World Economic Forum On Latin America 2006
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Building a Stronger Latin America in the Global Economy São Paulo, 5-6 April 2006
INSIGHTS
WORLD ECONOMIC FORUM
World Economic Forum on Latin America
Contents This publication is also available in electronic form on the World Economic Forum’s website at the following address: World Economic Forum on Latin America Web report: http://www.weforum.org/summitreports/latinamerica2006 (HTML) The electronic version of this report allows access to a richer level of content from the meeting including weblogs, photographs and session summaries. The report is also available as a PDF: http://www.weforum.org/pdf/SummitReports/latinamerica2006.pdf
Preface
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Foreword
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The Creative Imperative in Latin America
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Managing Global and Regional Risks
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Improving Latin America’s Competitiveness
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Continuing with the Integration Agenda
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Re-evaluating the Investment Framework
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Priorities for Action in Latin America
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Acknowledgements
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Other specific information on the World Economic Forum on Latin America, São Paulo, 5-6 April 2006 can be found at the following links: http://www.weforum.org/latinamerica http://www.weforum.org/latinamerica/programme http://www.weforum.org/latinamerica/indepth http://www.weforum.org/latinamerica/partners http://www.weforum.org/latinamerica/competitiveness
The views expressed in this publication do not necessarily reflect those of the World Economic Forum.
World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: [email protected] www.weforum.org © 2006 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.
REF: 200406 World Economic Forum on Latin America
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Preface In an election year in many countries across the region, the World Economic Forum on Latin America provided a platform, at a critical moment, for leaders to discuss the challenges and the opportunities facing the region in the years to come. Representing 24 countries, 300 participants from business, government, academia, media and civil society gathered in São Paulo on 5-6 April 2006 to reflect on Building a Stronger Latin America in the Global Economy. Special attention was placed on how Latin America could achieve sustained and equitable growth. Based on Forum tools brought to the meeting (Global Risks, Global Competitiveness, Global Scenarios), concrete recommendations emerged from the gathering. Consensus was reached on Regional Risks, Competitiveness Challenges, and Priorities for Action in Latin America. The results are incorporated in this publication. In the closing plenary, participants voted to focus over the next years on education – specifically teacher training and improving the quality of schools – and on using public-private partnerships to invest in infrastructure in rural areas, underdeveloped regions and urban slums. The Forum would like to once again take this opportunity to thank the Co-Chairs of the World Economic Forum on Latin America in São Paulo, who provided valuable insight and support for the programme. They were: Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil Luis A. Moreno, President, Inter-American Development Bank, Washington DC We now look forward to building a new partnership with the region. This will provide you and us at the World Economic Forum with essential guidelines to continue to engage with the region in specific initiatives and address the relevant issues in our forthcoming Annual Meeting in Davos as well as in our next World Economic Forum on Latin America roundtable during 2007.
Peter Torreele Managing Director
World Economic Forum on Latin America
Sylvie Naville Associate Director, Latin America
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Foreword – Building a Stronger Latin America in the Global Economy “When our region raises its head and negotiates on equal terms with rich countries without arrogance but with humility and perseverance, we will achieve more than when we were just crying out and weeping. We are ready to do that now.” Luiz Inacio Lula da Silva President of Brazil
What was immediately palpable when participants gathered in São Paulo for the World Economic Forum on Latin America was the fresh confidence evident in the region, particularly in Brazil, a country that has overcome macroeconomic trauma and volatile politics to emerge motivated and selfassured in its stability and growth prospects. In more than two dozen sessions and private meetings, business, government and civil society leaders from Latin America and around the world reviewed the state of the region and frankly discussed both its advantages and shortcomings. The highlight of the event was the spirited address by Luiz Inacio Lula da Silva, President of Brazil, who gave an upbeat assessment of the region and his country as they face the challenge of “Building a Stronger Latin America in the Global Economy”, the meeting’s theme. In a session that lasted nearly two hours and included a question-and-answer period, Lula neatly covered each of the meeting’s four subthemes, key challenges facing the region: “Managing the Impact of Global and Regional Risks”, “Improving Competitiveness”, “Continuing the Integration Agenda” and “Re-evaluating the Investment Framework”. At the end of the meeting, participants identified education and infrastructure as the most pressing of the priorities for Latin America. These are the key messages that emerged from the two days of interactive deliberations:
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Foreword – Building a Stronger Latin America in the Global Economy “It is obvious that there are people who benefit from the lack of reforms, who make a lot of money and have a lot of power because of this situation that hurts the great majority.”
