Latin America an the Carabbean past and future

A L V A R O U R I B E V É L E Z

Latin America and the Caribbean past and future

Issues to be addressed

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

2. Latin America between two policy paths

3. The policy challenges in the region

4. Lessons from the Colombian Experience



1. Emerging economies have become engines of economic growth.

2. During the last three decades developing countries have experienced a profound transformation driven by two components: On the one hand a rapid demographic transition. Since 1980 the World

population has increased by 2.5 billion people and 95 percent of that growth has taken place in the developing World.

The other element has been a dynamic period of sustainable economic growth. In 1980 developing economies represented 33 percent of the World GDP and today that number is closed to 46 percent.


1. By 2050 19 of the top 30 economies by GDP will be countries that we currently describe as ‘emerging’

2. China and India will be the largest and third-largest economies in the world.

3. Eight countries – India, China, Brazil, Russia, Indonesia, Korea, Mexico and Turkey – will be responsible for most of global growth up to 2025

4. Emerging economies will account for 68% of global growth by 2030.

5. In 1980, 5% of goods were sourced globally. By 2000, this was 20%. By 2025, it will be 50%.

6. In 1980, world exports accounted for one-sixth of global GDP. Today it is a quarter. By 2030, it will have risen to a third.

7. By 2030 the urban middle class will rise to 42% of the global population. The number of people with daily income of $10 to $100 a day will rise from 1.8 billion today to 4.9 billion by 2030.


According to FAO: Demand for food could increase 50% by 2030

Demand for water has been projected to rise by 30% between 2000 and 2030

The International Energy Agency has said energy needs will grow by 40% by 2030. According to BP China represents 20.3% of the World Energy

Consumption (The world largest energy consumer in 2010 for the first time over the U.S)

Natural Gas consumption has experience its strongest consumption rate since 1984 (7.4%)

Coal share in world energy consumption has reached its highest level since 1970 (29.6%). China represents 49% of the world coal consumption.

In 2010 Global Biofuel consumption grew by 13.4%


How does Latin America fit in this panorama? Between 1980 and today some changes have occured…

1. The inflation tragedy is over: in 1985 regional inflation average was 159%, today is below 6%. This means that fiscal and monetary prudence have become policy principlkes.

2. Debt is no longer a threat: Debt to GDP ratios in the region have passed from 40% in 2002 to 20.4% in 2011

3. Between 2003 and 2011 the region experienced a growth average of 4.4%...the highest since 1967-1974

4. Democracy has expanded in the region with few exceptions…

5. Regional exports have increased 160% betwee 2002 and 2010

6. In 2011 the region faced a record number in FDI reaching almost 113 US$billion


Population

Close to 600 million people

Average age between 24 and

28

Per Capita Income in PPP close to

US$10.000

Poverty reduction

64% of our population is a expanding middle class.

During the last decade 40 million people have left the poverty line

Life expectancy has increased from 65 to 75 years.

Child mortality has been reduced by 50 per cent.

Literacy rates are above 94%.

Mobile phone penetration has increased by 78 per cent.

Internet access has increased by 33%

Healthcare coverage has increased by 50 percent.

water and sanitation coverage has reached 80%.

Commodities in time of Demand

10 percent of the World oil reserves.

6 percent of the World Gas reserves

Almost 50 percent of the World cooper reserves.

50 per cent of the World silver reserves.

13% of the World iron reserves

26% of the World fertile land.

24% of the World beef supply.

Bio Reserves

20 per cent of the World

Biodiversity is concentrated in

the Amazon ring.

Almost 50% of the World potable water supply.

57% of the world primary forest

Policy Changes match four range of opportunities


The change process and the potential for the years ahead has happen by accident and it is a consequence of the consistency, congruence and sense of urgency that a group of countries have adopted as their policy cornerstone. Brazil, Mexico, Colombia, Chile, Peru and Uruguay represent 70 per cent of the region’s population and 75% of the regional GDP.

