terry mc coy 2013
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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. [email protected]
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
-------------
Financial
Social
Political Policy
---------------
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
---------------------------------------------
Slow growth
Weak terms of trade
Heavy US dependence
Widespread poverty
Drug-related violence
---------------------------------------------
Poor but growing
Countries
Argentina
-------------------------------------
Guatemala
El Salvador
Honduras
-------------------------------------
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