1. April 16, 2013
THE LATIN AMERICAN BUSINESS
ENVIRONMENT:
PRESENT, PAST AND FUTURE
Purdue CIBER
Terry L. McCoy
tlmccoy@latam.ufl.edu

2. Presentation
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

3. Components of the
Latin American Business Environment
Economic Domestic Environment
Global -------------
Financial
Policy
Political ---------------
Legal
Regional Social

4. NAFTA
Mexico
Dominican
Republic
Honduras
Guatemala
Nicaragua
El Salvador
Costa Rica
Venezuela
DR-CAFTA Panama
Colombia
Ecuador
Latin American
Business Peru
ANDEAN
Environment COMMUNITY
Brazil
Report Bolivia
Countries
Paraguay
http://www.latam.ufl.edu/labe/ MERCOSUR
publications.stm Chile
Uruguay
Argentina

5. Regional Profile:
Sustained Growth

6. With Moderate Inflation

7. Increased Trade

8. In Favorable External Environment:
Strong Commodity Prices

9. And Surging Capital Flows

10. Prudent Debt Management

11. And Improved Fiscal Management

12. Bottom Line: Rising Standards of Living

13. What Happened?
New Economic Model (NEM)
Macroeconomic Stabilization
• Policy measures to control inflation and stabilize
Economic Liberalization
• Structural reforms to open the economies
Complementary Components
• Free trade and regional integration
• Democratic governance
Logic 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

14. Market Reforms of 1990s
Policy Arena → Output → Outcome
Fiscal Deficit 1-2%/GDP Lower inflation
Spending Priorities Subsidies→capital ≥Pub. Invest.
Tax Reform VAT ≥Revenue
Fin. Liberalization Free interest rates ≥Savings&Invesv.
Exchange Rate Floating Competitive FX
Trade Liberalization Lower tariffs Comp. Advan.
For Investment Open regime ≥FDI
Privatization Sell off SOEs ≥Competition
Deregulation Roll back ≤Transaction cost

15. But History of Shifting Paradigms
(Adapted from Bulmer-Thomas, 2003)
Export-led Growth
(1850-1914)
Inward-looking Development
With ISI (1945-1980)
New Economic Model
(1990-present)
Reform 2001- 02 Downturn RI
2003-08 Sustained
Growth
2008-09 Crisis
2009-10 Recovery
Reform 2011-13 Softening RI
Inward-looking Development
Export-led Growth

16. Early Performance of the NEM:
Disappointment 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

17. Regional GDP Growth during Decade of
Reform
(Source: CEPAL 2002)
6
5.2 5.2
5
Annual Percentage Growth
4.0 4.1
4 3.7
3.2
3
2.3
2
1.1
1
0.5
0.3 0.2
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

18. Business Environments in 2000
Attractive Problematic
•Mexico •Colombia
•Dominican Republic •Venezuela
•Costa Rica •Argentina
•Chile •Paraguay
Mixed
•Guatemala
•El Salvador
•Honduras
•Nicaragua
•Panama
•Ecuador
•Peru
•Bolivia
•Brazil
•Uruguay

19. Future 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

20. “Pink Tide” Threat to NEM

21. What Happened?
“Lula Effect”
1. 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

22. 2013 Business Environments:
Attractive (9)
Defining Features Countries
Sustained growth with Brazil*
moderate inflation Mexico*
Diversified export base Chile*
Growing middle class Peru*
Centrist democratic politics Panama*
and strong institutions Colombia*
Social market policy Uruguay*
consensus and continuity
Costa Rica
Strong property rights
Dominican Republic
Transparency, accountability
Strong credit ratings and FDI
*Investment grade rating

23. Problematic Environments (4)
Defining Features Countries
Growth (with inflation) Venezuela
Energy export dependence Ecuador
Significant poverty reduction
Bolivia
Populist politics, strong
presidents, weak institutions ----------------------------
Interventionist states with Nicaragua
mixed heterodox policies
Weak rule of law, corruption
Weak credit ratings and FDI
Increasingly dependent of
China

24. Mixed Environments (5)
Defining Features Countries
Slowing growth with high inflation Argentina
Rich commodity base
Strong middle class
Increasing state control of economy
and macroeconomic imbalances
--------------------------------------------- -------------------------------------
Slow growth
Weak terms of trade
Guatemala
Heavy US dependence El Salvador
Widespread poverty
Drug-related violence
Honduras
--------------------------------------------- -------------------------------------
Poor but growing
Paraguay

25. Outlook 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

26. Longer Term Outlook:
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