In 2007 George W Bush traveled to Latin America to bolster the United States’ image in the region by focusing on poverty reduction and security initiatives. There were a number of mass protests and after his visit to some sacred Mayan ruins in Guatemala a group of indigenous Mayans felt the need to purify the site to eliminate Mr Bush’s “bad spirits”. The image of the US in Latin America remained poor. According to Latinobarómetro, the Chilean polling firm, in 2007 46% of Latin Americans felt that the United States was either a “negative” or “very negative” force in the region. Continue reading
Tag Archives: Colombia
Can Charter Cities aid in Latin America’s search for prosperity?
Honduras (yes, tiny Honduras) took a bold step earlier this year which could alter its economic trajectory and potentially impact the rest of Latin America. Frustrated by a lack of results from economic liberalization and free trade agreements which have been thwarted by cronyism, corruption and a lack of competitiveness, the Honduran Congress passed a constitutional amendment in January giving the government the power to create special development regions, or Charter Cities, which will have their own legal jurisdiction, administrative systems and laws. Charter Cities are created with a governing system defined by the city’s own charter document rather than by state, provincial, regional or national laws. The most recent examples include Hong Kong and Shenzen in China but the history of cities based on a unique governing charter goes back to the 12th century founding of Lübeck, a prosperous trading outpost in northern Germany. Continue reading
Chocó, the richest department in Colombia
But how can this be when up to 75% of Chocóans do not have access to basic services, infant mortality is 54 per 1,000 (compared to 19 per 1,000 for Colombia), the poverty rate is the highest in the country, and violence and corruption are still common? While the current reality is bleak for many Chocóans if you take a moment to look beyond these specific indicators and think innovatively about the region’s value and potential you may find that instead of being poor and “backward”, Chocó could be the richest department in Colombia. Continue reading
The Pragmatic Latinos
Things have been quiet around the Latin American desk at the office these days. While we have been diligently analyzing GDP results and budget plans and tweaking economic forecasts (often upward) our colleagues in the Western Europe and Middle East teams have been rushing back and forth from client calls and television interviews talking about debt crises and political instability. Continue reading
After the flood: Achieving a successful reconstruction
The anniversary of the devastating earthquakes in Haiti and Chile and the havoc wreaked by recent flooding in Colombia and Brazil reinforce the fact that 2011 will be a year of reconstruction in much of Latin America. Reconstruction of this scale can be costly, time consuming and socially disruptive, so it is important to avoid the failures of the past and strive for rebuilding projects that are effective, successful and sustainable. Continue reading
The search for prosperity
Innovation is essential in the search for prosperity. Indeed, it plays a key role in the Colombian government’s recently unveiled national development plan (DNP)—Prosperidad para todos—and is one of the 5 (engines) “locomotoras” of economic growth.
But what does innovation mean today in Latin America?
The DNP accurately points out that “innovation doesn’t only mean developing new products and transforming existing ones but it is also creating new ways to produce, deliver, market and sell, and ultimately, generating value throughout the production chain”. The Santos government’s focus on innovation is important because there is a clear innovation gap in Latin America. According to INSEAD’s Global Innovation Index there are no Latin American countries ranked among the top 40 innovators. The highest ranked South America countries are Chile (42nd out of 132), Uruguay (53rd), Brazil (68th) and Argentina (75th)—Colombia comes in at 90th, two spaces after Peru. One reason for the poor performance is a lack of public investment in research and development, which at approximately 0.6% of GDP in South America is well behind fast-growing Asian economies such as South Korea (3%) and Singapore (2.4%).
Despite this, most of South America is currently enjoying firm economic growth. This is largely supported by the commodity boom and a recovery in internal demand. However, rates of unemployment, poverty and inequality remain high. With its focus on innovation and competitiveness the Santos administration is simply acknowledging the fact that no country has found prosperity through a reliance on natural resources and low wages.
