The State of Business in Latin America

Overall, Latin America and the Caribbean have been growing at a stable, high rate for five or six years, with a regional consensus that microstability is valuable for the regional economy, said Luis Lopez-Calva, chief economist at the Regional Bureau of Latin America and the Caribbean of the United Nations Development Programme.

However, the region’s fundamental challenges include establishing a fully functioning market economy and finding ways to increase productivity and enhance competitiveness, Lopez-Calva said during a panel at the fifth annual Latin American Business Conference sponsored by the student-led Latin American Business Group, at Harper Center on April 12

“Establishing a fully functioning market economy requires strengthening the state, first in a fiscal dimension and second in a regulatory dimension to guarantee competitive environments,” Lopez-Cavallo said. “Social expenditure has improved, but we are in a vicious circle of making informality, for example, more profitable than formality.”

The political division of Latin America – between the bloc led by Venezuelan President Hugo Chavez and a group of countries that is very much part of globalization — is greater than ever, said John Williamson, senior fellow at the Peterson Institute of Economics www.iie.com. “Assuming we go forward more or less as is, the chances are quite good that this latter group of countries will join the global economy and enjoy a period of catch-up growth,” Williamson said.

Improved terms of trade are likely to remain stable for at least the short term but may not be permanent in those countries, he said. Income distribution is unlikely to continue to deteriorate in most of Latin America, Williamson said. “It’s already improved significantly in Columbia and Brazil, and that is likely to happen elsewhere, largely because of the greater expenditures on social programs and the discovery of how money can usefully be channeled to poor people to improve income distribution and also stimulate growth,” he said.

Because of the economic boom, countries may want to consider saving some of their increased revenue to build assets in case the boom is not permanent, said Felipe Larrain, professor of economics at Universidad Catolica de Chile www.puc.cl. For example, Chile’s government has invested $20 billion internationally under a law requiring such investment of “structural surplus,” Larrain said.

During the 1990s, domestic reforms were significant in every country in Latin America, except Venezuela, said Domingo Cavallo, former minister of the economy in Argentina and chairman and CEO of DFC Associates, LLC www.dfcassociates.com. “Of course price distortions and interventions in the market are a way of reversing those reforms, as in the energy sector,” Cavallo said. “But once countries address the inflationary problem with micropolicy — particularly monetary fiscal policy rather than price and market interventions — it is relatively easy to recover the good rules of the game for the domestic market economy.”

Second-year student Christine Lu said she appreciated the chance to hear about the state of business in Latin America firsthand. “The most important thing I learned is that there are still political issues in Latin America,” she said. “It’s like China. You can’t say, ‘The government is a problem. I never want to do business there.’ You have to try to catch the growth opportunity, but you also need to know how to measure the risk.”

—Phil Rockrohr