“The lack of infrastructure and investment is really the bottleneck to global competitiveness.” Luis A. Moreno President, Inter-American Development Bank, Washington DC; Co-Chair, World Economic Forum on Latin America
Moisés Naím Editor-in-Chief, Foreign Policy Magazine, USA
“The world needs a very clear sign that [the Doha Round] will end in success. But the level of ambition is very low nowadays. The clock is ticking and we just don’t move. The US and EU are just playing poker.” Manuel A. González Sanz Minister of Foreign Trade of Costa Rica
Managing Global and Regional Risks
Improving Latin America’s Competitiveness
Continuing with the Integration Agenda
Economic inequality and social marginalization are the greatest risks facing Latin America. These two problems are hindering the region from improving its competitiveness.
While Latin America lags other emerging markets including East Asia, China, India and Eastern Europe in competitiveness rankings, most countries in the region are making progress in their efforts to catch up.
It is essential for Latin America to deepen integration if it is to be more globally competitive.
• Latin American countries should look inward and assess their own advantages and shortcomings if they are to achieve greater competitiveness and sustainable growth. • Education is the compelling solution to income disparity and social inequity. • Government and business should not ignore the opportunity that exists in mobilizing the region’s poor, both as a source of labour and a potential market. • Political will over vested interests is essential to implementing meaningful reforms.
“We don’t want to take from the rich to give to the poor to make everybody poor; we want everybody to be prosperous.” Ricardo B. Salinas Pliego Chairman, Grupo Salinas, Mexico
• Macroeconomic stability is now widely regarded in the region as a political imperative. • To boost competitiveness, the region needs to focus on improving logistics, reducing bureaucracy and eliminating trade barriers.
• In trade development, emphasis should continue to be made on multilateral and regional initiatives. But with those efforts stalled, bilaterals may be the best alternative.
• Public-private partnerships could help marshal the resources necessary to invest in necessary infrastructure development.
• Infrastructure development, particularly through public-private partnerships, is crucial for regional integration.
• Investment in education is essential, particularly in better training and compensation for teachers.
• The energy sector, particularly non-petroleum products and biofuels, could play a leading role in enhancing regional integration.
• Latin American countries should also aim to exploit their comparative advantages and established niches such as biofuels and renewable energy.
• The region should not let political differences derail integration.
“We need to improve in terms of automation, information technology and the quality of our labour force.” José C. Grubisich Filho Chief Executive Officer, Braskem, Brazil
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• The region must pursue efforts to improve infrastructure links, increase intra-regional trade and boost cooperation in strategic sectors such as energy and tourism.
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“What we see today is an explosion of bilaterals. This is bad for the world, but this is unfortunately the way the Americas are going.” Marcos S. Jank President, Institute for International Trade Negotiations (ICONE), Brazil
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Foreword – Building a Stronger Latin America in the Global Economy “Latin America is in the process of normalizing; it is what many people have been working for, and the financial system is part of that.” John Williamson Senior Fellow, The Institute for International Economics, USA
Re-evaluating the Investment Framework To remedy the region’s poor performance in attracting foreign direct investment compared to other emerging markets, Latin America should tackle major competitiveness shortcomings such as doubts about political stability, investor ignorance and deficiencies in the financial sector.
The Creative Imperative in Latin America “We cannot afford to come up with economic equations without looking at the social side. Unless we invest in the social side, we will not be politically positioned to tackle economic problems.” Jorge Gerdau Johannpeter President and Chief Executive Officer, Gerdau, Brazil; Co-Chair of the World Economic Forum on Latin America
• Businesses in the region should play an active role in diversifying the economy and attacking such competitiveness shortcomings as poor education and low R&D investment. • In devising their strategies and business models, investors should take into account the region’s social context – the need for growth with equity.
• Latin America’s attractiveness to investors has been hampered by poor regulation and lingering perceptions that the region is politically unstable. • Governments should combat ignorance about the region with greater transparency and better governance. • Bottlenecks need to be unblocked. In particular, deficiencies in the financial sector, including the difficulty small and medium size enterprises have in accessing capital, must be addressed.