Colombia has taken some initial steps to foster innovation but the DNP is right to suggest that more needs to be done to make the leap to a “knowledge-based” economy. According to Michael Fairbanks, a competitiveness expert and founder of the OTF Group, the key areas to focus on are institutions, knowledge resources, human capital and culture. Institutional capital includes legal protections of tangible and intangible property, government departments that work with little hidden costs to the economy and firms that maximize value to shareholders while compensating and training workers. Knowledge resources include international patents and university and think-tank capacities. Human capital represents the skills, insights and capabilities of the workforce and cultural capital means not only country’s artistic output but also people’s attitudes and values toward innovation and entrepreneurship.
Innovation success stories from the US and Europe also highlight the importance of entrepreneurial clusters, an established system of rules and access to financing. The success of Silicon Valley has spawned numerous imitations but few have been able to manufacture California’s concentration of technological entrepreneurs and informed investors. The so-called Silicon Roundabout, an emerging hub of internet companies based in the Shoreditch area of East London, is a recent example of a successful innovation cluster which grew spontaneously as a result of access to highly skilled employees, investment (Shoreditch is adjacent to London’s financial district) and cheap rents.
Government leadership and vision is also important, particularly in emerging countries which do not have the venture capital capabilities of the US and UK. In this regard, the Santos government is off to a good start with its bold plan. Now the government will have to encourage all sectors of society—especially businesses, entrepreneurs and universities—to follow its lead and work together in the search for prosperity.
The rise of the Latin American Pacific Rim
The integration of the stock markets of Colombia, Peru and Chile and the creation of the Mercado Integrado Latinoamericano (MILA) may prove to be the first step toward the economic integration of Latin America’s Pacific Rim. The first phase of the stock market integration makes the shares of each exchange available to investors in all three countries and is expected to increase trading volumes and create the critical mass needed to attract more foreign investment. The successful creation of the MILA—which many said would be delayed or never completed at all—is encouraging even more expansive integration projects.
Outgoing Peruvian president Alan García has been promoting a plan to create a zone for the free movement of goods, people and capital that would include Colombia, Chile, Panama and Ecuador. While the talk of a grand integration scheme is great for summits and state visits once you set aside some of your Pan-American fervor, you have to ask can something like this really work? The answer is: “well, maybe it has to”.
There are some obvious costs of this sort of integration but Latin America needs to find ways to take better advantage of the global economic shift toward Asia-Pacific while also improving competitiveness and speeding up the process of innovation. The commodity boom will not last forever and commodity exporting countries need to start developing other competitive advantages. However, any integration schemes will have to proceed cautiously. Without the proper regulations increased financial integration and the free movement of people could be a boon for the drug trade and other criminal activities. Historical differences between countries will also be difficult to overcome.
Fortunately, the financial authorities in Colombia, Peru and Chile have shown that incremental integration can be successful. Mr García’s suggested plan is much more ambitious and the inclusion of Panama and Ecuador, which is still a member of Hugo Chávez’s socialist ALBA, could prove risky. However, closer integration is important for attracting investment and spurring growth. While small, Panama has a dynamic economy (which expanded by nearly 6% per year in 2000-09) and a thriving financial sector. Bringing Ecuador back into the free market fold would further reduce some of Mr Chávez’s influence while boosting the economic zone’s oil output. All together, this “Zona del Arco Pacifico Suramericana” would have a population of 111 million and an economy worth US$1.1trn in purchasing power parity terms (just over half the size of Brazil). The zone would be a premier mining producer with an average daily oil production of 1.4 million barrels and access to at least eight ports pointed toward Asia. Chile’s well established rules and regulations would serve as an invaluable model for its partners. The free movement of capital would help to develop the innovation industries which are needed to compete and a united Arco Pacifico would more equally balance a rising Brazil and further reduce reliance on the US market.
While the odds are against the timely creation of such an ambitious grouping, the opening of the MILA this week reminds us that ambitious projects in Latin America can be completed. Panama, Colombia, Ecuador, Peru and Chile should not rush into an integration plan but perhaps they can follow the example of the MILA by focusing on mutual benefits and adopting a well-thought out and achievable plan on action. The need to adapt to the changing global economic and political landscape requires it.
