3 in 2004
• Which is an improvement over the last 3 years but
  less than needed for significant increases in per
  capita income
• Trade should increase on both import and export
  sides which raises the risk of growing current
  account deficits and needs increased FDI to cover
  them
• Inflation should not increase
• Social welfare is unlikely to experience
  substantial short term changes but tangible
  progress and demonstrated success in addressing
  poverty and crime would reverse the sense of
  social deterioration. Need sustained growth and
  rising employment