“We are progressing fast in Brazil. In very short time, we will be investment grade. It will be very important to reduce the cost of capital to have more liquidity. When the cost of capital becomes reasonable, Brazilian companies should boom” David Feffer President, Suzano Holding, Brazil
During the World Economic Forum on Latin America, government, business and civic society leaders considered how the region can achieve and sustain high economic growth with equitable income distribution. This continued discussions held at the World Economic Forum Annual Meeting 2006 in Davos. Throughout the consultation process, the focus has been on discerning the “creative imperative” in approaching the challenge of building a stronger Latin America in the global economy. Participants in Davos, São Paulo and around the world have worked to come up with innovative solutions and approaches and to set priorities for action that would constitute an agenda for Latin America to enhance its global competitiveness. Some of these proposals were included in a list of ten recommendations for social and economic change that were issued in a communiqué at the closing session of the World Economic Forum on Latin America. After reviewing them, participants voted to focus over the next year on education – specifically teacher training and improving the quality of schools – and on employing publicprivate partnerships to invest in much needed infrastructure in rural areas, underdeveloped regions and urban slums.
The following is a selection of creative approaches that participants discussed in São Paulo: • Education: Train and properly compensate teachers to raise the quality of schools. Do not simply extend the mandatory school year. • Infrastructure and Investment: Employ public-private partnerships to channel investment into urgently needed infrastructure. • Business Model: Deepen the effective reach of existing regional business models by finding ways to tap the human resources and consumer potential of the poor. • Social Equity: Develop safety net programmes that are fiscally sustainable, while promoting other progressive policies including efficient tax collection, universal social security and home ownership financing schemes. • China: Turn China’s emergence from challenge to opportunity by taking advantage of China’s low-cost environment through business process outsourcing and its need for natural resources, which Latin America possesses in abundance. • Financial Services: Provide innovative products such as securitized instruments (mortgages, real estate investment trusts, debt) that help small and medium-sized companies access funding by bringing down the cost of capital and increasing liquidity. • Trade: Ensure that bilateral agreements go beyond commitments made at the multilateral level, while maintaining focus on multilateral and regional initiatives. • Competitiveness: Fight investor ignorance with increased transparency and better governance by using such tools as competitiveness assessments and regionwide and cross-regional benchmarking.
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Managing Global and Regional Risks
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The risk posed by inequality and exclusion “is nothing new,” observed Moisés Naím, Editor-inChief, Foreign Policy Magazine, USA. “But now it has more political potency and a greater economic effect.” Noted David Rothkopf, President and Chief Executive Officer, Garten Rothkopf, USA: “The consequences of inequality can be recast as disenfranchisement, political polarization and, perhaps most sensitively, as a class culture.”
very high
Programmes like Brazil’s Bolsa Familia, Mexico’s Oportunidades and Colombia’s Familias en Acción are credited with beginning to weave a safety net under the poorest of the poor. Beyond social programmes, “Education, education, education,” as Ricardo Young Silva, President, Ethos Institute, Brazil, put it, is high on the agenda. At least some answers to questions about longterm sustainable growth and increased global competitiveness may lie precisely in the human resources that are now wasted by poverty and exclusion. “We cannot afford to come up with economic equations without looking at the social side,” said Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil, and CoChair of the World Economic Forum on Latin America. Said President Lula: “People in Latin America used to say there was a paradox, that you had to grow first to invest in social programmes later. We believe that spending money on the poor is an investment.” World Economic Forum on Latin America
been done.” He noted one key reason: “It is obvious that there are people who benefit from the lack of reforms, who make a lot of money and have a lot of power because of this situation that hurts the great majority.”
Top ten risks affecting the region
China’s rise Organized crime Regulation Income inequalities
US twin deficit
high
Using the Gini Index of inequality in the distribution of income and consumption, a World Bank study found that at the end of the 20th century Latin America and the Caribbean measured nearly 10 points greater inequality than Asia and 17.5 points than OECD countries. Another study by the InterAmerican Development Bank found that extreme poverty worsened in many Latin American countries during the early years of the current decade. This stands in contrast to strides made in China and India to lift over 100 million people out of extreme poverty.
In spite of that well-placed political will, the task won’t be easy. “It is not uncommon to come up with answers like education, institution building, reducing corruption and fighting inequality,” said Naím. “It is all true, and it has all been said before. But over the last 20 years not much has
Regional political instability Oil price Environmental degradation
Natural disasters Climate change
medium
Compared to global rankings, corruption and organized crime also rank higher as risks in Latin America than elsewhere. In turn, China is more often classified as an opportunity than a threat, except to Mexican industry, and concern over international terrorism is downplayed.
While cooperation from the global community is certainly welcome, Latin Americans are prepared to tackle their own problems. “The problem with South America is that we have looked to the United States and Europe and admired their wealth, and we have looked to China and admired its growth, but we haven’t thought about what we should be doing ourselves,” said Luiz Inacio Lula da Silva, President of Brazil. “It is like someone who envies his neighbour’s new television set instead of trying to figure out how to buy his own TV.”