A shifting balance of power
The balance of power between the United States and Latin America has been shifting steadily over the last decade but for a variety of reasons Colombia has remained reliant on US support and loyal to the US government. This is now changing as Colombia gradually assumes a modest, but more prominent, economic and political role in global affairs.
The visit from high level US State Department officials in late October exemplified this trend and highlighted the fact that Colombia no longer has to go to Washington with its cap in its hand asking for support. It is unclear if talk of an enhanced partnership will be realized but this might not matter too much for Colombia, which has recently been strengthening ties to Europe, Asia and other Latin American countries. For all the grand words of James Steinberg, the US Deputy Secretary of State, the actual scope of the cooperation mentioned in the talks seemed a bit underwhelming for an ally that is “among the strongest and most vital that the US has.” A new focus on energy cooperation and scientific innovation does mark a change—and could bring some benefits to Colombia—but with US foreign policy centered on the Middle East and Asia and the Obama administration heavily focused on domestic issues there is nothing to suggest that there will be much concrete action. This is a shame because Colombia offers a lot of opportunities for the State Department’s often-stated goal of pursuing “mutually beneficial” policies. The US may not realize it yet but it needs access to Colombia’s growing market as well as firmer allies in South America. The US’s failure to ratify the Free Trade Agreement with Colombia has opened the way for exporters from Canada, Europe and Asia to take advantage. While the new Republican majority in the US House of Representatives might be positive for the approval of the Colombian FTA, there is no guarantee for swift action. Protectionist Democrats and isolationalist “Tea Party” Republicans may have the power to further delay the agreement. Fiscal conservatives will aim to further reduce US foreign aid and assistance. This is in contrast to other governments who recognize the need to expand trade and international support. At a recent speech in London the UK foreign minister, William Hague, claimed that they “need to focus more on Latin America” which is one of “the engines of international economic growth.”
It is true that original expectations in Latin America of President Obama were perhaps too high but the White House also made some mistakes. They spent too much time courting a Brazil, whose foreign policy focus is heavily weighted to “the South” instead of “the North”, and too little time supporting Mexico and Colombia, two historical allies. The US visit to Bogotá may finally suggest a shift in strategy. There is talk that the US may now focus on shoring up ties with the axis of “market-friendly” allies like Mexico, Colombia, Peru and Chile. Indeed this group is already forming its own alliances and US support for this integration would be mutually beneficial. However, I do not think that anyone in Latin America, including Colombia, is necessarily holding their breath for further engagement from Washington. In many cases they may not need it.
Is this the beginning of the “decade of Latin America”?
Years from now some might look back and decide that the “Decade of Latin America” officially began in the Atacama Desert on October 14th 2010, as the world focused its attention on the resoundingly successful and innovative rescue of the 33 miners in Chile. The Fenix capsule brought the trapped miners to the surface in the same way that Chile, Brazil, Colombia and Peru are leading Latin America into what could be a decade of growth and progress. To be honest, the change has been under way for some time—and others including the president of the Inter-American Development Bank, Luis Alberto Moreno, and The Economist have already made the “Latin American Decade” claim. However, the mining rescue has thrust Latin America into the global consciousness. The achievement and attitude of the Chileans was in sharp contrast to the other main stories of October: a cynical election campaign in the US and mass strikes in Europe. As the older developed world struggles to hold on to the past, Latin America is young, optimistic and forward looking.
While Central America and the Caribbean continue to deal with the impact of the US recession, South America is clearly leading the way and in some cases, such as in Haiti, directly assisting its poorer neighbors. South America performed much better than expected during the global financial crisis and the continent is set to grow more than twices as fast as the OECD average during the next 5 years. Generally well-kept and increasingly stable democratic systems will give the region an advantage over some other emerging markets. More importantly perhaps, in a global environment characterized by uncertainty and risk, this generation of Latin American leaders, who have lived through the political and economic turmoil of the 1980s and 90s, may be more able to deal with the current challenges than their counterparts in North America and Europe.