This group of countries have common characteristics that explain their outstanding performance:

1. The strengthening of Liberal Democracy

2. The adoption of an institutional Framework in favor of foreign and national investment.

3. The construction of a sound and sustainable social safety net.

4. The expansion of export markets and the commercial integration with the World (FTA’s)

5. A public administration driven by results.

6. A sound Macroeconomic Administration driven by fiscal and monetary prudence.

7. Better regulatory environment

8. Construction of strategic infrastructure.

9. The consolidation of an innovation agenda leaded by an improvement in education.

10. A well capitalized financial sector and the constant expansion of financial services.

Today countries like Panama, Dominican Republic, Costa Rica, Salvador, Guatemala, Honduras, Belize, Paraguay, as well as most of the Caribbean States, are following that line of behavior

Policies have been the root of Latin American Changes

Building Modern

Democracies

(5 parameters)

Security

Freedoms and Private Initiative

Independent Institutions

Social Cohesion

People Participation

A dynamic Economic

transformation

Investment Target Policies

Maintaining Fiscal and Monetary transformation

Integrate commodity and knowledge based

economies.

Expand export markets

Create an Entrepreneurship culture

(Innovation agenda)

Closing Social Gaps

Improve education (quality, coverage,

vocational)

Insure Universal Healthcare

Formal Job creation

Access to Finance

Climate Change, Environment and Energy

Sustainability

Expand renewable sources

Install an energy efficiency conscience

Improve waste management

Protect the Amazon Ring

Reduce Co2 Emissions


Despite the changes that have been achieved some important challenges remain…



The regional current Political Map is a “Tale of two cities” like the Charles Dickens Book… (The ALBA and the non Alba Model)

ALBA (Leaders: Venezuela,

Ecuador, Bolivia, Nicaragua and Cuba)

Anti-U.S

Anti-Free Trade

Lack of investment Confidence

Weak institutions

Political Insecurity

Ideology driven countries

Political Polarization

Modern Democratic Center Countries (Brazil, Colombia, Peru, Chile, México, Uruguay, Paraguay,

Panamá, Republic Dominican, Costa Rica, etc)

Cooperation with the U.S

Pro Free Trade

Investment Confidence

Independent Institutions

Political Stability

State Long Term Policies and Mgt by Results

Organized Party Systems

The Democratic Center takes the lead: • Investment grade countries are in this Group: Mexico, Brazil, Chile, Colombia, Peru and Panama.• Countries with more market access through FTA’S are in this group• Countries with more FDI are in this group• Countries with more Middle Class Expansion are in this group.• Better fiscally sustainable social programs: Chile, Mexico, Brasil and Colombia.

Only the group of Countries in the Democratic Center will become the regional active participants of the Emerging Markets Boom…some of the ALBA Members will see some benefits, but without solid long term development agendas, they will face transitory profits…

Venezuela

Inflation

Reduction in oil production

Brain drain

Social conflict

Insecurity

Private initiative in Jeopardy

Bolivia

Loss of citizen support

Quality of live deterioration

Lack of private initiative.

Loss in private investment

Ecuador

Press Liberties in danger

Lack of long term private investment.

Political stability at the expense of higher

tensions.

Oil driven political power

Nicaragua

Institutional deterioration (Reelection without

constitutional authority)

Corruption

Private initiative: Uncertainty

Shameful Chavistas


Bad policies are deteriorating the political and economic context in the ALBA Countries….

PeruHumala Challenges

Maintain Investment Confidence

(The mining royalty debate)

Improve social expenditure

targeting

Improve Labor markets

• Combat informality

• Improve productivity

Continue with International insertion

• Implement the FTA with USA

• Pacific Agenda with Colombia, Chile and Mexico.

Challenges

Fiscal and Monetary Credibility

Institutional quality

Capacity to generate

confidence

Solve Public-Private

Conflicts

Trigger FDI

Argentina

Security

Human Insecurity

Legal Insecurity

Political insecurity

Individual Liberties

Property rights at risk

Limit freedom of expression

Limit freedom of press

Independent institutions

Courts controlled by the Executive

Branch.

Independent institutions are

controlled by the Executive

father

One Party controls the Parliament

Citizen participation

Limited

Controlled

Instruments vital for political

pressure.

Social Cohesion

Class polarization

Fiscal policy is unsustainable

Venezuela

ChallengesRegional integration

Urban security

Drug consumption

Cost of money

Infrastructure

Weak Doing Business

Indicators

Foreign Policy

Brazil

The Challenges of Doing Business in Brazil

Area: 8,514,877 sq km Population: 203,429,773 (July 2011 est.) GDP: $2.172 trillion (2010 est.) GDP Composition by Sector:

Services: 67.4% (2010 est.)Industry: 26.8%Agriculture: 5.8%

Unemployment Rate: 6.7% (2010 est.)

Exports: $201.9 billion (2010 est.)

Export Commodities: Transport equipment, iron ore, soybeans, footwear, coffee, autos

Export Partners: China 12.5%, US 10.5%, Argentina 8.4%, Netherlands 5.4%, Germany 4.1% (2009)

Imports: $181.7 billion (2010 est.)

