LATIN AMERICA STRATEGIC PEST ANALYSIS - 2012

LATIN AMERICA STRATEGIC P.E.S.T ANALYSIS - 2012 -

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LATIN AMERICA

STRATEGIC P.E.S.T ANALYSIS

2012

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I. INTRODUCTION

Latin America has come of age as a region of relative political and social stability that is

attracting ever-greater attention in a global context of financial and economic crises in

the more developed world. This is despite the many challenges that the region

continues to face in its efforts to attain development while consolidating and expanding

social achievements.

It is in this scenario that former Brazilian President Luiz Inácio Lula da Silva has been

fond of repeating that “this is Latin America´s decade”, and international economic

indicators would seem to bear this out. According to preliminary World Bank statistics,

overall economic growth in Latin America and the Caribbean will be 4.1% in 2012,

above the world average of 3.6% respectively.

The region’s relative stability, maturing markets and more dynamic growth compared to

developed nations has also made it an attractive place for investments from those parts

of the world. Thus, the dynamic in the region has gradually shifted toward investments

with a more long-term vision and involving greater transfer of technology and

knowledge.

This growth in all areas, both commercial as well as in terms of public services, is

naturally reflected in the rising use of new technologies of all types, which are reaching

the region at ever-faster paces, practically eliminating the delays in uptake that used to

characterize such progress. This is especially so with Information and Communication

Technologies (ICTs), as they allow countries and enterprises to “leapfrog” into the new

world economy without the tremendous capital expenses that would have been required

in the past.

However, it should also be noted that this development is not happening at an even

pace throughout the region and that, in fact, the larger and relatively more sophisticated

markets of South America and Mexico have clearly broken away from the pack.


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II. REGIONAL OUTLOOK

The economic outlook for Latin America shows a relatively positive picture for the

coming years, there is anyway some uncertainty linked to the actual slowdown in

Europe and the United States, both important trading partners.

However, in some commodity-exporting countries such as Chile and Brazil, where

economic growth is forecasted to reach 5.1% and 2.4%, respectively, in 2012 some

signals of overheating with inflationary pressures have already started to accrue and are

becoming increasingly worrisome in the region.

In terms of competitiveness, many countries have experienced significant

improvements. Mexico, Peru, Bolivia, and Brazil register the largest improvements,

while Panama, Ecuador, Argentina, Barbados, and Uruguay have seen more moderate

progress. The rest of the countries in the region have either remained stable like

Colombia, or have slightly declined. In order to keep the positive momentum going,

Latin America will need to address some of the persistent challenges that constrain its

competitiveness. While the region is vast and heterogeneous as a whole, four main key

challenges that affect each country differently can be highlighted:

Weak institutions with high costs associated and lack of physical security

Poor development of infrastructure

Inefficient allocation of production and human resources; and, increasingly

Lack in innovation vis-à-vis more developed, but also emerging, economies

Addressing these challenges in the next decade will be crucial to ensure the economic

and social progress of the following countries that lead the region:

i. Mexico has one of the highest improvements in the region. The country’s efforts

to boost competition and its regulatory improvements that facilitate

entrepreneurial dynamism are contributing to an improvement of the business

environment. This development, coupled with the country’s traditional competitive

strengths such as its large internal market size, fairly good transport


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infrastructure, macroeconomic policies, and strong levels of technological

adoption have led Mexico to improve its competitive edge. However, the country

still suffers from organized crime; security concerns. Adopting and implementing

policies to boost ICT, energy, and retailing, along with additional reforms to

render the labour market more efficient are still needed to increase the efficiency

of the Mexican economy. The current overall poor quality of the educational

system, insufficient company spending in R&D, and limited innovation capacity

can jeopardize the future ability of the country to compete internationally in higher

value-added sectors.

ii. Panama, has remained relatively stable in most competitiveness drivers. Overall,

it benefits from important strengths in its efficient financial market, solid transport

infrastructures, and very good technological adoption, especially through FDI.

Except these advantages, the country still faces important weaknesses in terms

of education. Panama also struggles with rigidities in its labour market, low levels

of public trust of politicians, insufficient judicial independence, and favouritism in

the decisions of government officials a situation that has deteriorated in the past

years.

iii. Venezuela continues to fall because of quality of the country’s public institutions.

