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Terry mc coy 2013


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Terry mc coy 2013

  2. 2. PresentationCurrent Environment for Business and Investment•Regional profilePast Environments•History of shifting policy paradigms•Market reforms of 1990s and populist pushbackCurrent Country Breakdown•Attractive, problematic and mixed environments•Short-term outlook•Longer term outlookConclusions•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 seriousstructural obstacles
  3. 3. Components of the Latin American Business Environment Economic Domestic EnvironmentGlobal ------------- Financial Policy Political --------------- LegalRegional Social
  4. 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 MERCOSUR publications.stm Chile Uruguay Argentina
  5. 5. Regional Profile:Sustained Growth
  6. 6. With Moderate Inflation
  7. 7. Increased Trade
  8. 8. In Favorable External Environment: Strong Commodity Prices
  9. 9. And Surging Capital Flows
  10. 10. Prudent Debt Management
  11. 11. And Improved Fiscal Management
  12. 12. Bottom Line: Rising Standards of Living
  13. 13. What Happened? New Economic Model (NEM)Macroeconomic Stabilization• Policy measures to control inflation and stabilizeEconomic Liberalization• Structural reforms to open the economiesComplementary Components• Free trade and regional integration• Democratic governanceLogic 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. 14. Market Reforms of 1990sPolicy Arena → Output → OutcomeFiscal Deficit 1-2%/GDP Lower inflationSpending Priorities Subsidies→capital ≥Pub. Invest.Tax Reform VAT ≥RevenueFin. Liberalization Free interest rates ≥Savings&Invesv.Exchange Rate Floating Competitive FXTrade Liberalization Lower tariffs Comp. Advan.For Investment Open regime ≥FDIPrivatization Sell off SOEs ≥CompetitionDeregulation Roll back ≤Transaction cost
  15. 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. 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. 17. Regional GDP Growth during Decade of Reform (Source: CEPAL 2002) 6 5.2 5.2 5Annual 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. 18. Business Environments in 2000Attractive Problematic•Mexico •Colombia•Dominican Republic •Venezuela•Costa Rica •Argentina•Chile •Paraguay Mixed •Guatemala •El Salvador •Honduras •Nicaragua •Panama •Ecuador •Peru •Bolivia •Brazil •Uruguay
  19. 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. 20. “Pink Tide” Threat to NEM
  21. 21. What Happened? “Lula Effect”1. Election Outcomes, 2000-07Populist Left Pragmatic Left Center RightBolivia Chile MexicoNicaragua Peru ColombiaEcuador Costa Rica HondurasVenezuela Brazil Argentina Uruguay2. Economic Recovery and Sustained Growth, 2003-08• Opposition to NEM declined• Social inclusion incorporated into model• Center-left political consensus and policy continuity took shape3. Produced Two Models in the “New Latin America”• Dominant: Social Market• Dissident: Populist
  22. 22. 2013 Business Environments: Attractive (9) Defining Features CountriesSustained 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 RicaStrong property rights Dominican RepublicTransparency, accountabilityStrong credit ratings and FDI *Investment grade rating
  23. 23. Problematic Environments (4) Defining Features CountriesGrowth (with inflation) VenezuelaEnergy export dependence EcuadorSignificant poverty reduction BoliviaPopulist politics, strongpresidents, weak institutions ----------------------------Interventionist states with Nicaraguamixed heterodox policiesWeak rule of law, corruptionWeak credit ratings and FDIIncreasingly dependent ofChina
  24. 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. 25. Outlook for 2013-14Mild 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 ElSalvador lowest2013 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. 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