Conflicts still exist but political and economic integration is advancing. Latin American businesses, led by the powerful “Multilatinas”, are expanding beyond their home markets and becoming more competitive. Savings from the commodity boom have allowed some countries like Chile and Brazil to invest in technology, infrastructure and education. Others, like Colombia, are now following suit.
It would be naïve however to assume that success is guaranteed. Governments in Venezuela, Bolivia and Argentina appear to be going against the grain by resurrecting failed economic and social policies. Most countries have high levels of inequality and poverty. The quality of education is still generally poor. Crime and drug trafficking are serious problems.
Nonetheless, when you compare the current situation in Latin America with the US and Europe the differences are stark. The US has succumbed to ultra-partisanship and special interests have overtaken the national interest. The aging (and shrinking) European population appears unable to adapt and innovate its welfare system to meet today’s circumstances. In contrast, the population of Latin America is young, growing and among the happiest in the world (according to a number of “happiness indexes”). It won’t be easy but Latin America now has its chance in the global spotlight. If Latin Americans can follow the example of the now famous Chileans and unite, adapt and innovate this could be a decade to remember.
Don’t blame the cow
The strength of the Colombian peso is hitting non-commodity exporters and Dutch Disease—the negative consequences of an influx of foreign exchange related to natural resource investment and production—could place Colombia’s quest for “Democratic Prosperity” for all at risk. The peso is being boosted by three underlying factors: the spike in earnings from oil and mining exports, an increase in foreign investment in the extractive sectors and an influx of foreign debt to finance the rising fiscal deficit. Each of these trends will generally continue over the medium term and given the stronger than expected first quarter GDP growth and the pro-growth policies of the new administration some are now suggesting that the peso has entered a new equilibrium. Barclays Capital released a report last week suggesting that the exchange rate will end this year at Ps1,700:US$1. Exporters are obviously anxious.
While it is true that the fundamentals supporting the peso are historically strong, the exchange rate is dependent on some uncontrollable external factors. Mainly, the international price of oil and minerals and global risk sentiment. With average commodity prices set to grow only moderately, and in some cases decline, next year and GDP growth in developed countries expected to slow during the rest of this year and most of next, pressures on the peso will ease gradually. The exchange rate will probably average closer to Ps1,900:US$1, but this may not be much comfort to exporters competing on cost. They have been pressuring policymakers to intervene but past interventions have had only a mild and temporary impact. So what to do, pressure for stronger interventions or follow another path?
An anecdote about the Colombian leather industry in the mid-1990s, as told in Plowing the Sea: Nurturing the Hidden Sources of Growth in the Developing World written by development consultants Michael Fairbanks and Stace Lindsay, may shed some light on the subject. The authors’ research showed them that Colombian leather was priced too high and the quality was too low for most buyers in the US. The two consultants then went to Colombia to tell the manufacturers of their findings. “Its not our fault,” was the reply. It was the fault of the tanneries who supplied the cow hides. The owners of the tanneries were just as defiant, “it is the fault of the slaughterhouses who give us low quality hides” they suggested. The slaughterhouses in turn blamed the ranchers for ruining the hides by branding them too much. Finally, the ranchers exclaimed that, far from being their fault, it was actually the “fault of the cow” who rubbed its hide against the barb wire fence to scratch and avoid the region’s flies.
Given the current situation with the peso there is no time more to waste on blaming (whether cows or central bankers). Colombian industry needs to innovate, improve production and add more value to its export products in a way that allows them to compete, no matter the strength of the peso. Innovation and adding value creates higher-paying jobs which will help develop a larger middle class and boost internal consumption. This is what is needed to spur stronger economic growth and reduce inequality.
Yes the government can make some adjustments which would ease the pace of peso strengthening. The new administration can also implement policies to help the private sector succeed and the Banco de la República can help to prevent some volatility. But, in the end, Colombian exporters need to take responsibility for their future. The time of “blaming the cow” is past and if Colombia wants to become a truly prosperous country it needs to invest in human capital and innovate, innovate, innovate.