> Severity
The twin curses of economic inequality and social marginalization loom as the greatest risks facing Latin America. “Business can no longer survive in a failed society,” said Ivan F. Zurita, Chief Executive Officer, Nestlé Brasil, Brazil.
Closing Plenary on “Priorities for Action”: Co-Chair Jorge Gerdau Johannpeter, World Econommic Forum Managing Director Ged Davis and Co-Chair Luis A. Moreno
low
Update 2006: Global Economy
Managing Global and Regional Risks
low
medium
high
very high
> Likelihood Geopolitical
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Societal
Environmental
Economic
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Improving Latin America’s Competitiveness Most Latin American countries have made great strides to improve their competitiveness. They have quelled hyper-inflation, restructured and paid down debilitating foreign debts, and privatized sundry state-owned firms. Import tariffs have been slashed, exports are up and nearly every country is more integrated into the global economy than it was a decade or two ago. Some governments have embarked on regulatory reforms designed to unleash the creative energy and job creation capacity of small businesses. “I am impressed by the acceptance across the region of macroeconomic stability as a political imperative,” said Anoop Singh, Director, Western Hemisphere Department, International Monetary Fund (IMF). No longer, he added, are such policies imposed from abroad. “This is an amazingly important development,” he said.
Improving Latin America’s Competitiveness
Yet, seen from a global perspective, the region’s progress pales by comparison. On the World Economic Forum’s Global Competitiveness Index (see Figures 1 & 2), the Latin American country average lags behind scores for China, India, Eastern Europe and the East Asian NICs (Hong Kong, Singapore and Taiwan) . In 1980 Latin America boasted more extensive networks of productive infrastructure like roads, electricity and telecommunications than the countries of East Asia. Since then the Asian “tigers” scampered ahead and now lead by a factor of three to two, according to a World Bank report. A child entering school today in Argentina or Brazil can expect to complete 16 years of study, according to a UNESCO study, but the quality of education leaves much to be desired; a 32-country study by the OECD measuring 15-yearolds’ abilities in math, science and their native language ranked Brazil and Mexico well behind the global average.
South African Minister of Trade and Industry Mandisi Mpahlwa and Brazilian Minister of Development, Industry and Trade Luiz Fernando Furlan in discussion during the session “Competing in the Global Economy”
Figure 1: Regional comparators for goods market efficiency
A. Good markets: distorsions, competition and size
Source: World Economic Forum, Global Competitiveness Report 2005-2006
Figure 2: Regional comparators for labor market efficiency
B. Labor markets: flexibility and efficiency
Rather than lament lost opportunities, many Latin American policy-makers are looking on the bright side. “There is good news on two fronts,” said Luiz Fernando Furlan, Minister of Development, Industry and Trade of Brazil. “First, Brazil’s competitiveness is growing. There are signs of that in foreign trade, which is up by 20% a year over the last three years. And second, there is room to improve our competitiveness in terms of improving logistics, reducing bureaucracy and eliminating domestic barriers.” Many countries are banking on public-private partnerships (PPPs) to boost infrastructure development. In Brazil the new legislation for PPPs includes a guarantee fund to calm the skittish nerves of private investors who might otherwise be wary of joining forces with the government. “Without investment in infrastructure, we’ll remain spectators for the next 100 years,” said Luiz Inácio Lula da Silva, President of Brazil. Education has become a mantra for many Latin American reformers, but guaranteeing high quality instruction for the poor majority is proving more difficult than building classrooms and tracking down truants. Training for teachers and higher salaries to recruit better candidates into the profession
represent two elements of the solution to the equality equation. “We don’t need one great business executive; we need hundreds of great executives. We don’t need a few good engineers; we need thousands of good engineers,” said President Lula. One road to success is to further specialize in areas where the region already enjoys a competitive advantage. Latin America and especially Brazil are well positioned to become global leaders in biofuels and renewable energy, and the United States and other countries are keen to explore partnerships in the region to develop them. Furlan has met with officials from California, Japan, South Africa and elsewhere to discuss initiatives in the biofuel realm. New investments in the cultivation and refining of sugarcane, Brazil’s raw material for ethanol production, are booming. Meanwhile Argentina is offering incentives for biofuel development from soybeans, said Martín P. Redrado, President of the Central Bank of Argentina.
