What executives are asking about Latin America
Latin America's economy may not be growing as quickly as those of China or India, but it presents real opportunities, and the political risks are often exaggerated.
2007 Special Edition: Shaping a new agenda for Latin America
Executives of multinational companies could be excused forwondering what to make of Latin America as a place to do business today. On the upside, they see sound economic growth, increasing opportunities to serve a maturing consumer base, and a world-class commodity sector. On the downside, Latin America’s growth is much slower than Asia’s, and companies must deal with political uncertainties, regulatory constraints, and infrastructure shortcomings. Thefollowing questions and answers address some of the current concerns of executives working in the region or considering investments there.
To what extent should multinational companies be concerned about the recent political movement to the Left, particularly in Bolivia and Venezuela?
Care is needed to characterize the political shift in Latin America correctly. The continent-wide free-marketmeasures of the 1990s were often not applied as successfully as might have been hoped. They failed to generate sufficient investment, while consumers found that they were not always the direct beneficiaries of the changes.
After the 2001–02 economic downturn, there was a backlash against the “neoliberal” reforms of the previous decade and a movement to restore the protectionist policies of thepast. Even so, with the exception of a few countries, fiscal prudence, macro-economic controls, open borders, and an understanding of the need to attract foreign direct investment will still be the order of the day.
Of course, the political changes in some countries have certainly caused problems for investors—in Bolivia’s energy sector, for example. There are also clearly issues in Venezuela.Looking at Latin America as a whole, however, the economies of Brazil and Mexico alone account for two-thirds of the gross domestic product. Not surprisingly, most of the foreign direct investment has been focused there.
In Brazil and Mexico, political developments have not put off investors in recent years. Quite the opposite: capital markets and investors seemed unconcerned by the results ofBrazil’s recent presidential election and by the disputed outcome of Mexico’s presidential election in 2006, eventually won by the conservative candidate Felipe Calderón. In Brazil, the stability of the financial markets after the reelection of President Luiz Inácio Lula da Silva, in October 2006, stands in marked contrast to the volatility following his initial election, four years ago.
In LatinAmerica, as in most emerging markets, local knowledge makes all the difference when companies decide whether to invest: local partners can help much more than lawyers or advisers. In Argentina, for example, leading multinationals have successfully coinvested with local private investors both in the energy and the telecommunications sectors. Investment decisions depend on the specificindustry—heavily regulated sectors such as telecommunications may be more vulnerable to changes in government policy than, say, steel. Overall, higher risks require higher returns. Invest-ments must be carefully evaluated with that in mind.
Why has Latin America recently been growing so much more slowly than Asia? Could this change?
From the end of the Second World War through the early 1980s, when the debtcrisis hit, Latin America had a high growth rate. The region’s economies as a whole grew by 5.5 percent a year compounded annually from 1950 to 1980, compared with 5.2 percent in China, 3.7 percent in India, and 3.5 percent globally.
Latin America’s economy grew through industrialization, which generated a huge movement from agriculture to modern economic activities. The same thing is...