This dismal showing, coupled with severe weaknesses in its markets efficiency

and deterioration in the macroeconomic stability have led the country to feature

at the bottom of the region and among the least competitive countries in the

world. Despite being at the forefront in its tertiary education enrolment rate, the

overall quality of the educational system is weak. This, added to a lack of

sophisticated businesses and poor innovation potential, critically constrain the

competitiveness performance of the country.


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iv. Costa Rica, is suffering of the macroeconomic imbalances seen in its high

budget deficit and inflation and a scarcity of financial resources for the private

sector. With fairly nice forecasts of around 4.5% GDP growth rates for the

coming years, the country still depicts a strong overall position in the region

thanks to its friendly trade policies, with low tariffs, few constraints on FDI, and its

strong educational system. Costa Rica presents strong levels of technological

adoption with many companies in high-tech industries, as well as solid business

sophistication and innovation. All these factors can generate significant benefits.

v. Colombia experiences an improvement based on its competitive strengths

clustered around a stable macroeconomic environment; an improving

educational system with a high level of enrolment and a large domestic market.

On the other hand, despite the sustained efforts of the government to improve

social pacification and eradicate organized crime, security concerns remain very

high on the list of factors dragging down its competitive potential. In addition,

improved regulation to foster domestic competition and facilitate a more efficient

allocation of resources, as well as further investments to improve the transport

infrastructure, are needed.

vi. Peru improved its macroeconomic stability and strengthened its competitive

edge thanks to a better control of inflation, a reduction of the government deficit,

coupled with a friendlier environment for entrepreneurship. The country still faces

a number of important challenges to solve as a weak public institutional

environment, an educational system in need of higher quality, and the very low

level of innovation. The impressive economic outlook for the next years, with

GDP growth rates forecast of 6% in 2012 thanks to high mineral prices, provides

a good opportunity to undertake the necessary investments and reforms to

address its pending competitive limitations.


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vii. Chile: remains the most competitive economy in the region. Early measures to

open and liberalize its markets by introducing high levels of domestic and foreign

competition, a relatively flexible labour market, and one of the most sophisticated

and efficient financial markets have also helped the country to maintain its long-

term growth prospects in the past decades. As Chile moves quickly toward

higher levels of rent and the next stage of development, companies with low

investment in R&D and a weak capacity for innovation act in an innovation

environment characterized by relatively low-quality scientific research institutions

and weak university-industry collaboration in R&D. Making sufficient progress on

this front is the major challenge that Chile will face in the next decade.

viii. Brazil benefits from several competitive strengths, including one of the world’s

largest internal markets and a sophisticated business environment. Moreover,

the country has one of the most efficient financial markets and one of the highest

rates of technological adoption and innovation in the region. On a less positive

note, Brazil still suffers from weaknesses that hinder its capacity to fulfil its

tremendous competitive potential. The lagging qualities of its overall

infrastructure despite its Growth Acceleration Programme (PAC), its

macroeconomic imbalances, the poor overall quality of its educational system,

the rigidities in its labour market, and insufficient progress to boost competition

are areas of increasing concern.

ix. Uruguay leverages its traditional competitiveness strengths thanks to its

transparent and well-functioning public institutions, its high rates of education

enrolment and its stable policies that encourage FDI. However, despite this

progress, inflationary pressures and the reduction of the national savings could

bring significant macroeconomic distress if not properly tackled. Moreover, as

Uruguay keeps growing and moves steadily toward a higher stage of


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development, policies to increase domestic competition that would incentivize

higher business-sector investment in R&D and innovation capacity will become

increasingly important.

x. Argentina is getting more and more unstable. The extraordinary competitive

potential of the country that benefits from a large domestic market size and a

population that has a high level of education remains unfulfilled because of both

a lack of trust in its institutions and the large inefficiencies in its allocation of

goods, as well as labour and financial resources. Excessive red tape that

benefits the expansion of the informal economy and high barriers to trade bring a

lack of confidence in the financial system. The progressive deterioration of the

country’s macroeconomic stability and a two-digit inflation rate, casts additional

worrisome uncertainties about the sustainability of its economic growth. Unless

these weaknesses are addressed, this situation could lead the economy back

into the erratic fluctuations of the past, characterized by high expansionary

periods followed by deep recessions.

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LATIN AMERICA STRATEGIC PEST ANALYSIS - 2012