“There is a very serious energy agenda that we can work on together,” observed E. Anthony Wayne, US Assistant Secretary of State for Economic and Business Affairs. “We are embarking on a programme to diversify our energy sources and change the mix, and Brazil is a leader in ethanol production.” A potential outgrowth of efforts in biofuel could be a broader expansion in biotechnology. “There are only three countries in the world that have decoded the genome of a living organism, and Brazil is one of them,” said Furlan. “And we are rich in biodiversity.” “Over the years, the price paid to producers for ethanol has dropped from US$ 100 a barrel to US$ 30 a barrel without subsidies. It has become competitive with gasoline.” Jose Goldemberg Secretary for the Environment, Government of the State of São Paulo, Brazil
Source: World Economic Forum, Global Competitiveness Report 2005-2006
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Continuing with the Integration Agenda “In an ideal world, we would go multilateral, but that world does not exist. Bilaterals, however, should be WTO plus.” Manuel A. González Sanz Minister of Foreign Trade of Costa Rica
Deeper integration of Latin America is essential for global competitiveness, particularly in the face of greater cooperation among countries in other regions and the rise of China and India. Yet the immediate outlook for closer relations among Latin American economies is poor. While intra-regional commerce has mushroomed, the Free Trade Area of the Americas (FTAA) and a Mercosur-EU arrangement have stalled at a time when progress is imperative, given the World Trade Organization’s flagging Doha Round. And while recently across the region, democracy has spread, macroeconomic stability has increased, the investment climate has improved and confidence has palpably risen, this celebrated convergence of favourable factors has not translated into significant practical integration.
negotiated faster than multilateral deals but can result in a messy jumble of inconsistent commitments. The best agreements are typically forged among the bigger economies, leaving small ones disadvantaged. “In an ideal world, we would go multilateral, but that world does not exist,” Manuel A. González Sanz, Minister of Foreign Trade of Costa Rica, conceded. “Bilaterals, however, should be WTO plus.” With infrastructure, the main impediment is the lack of private sector participation due to risk. Funding requirements are so high that governments alone cannot provide the necessary capital to remedy Latin America’s infrastructure deficit. But according to the World Bank, the value of infrastructure projects with private investment fell from a record US$ 71 billion in 1998 to US$ 16 billion in 2003. As in other developing regions, besides traditional concession schemes such as the build-operate-and transfer (BOT) arrangement, an increasingly popular
Continuing with the Integration Agenda solution is the public-private partnership (PPP) which allows for risk to be shared between government and private actors. Brazil has been at the forefront of PPP deployment in Latin America, with legal frameworks for such partnerships in place in some dozen states and at the federal level. Risk management becomes even more difficult with cross-border infrastructure investment. For this reason, Latin American countries have to negotiate regional agreements along the lines of Europe’s Energy Charter Treaty in which over 50 nations participate. The energy sector may play a leading role in enhancing regional integration. Brazil this year joins the ranks of the half dozen Latin American countries that are net exporters of petroleum, allowing the region to cooperate more in developing energy markets and alternative fuels. A planned US$ 25 billion gas pipeline network will link natural gas reserves in Venezuela with Brazil, Argentina, Bolivia, Paraguay and Uruguay.
This “project of the century,” as Lula dubbed it, could be a major catalyst for cross-border cooperation and regional cohesion. Politics, however, could get in the way. Many participants warned of a growing political divide. “The hemisphere has split between countries that want greater participation in the global economy and those that reject the global environment,” warned Eric Farnsworth, VicePresident, Council of the Americas, USA. Others observed that the wave of populism emerging in some countries threatens regional harmony. “We are in a dangerous situation,” cautioned Boris Fausto, Historian and Professor, Political Science, University of São Paulo, Brazil. Despite such risks, the logic of deeper regional integration remains compelling and the pressures to pursue it are building rapidly, the stakes rising every day. Indeed, Latin America cannot afford to talk for another century. It must act now.
