Latin America by nINZv9

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									Latin America



   Week 10



                1
    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


                                                3
    The general opening position
   General economic position was state
    controlled and inward oriented
   The Change
   Beginning in Chile in mid 1970’s and
    spreading across the region toward:
   Free market model
   Promotion of regional and
    international economic integration

                                     4
            Why a change?
   Sparked by internal economic crises
   Promoted through international
    influences
   US political and economic pressure
   Globalization of capital and product
    markets



                                     5
    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



                                          6
                    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.

                                       9
    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.



                                                    10
    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


                                                    11
    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

                                     12
                   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




                                                                      13
           As an Example…
   1980’s
   Bouts of inflation
   Unpayable foreign debt
   Endemic corruption
   Waste of capital




                             14
                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




                                           16
          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



                                                         17
      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


                                                   18
         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…


                                      19
             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.



                                                         21
         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)


                                              23
         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.                                 24
           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

                                           27
    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


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