Import Commodities: machinery, electrical and transport equipment, chemical products, oil, automotive parts, electronics

Import Partners: US 16.1%, China 12.6%, Argentina 8.8%, Germany 7.7%, Japan 4.3% (2009)

Good results but there are some worriying “TO DO BUSINESS” indicators

Country DB 2011 DB 2010

Mexico 35 41

Peru 36 46

Colombia 39 38

Chile 43 53

Argentina 115 113

Uruguay 124 122

Ecuador 130 127

Brazil 127 124

Venezuela 172 170

Doing Business 2011 shows some elementes that affect Brazil as a destiny for investments (127 out of 180 in the Doing Business Report)

1. Bureaucracy2. Weak Infrastructure3. Weak Technology4. Preference to Local Companies5. Complex tax system

The Challenges of Doing Business in Brazil

Brazil in comparison to the Region best and worst performers

Indicator Brazil Chile Mexico Colombia Peru Venezuela

Starting a Business (Proceadures)

15 8 6 9 6 17

Starting a Business (Days)

120 22 9 14 27 141

Days for Construction

Permits

411 155 105 50 188 395

Hours devoted to pay taxes (Hours

per year)

2600 316 404 208 380 864

Days to enforce a contract

616 480 415 1346 428 510

Enforcing Contracts (Cost % Claim)

16.5 28.6 32 47.9 35.7 43.7

Cost to export US$ per Container

US$1730

US$745

US$1420 US$1770 US$860 US$2590

Brazil Infrastructure challenges

Brazil’s infrastructure ranks 74th out of 133 countries, even though its overall economy ranks 56th, according to a World Economic Forum (WEF) survey that asked firms to rank global competitiveness. Among the BRIC economies, Brazil’s infrastructure ranks similar to India’s (76) and Russia’s (71), but it lags China’s (46). Within Latin America, Brazil’s infrastructure ranking is near Mexico’s (69) and is significantly better than Venezuela’s (106), but it is far behind Chile’s (30);

Infrastructure spending in Brazil has been in a declining trend over the past 40 years, averaging 5.4% of GDP during the 1970s, 3.6% in the 1980s, 2.3% in the 1990s, and 2.1% in the 2000s. Some studies suggest infrastructure investment of 2.0% of GDP is needed simply to sustain the current infrastructure stock in Brazil.

Brazil must invest 4% of GDP (doubling its current investment) for 20 years to catch up with Chile, the benchmark in Latin America, according to our estimates.

To catch up with South Korea — the benchmark in Asia — Brazil would need to invest 6–8% of GDP per year.

Source Morgan Stanley

Brazil Infrastructure challenges

Challenges for infrastructure development

Improving the business environment. Brazil needs a

more stable and credible regulatory environment The

main issues are: 1) regulatory bottlenecks, 2) excessive

renegotiations of concessions, and 3) the lack of efficiency of

regulatory agencies.

Rethinking fiscal priorities. The government needs to redesign spending strategies and rethink priorities by 1)

addressing budget rigidities, 2) reducing mandatory earmarking in the budget, and 3) revisiting structural

entitlements (i.e., social security reform)

Reforming the tax system. The

government intake is close to 40% of GDP,

while companies spend on average

2,500 hours per year to prepare, file, and

pay their taxes.

Reform the Police Structure

Citizen participation in the fight against organized crime

Strengthen intelligence

Border affairs

• Drug Consumption• Assault Weapons

The security challenge

Mexico

ChileTwo situations

Characteristics

Economic Stability

Political Stability

Investor Confidence

Innovation and entrepreneurs

hip agenda.

Quality of live and

opportunities

Youth distrust in Political

Parties and in Government.

Aggressive protests

Dependant on the China

effect

EcuadorThe political condition

Economic

4.5% Fiscal deficit

Oil price has been the driving force.

Investors distrust

4.5% inflation

Political

The President has concentrated more powers

Conflict with congress and with independent media will deteriorate

as the Government pushes more interventionist reforms

There is not a clear opposition figure

Urban security has been deteriorating

Bolivia: new problems arise

Economic

Populism platform loosing popular support

Fiscal superavit driven by more tax collections

Economic Growth above 4.6% driven by Gas price

Inflation close to 9%

Investors distrust with the exception of foreign governments

corporations

Political

2/3 of Congress controlled by the President Coalition

Hunting of all opposition leaders

Confrontation with Santa Cruz Governor Ruben Costas.