Take infrastructure. Last year, the World Bank reported that the rate of infrastructure spending in Latin America had been halved since the 1980s, falling to 2% of GDP, compared with 4%-6% in East Asian middle-income countries and inadequate regional supply chains raised export costs by 15% to 34%. The Bank called on countries in the region to triple spending on infrastructure to make up for years of under-investment and poor maintenance. “If we don’t have the bridges, highways, railroad and energy facilities, we will just keep talking for another century about the need for integration and it won’t happen,” said Brazilian President Luiz Inacio Lula da Silva. The priority therefore is to accelerate efforts to improve infrastructure quality and links, boost intraregional trade and promote cooperation in such areas as energy, tourism and investment. On the trade front, countries are discovering each other. “We were manic about the US buying from us,” President Lula explained. “But we forgot that our neighbours could also buy from us.” With regional efforts stymied and the Doha Round in trouble, Latin American countries are focusing on bilateral accords, which can go further and be 12
Plenary Session on “Competing in the Global Economy”: E. Anthony Wayne, US Assistant Secretary of State for Economic and Business Affairs; Henrique de Campos Meirelles, Governor of the Central Bank of Brazil; Martín P. Redrado, President of the Central Bank of Argentina; Alan P. Larson, Senior Strategic Adviser and Director, World Economic Forum; Senior Adviser, Covington and Burling, USA; Mandisi Mpahlwa, Minister of Trade and Industry of South Africa; Luiz Fernando Furlan, Minister of Development, Industry and Trade of Brazil
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Re-evaluating the Investment Framework “Investment is function of confidence. Investors have to be able to see what lies ahead. Our countries, however, are perceived as politically unstable.” Rosario Cordoba Director, Revista Dinero, Colombia
In the area of investment, the priorities for Latin America are clear. First, the region must find ways to boost foreign direct investment (FDI), which has lagged other regions. Second, the continent must diversify the business and investment opportunities it offers beyond natural resources and commodities, particularly in light of the emergence of China as both a market opportunity and a formidable competitor. Third, Latin America should tackle bottlenecks that hinder its ability to raise and sustain high growth with equitable income distribution. These include: a skills deficit, the lack of infrastructure, the immaturity of the region’s capital markets, regulatory unpredictability, the tax burden, high interest rates, and lingering perceptions that Latin America is politically unstable.
While Latin America has benefited from the spread of democracy, perceptions of instability are exacerbated by anxieties about growing populist movements in some countries. The large number of presidential elections this year has stoked worries further. “The problem of political risk in Latin America today is much more about stable political coalitions and quality of governments,” said José Miguel Insulza, Secretary-General, Organization of American States (OAS), Washington DC That is perhaps the biggest challenge that Latin American countries hoping to boost FDI have to face. While Chile, Brazil and Mexico have managed to differentiate themselves from the pack, most other countries have failed to avoid the tar brush of poor governance. The region must combat ignorance about Latin America and the tendency of many investors to take a simplistic approach. Greater transparency and better governance are the most obvious ways to achieve this.
Re-evaluating the Investment Framework Each country individually, and the region collectively, should use competitiveness assessments to address specific shortcomings. There are many bottlenecks that have to be tackled. In financial services, for example, small and medium size enterprises need better access to capital. This would require a range of reforms to bring down the cost of capital and enhance liquidity including changes in the tax regime, adjustments to collateral and bankruptcy rules, better prudential regulation, the establishment of credit bureaus and the launching of innovative risk mitigation instruments. The region should work together to develop a capital markets hub. “If you are able to have one single financial centre for Latin America, then liquidity will be much greater and companies won’t migrate to raise capital,” explained Guillermo de la Dehesa, Vice-Chairman, Goldman Sachs Europe, Spain. Finally, businesses in the region have an active role to play. They can enhance the investment
climate by investing more in R&D, partnering the government in education and healthcare programmes aimed at boosting competitiveness, and developing new sectors that leverage Latin America’s comparative advantages. For example, the region can take a leading role in Spanishand Portuguese-language outsourcing and IT services. Businesses should also be encouraged to incorporate the social context in their investment strategies. This means combining the need to grow with social responsibility, according to Ivan F. Zurita, Chief Executive Officer of Nestlé Brasil. Nearly three-quarters of their consumers in Brazil are in the lower middle class or low income brackets. To reach these customers, Nestlé set up sales and distribution networks in slum areas. This is the sort of business model innovation that investors must adopt to make inroads in today’s Latin America.
According to the United Nations, in 2004, US$ 67.5 billion in FDI flowed into Latin America and the Caribbean – mainly to Brazil, Mexico and Chile. This was a rise of 44% over the year before, but only accounted for 29% of total investments going to developing economies, only slightly greater than China’s share (26%). This was significantly lower than the level at which the region used to enjoy in the 1990s. The fall in attractiveness mainly concerns factors ranging from poorer infrastructure quality and investment to problems with the management of public finances. Additionally, unpredictable politics, arbitrary regulations and slow bureaucracies aggravate the situation. “Investment in the region is insufficient and very low because countries, with the exception of Chile, have poor regulation,” Rosario Cordoba, Director, Revista Dinero, Colombia, explained. “Investment is a function of confidence. Investors have to be able to see what lies ahead. Our countries, however, are perceived as politically unstable.” Opening Plenary on “Risks and Opportunities for Regional Development”: Peter Torreele, Managing Director, World Economic Forum; Ricardo B. Salinas Pliego, Chairman, Grupo Salinas, Mexico; Claudio Lembo, Governor of the State of São Paulo, Brazil; José Miguel Insulza, Secretary-General, Organization of American States (OAS), Washington DC; Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil; Gilberto Kassab, Mayor of São Paulo, Brazil; Guillermo Perry Rubio, Chief Economist, Latin American and Caribbean Region, World Bank, Washington DC
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Priorities for Action in Latin America
The aim of the Priorities for Action* is to consolidate options and propose solutions to the regional challenges. Latin America’s leaders recognize the need to renew and reinforce their commitment to improve the state of their region and the world. To compete globally, countries should pool their strengths to achieve the scale necessary to build better infrastructure, deepen regional agreements and strengthen regional institutions and governance. During the World Economic Forum on Latin America, participants were asked to address the following question: How can we achieve equitable distribution of income with economic growth? Figures below refer to participants’ responses on social and economic priorities for action and represent percentages of the total audience at the Closing Plenary. Together with the ideas collected prior to the roundtable the following priorities for action were identified: Social Priorities for Action
2. Safety Net: Increase demand actions through vouchers and/or conditional cash transfers such as the Oportunidades (Mexico), the Bolsa Familia (Brazil) or the Familias en Acción (Colombia). 3. Housing: Enhance access to housing through schemes that support demand, which complements the purchasing power of low income households. Banks and governments should promote the use of mortgage insurance and find ways to extend the tenure of mortgages. 4. Education: More emphasis and resources should be put on the training of teachers and quality education than in extending mandatory periods of education for children. Educators should be appropriately compensated. Resources should be employed to improve school system management at all levels. 5. Employment: Increase the supply of skilled labour so that the high value-added sectors of the economy can grow and improve income distribution, while ensuring long-term growth. Enhance the efficiency of the labour market, while protecting the rights and well-being of the employee.
Priorities for Action in Latin America
Economic Priorities for Action 1. Institutional Reform and Innovation: Set up a public-private agency to concentrate national efforts on attracting investors and promoting innovation. Offer tax credits for R&D spending in the private sector. 2. Tax Reform: Increase the tax base, simplify the fiscal system and reduce tax evasion by investing in information systems. Institutions need to be strengthened to ensure that these funds are invested efficiently and to minimize the possibilities of corruption and political manipulation. 3. Infrastructure and Investment: Publicprivate partnerships (PPPs) and similar concessions should be set up to focus on building necessary infrastructure over the long term, particularly in rural areas, regions that are underdeveloped and urban slums. Governments should implement appropriate regulation and increase capital expenditure.
1. Equal Access: Promote active social policies in favour of low income households, reconciled with macroeconomic stability, sound fiscal policies and efficient tax collection. An important role should be to enhance access by low income families to basic healthcare, good quality education from pre-school level and universal social security.
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4. Financial Services: Improve access of small enterprises and producers to financial services (“bancarización”, credit, insurance). This would require better creditor rights, credit bureaus, prudential regulation and innovation in financial products. Promote risk mitigation instruments to help SMEs access long-term financing in local currencies. 5. International Trade: Actively engage in negotiations to promote fair trade of manufactured and non-manufactured products.
Each country should focus, through stable political coalitions and quality of its government, on unblocking the constraints that are impeding it from achieving equitable income distribution and sustained growth.
*The Priorities for Action in Latin America were presented to participants on 6 April 2006 in the Closing Plenary of the World Economic Forum for Latin America in São Paulo. Co-Chairs and participants voted on the base of their willingness to engage in the implementation of such priorities.
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Acknowledgements The World Economic Forum would like to thank its Partners for their valuable support of the World Economic Forum on Latin America, São Paulo, 5-6 April 2006:
Strategic Partners Audi HP KPMG Kudelski Group Merck & Co. Nestlé New York Stock Exchange PepsiCo Zurich Financial Services
Regional Partners Banco Hipotecario SA Grupo Salinas
Official Carrier Iberia The World Economic Forum would also like to thank the Government of São Paulo and ApexBrasil for their support and TV Cultura as host broadcaster.