Next week 56 Supreme Court Judges will be elected

International

Under the influence of Chavez

Improvement in the dialogue with the U.S

International Market Distrust

Country Homicides per

100K Hab

Violence cost as % of GDP (Live years

lost due to handicapped

circumstances)

Private sector losses due to

insecurity (% sales)

Violence costs as % of

GDP

Numberof gang

members

Number of gangs

Honduras 43 1,31% 4.5% 9.6% 36.000 112

Guatemala 45 1.43% 3.9% 7.7% 14.000 434

El Salvador

58 1.99% 4.5% 10% 10.500 4

Nicaragua 14 0.96% 3.1% 10% 4.500 268

Costa Rica 8 0.58% 3.6% 2.660 6

Panamá 11 0.63% 2.5% 1.385 94

Central America: The security Drama

Violence and organized crime

Not the same stories

A region of different development stories

The 7 giants (Brazil, Mexico, Argentina, Chile, Colombia, Peru

and Uruguay)

a) 70 of the Region population.

b) 85% of the Region GDP

c) Poverty reduction

d) High levels of investment

e) Commercial integration

f) Institutional stability

Central America

a) 3% of the Region GDP (US$163 Billion)

b) 7% of the Region population (43 million)

c) Income inequality

d) Moderate investment levels

e) Low tax collections

f) Fragile energy matrix

Caribbean

a) 4% of the Region Population

b) 2% of the Region GDP

c) Tourism dependence

d) Natural disaster risks

e) Low industrial base

f) Need for long term access to markets

3. The policy challenges in the region

The China effect…

Country China Ranking

as a trading partner

Porcentage of total exports

2010

Brazil 1 15%

Mexico 4 2.2%

Colombia 3 6.2%

Chile 1 16%

Peru 2 16%

Venezuela 2 7.9%

China’s influence as a trading partner will continue to increase, thus strenghthening its political and diplomatic relations with the regional key players…

China is the destination for c.10% of LatAm exports today, and is the largest trade partner for Brazil and Chile. LatAm was also the largest recipient of announced Chinese outbound investment in 2010, focused on energy and mining.

U.S-Latin America relations The evolution of U.S Latin America Relations…from Doctrines to specific policies…

Doctrines

Monroe Doctrine

Teddy Roosevelt “BIG STICK”

Howard Taft “Pan-American Union”

FDR “Good Neighbor”

Ike Pan American Operation

Alliance for Progress

Carter “Human Rights Agenda”

Reagan Regional Cold War

Bush “War on Drugs” and trade

Clinton “NAFTA” & “FTAA”

Objectives

Protect the region from foreign invasions and strengthen the U.S influence in the hemisphere

Exercise strategic control of the region applying hard power (Military interventions in Nicaragua, DR, Haiti, etc)

Build and institutional and permanent diplomatic coordination under the U.S Leadership.

Regional support for World War II and coordination to face the Great Depression

Improve development assistance to prevent social turmoil (Creation of the IDB)

Improve development assistance to prevent the communist expansion.

Promote Human Rights policies to confront the emerging power of dictatorships in the region.

Intervention in Nicaragua, Grenada and Panama.

Fight against Drug Cartels in the region concentrated in Colombia, promotion of NAFTA and Unilateral Trade Preference Act.

Enactment of NAFTA, promotion of the FTAA (1993) and the Andean Trade Preference Drug Enforcement Act.

Policies

Bush Vs Obama and the FTA’s… (Next slide)

U.S-Latin America relations

Two administrations and its strategic approaches…

Bush: 1. FTA’s with Chile, Colombia, Peru,

Panama, CAFTA, DR.2. Actively supported the fight against

terrorism in Colombia.3. Promoted the Democratic Charter in

the OAS (Signed in Lima September 11 2001)

4. Politicaly confronted anti-democratic regimes in the region.

5. Stablished the Millenium Corporation.6. Debt Relief for Bolivia, Nicaragua,

Honduras, Haity and Guyana.

Obama: 1. FTA’s with Colombia and Panama

took almost 3 years to be ratified.2. Actively supported the fight against

terrorism in Colombia.3. Political diplomacy with anti-

democratic regimes in the region.4. Timid speech against Drug Cartels in

the region. 5. Cautious attitude towards the

security crisis in Mexico and the U.S share of responsibility

4. Lessons from the Colombian Experience

Security

28.837 homicides

2882 kidnappings

69 homicides per 100.000 habitants

1645 terrorist attacks

350 mayors out of their municipalities

158 municipalities without police

Economy

Average Economic Growth 1994-2001: 2.1%

GDP per Capita: US$2377

Investment as % of GDP: 16.5%

Exports: US$11.975 million

FDI: US$2.100 million

Inflation: 6.99%

Fiscal balance: -3.2%

Social

Unemployment: 16.2%

Health Coverage: 25 million Colombians.

Pension affiliates: 4.5 million

Poverty: 57%

Education Coverage: Primary 97%, High school: 57%, University: 24%.

Mobil Phone Lines: 4.6 million

Internet coverage: 1.9 million

Ten years ago Colombia was a fragile state…The Colombian Paradox: a long and stable democracy in a

permanent threat from terrorist groups, drug dealers and organized crime…

Colombia faced a Confidence Deficit

The elusive quest for peace

Many governments exhausted all their political capital

attempting to reach peace through political dialogue…the

result was military strengthening from illegal armed groups and a rapid growth in their criminal

activities (68% thought the country was going in a

negative track)

Terrorist Groups (Guerrillas and

Paramilitaries) had created a sense of defeat in the Colombian people.

Fear impacted in the Colombian people

Mindset

The lack of investment

The drain of human capital

The sense of danger in Colombian roads.

The expansion of massive kidnappings created an

emotional domino effect

Building Confidence became our priority

We introduced a comprehensive policy framework…

Social Cohesion

Investment with

fraternity

Democratic Security

Confidence

Security as a Democratic Value

Security for all

Confront all criminal

organizations

Security without

martial law

Security with freedoms and human rights

protection

Security in coordination

with the people

Investment Target

Security:

Human

Legal

Political

Sound Macroeconomics

Incentives

Access to markets

Competitiveness factors:

• Infrastructure• Regulation• Connectivity• Logistical

chain

Social Cohesion

Highest quality in education

Universal healthcare

Access to Finance

Stable Jobs and entrepreneurial

spiritConnectivity

Our policy achievements generated a turning point

Indicator 2002

2010

Homicides 28838

7400

Kidnappings 2882

123

Homicides per 100K Habitants

69 16.3

Terrorist attacks 1645 250

Municipalitieswithout mayors

presence

350 0

Municipalities without police

158 0

Indicator 2002 2010

Average Economic

Growth

2.1% 4.3%

GDP per Capita

2377 5300

Invest % GDP

16.5% 24.6%

Exports US$11.000

US$ 39.000

FDI US$2.100

US$7.000

Inflation 6.9% 2.5%

Indicator 2002 2010

Unemployment

16.2% 11.6%

Health Coverage

25.1 million 43.1million

Pension affiliates

4.5 million 7.1 million

Poverty 57% 38%

Education coverage (Primary, Hs,

University)

97%57%24%

100%79.4%35.5%

Mobile phone users

4.6 million lines

41 million

lines

• Reached the highest economic growth in more than 20 years.

• The largest education, health and connectivity coverage in its history.

• The largest poverty reduction in Colombian history

• The biggest FDI rates in history

• The lowest violence records in 30 years

• Expanded the middle class

• Highest exports in Colombian History.

• Paramilitary groups dismantled

• FARC structure severely dismantled

• Per Capita income more than doubled

Colombia’s current challenges

Security

Maintain Macro-Vision and Micro-Management

Continue dismantling all terrorist organizations

Continue dismantling drug cartels apparatus.

Strengthen Citizen Security agendas with

local authorities

Economic

Face new trends of currency appreciation

Maintain and increase FDI flows (Security,

incentives and stability rules)

Fiscal Policy to face new countercyclical challenges

Increase tax collections

Expand new trade markets through FTA’s

Social Cohesion

Fight labor informality and create quality jobs

Insure education and health quality

Expand vocational training coverage

Create Entrepreneurial Family Transfers

program

Political

Judicial reform.

Strengthen Democratic Center

Improve local institutional capacity

New law implementation (Victims and land)

Prevent the emergence of populist movements

One final thought: The politics of Confidence

The region requires a DEMOCRATIC CENTER PLATFORM based on three pillars: Democratic Security

Investment with fraternity

Social Cohesion

These were the pillars embraced by Colombia to make a change and are the pillars to face the challenges ahead in many countries.

Without security there is no investment and without investment there are no resources for a strong social agenda.

www.alvarouribevelez.com

Presentations & Public Speaking

Latin America an the Carabbean past and future