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Contributors Peter Torreele is Managing Director of the World Economic Forum. Sylvie Naville is Associate Director, Latin America. Emilio Lozoya is a Global Leadership Fellow and Manager, Latin America. Jacques Marcovitch is Professor at the University of São Paulo and Senior Adviser to the World Economic Forum. Chantal Adamson is Senior Event Manager. Vidhi Tambiah is Associate Director, Global Agenda, at the World Economic Forum. He worked with William Hinchberger and Alejandro Reyes to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the World Economic Forum on Latin America in São Paulo. Session summaries are available at: www.weforum.org/ Alicia Bartlett, Icon Design Associate Director, Editing: Nancy Tranchet Design and Layout: Kamal Kimaoui, Associate Director, Production and Design Photographs: Julio Vilela
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The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)
INSIGHTS
WORLD ECONOMIC FORUM
World Economic Forum on Latin America
Contents This publication is also available in electronic form on the World Economic Forum’s website at the following address: World Economic Forum on Latin America Web report: http://www.weforum.org/summitreports/latinamerica2006 (HTML) The electronic version of this report allows access to a richer level of content from the meeting including weblogs, photographs and session summaries. The report is also available as a PDF: http://www.weforum.org/pdf/SummitReports/latinamerica2006.pdf
Preface
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Foreword
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The Creative Imperative in Latin America
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Managing Global and Regional Risks
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Improving Latin America’s Competitiveness
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Continuing with the Integration Agenda
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Re-evaluating the Investment Framework
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Priorities for Action in Latin America
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Acknowledgements
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Other specific information on the World Economic Forum on Latin America, São Paulo, 5-6 April 2006 can be found at the following links: http://www.weforum.org/latinamerica http://www.weforum.org/latinamerica/programme http://www.weforum.org/latinamerica/indepth http://www.weforum.org/latinamerica/partners http://www.weforum.org/latinamerica/competitiveness
The views expressed in this publication do not necessarily reflect those of the World Economic Forum.
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Preface In an election year in many countries across the region, the World Economic Forum on Latin America provided a platform, at a critical moment, for leaders to discuss the challenges and the opportunities facing the region in the years to come. Representing 24 countries, 300 participants from business, government, academia, media and civil society gathered in São Paulo on 5-6 April 2006 to reflect on Building a Stronger Latin America in the Global Economy. Special attention was placed on how Latin America could achieve sustained and equitable growth. Based on Forum tools brought to the meeting (Global Risks, Global Competitiveness, Global Scenarios), concrete recommendations emerged from the gathering. Consensus was reached on Regional Risks, Competitiveness Challenges, and Priorities for Action in Latin America. The results are incorporated in this publication. In the closing plenary, participants voted to focus over the next years on education – specifically teacher training and improving the quality of schools – and on using public-private partnerships to invest in infrastructure in rural areas, underdeveloped regions and urban slums. The Forum would like to once again take this opportunity to thank the Co-Chairs of the World Economic Forum on Latin America in São Paulo, who provided valuable insight and support for the programme. They were: Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil Luis A. Moreno, President, Inter-American Development Bank, Washington DC We now look forward to building a new partnership with the region. This will provide you and us at the World Economic Forum with essential guidelines to continue to engage with the region in specific initiatives and address the relevant issues in our forthcoming Annual Meeting in Davos as well as in our next World Economic Forum on Latin America roundtable during 2007.
Peter Torreele Managing Director
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Sylvie Naville Associate Director, Latin America
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Foreword – Building a Stronger Latin America in the Global Economy “When our region raises its head and negotiates on equal terms with rich countries without arrogance but with humility and perseverance, we will achieve more than when we were just crying out and weeping. We are ready to do that now.” Luiz Inacio Lula da Silva President of Brazil
What was immediately palpable when participants gathered in São Paulo for the World Economic Forum on Latin America was the fresh confidence evident in the region, particularly in Brazil, a country that has overcome macroeconomic trauma and volatile politics to emerge motivated and selfassured in its stability and growth prospects. In more than two dozen sessions and private meetings, business, government and civil society leaders from Latin America and around the world reviewed the state of the region and frankly discussed both its advantages and shortcomings. The highlight of the event was the spirited address by Luiz Inacio Lula da Silva, President of Brazil, who gave an upbeat assessment of the region and his country as they face the challenge of “Building a Stronger Latin America in the Global Economy”, the meeting’s theme. In a session that lasted nearly two hours and included a question-and-answer period, Lula neatly covered each of the meeting’s four subthemes, key challenges facing the region: “Managing the Impact of Global and Regional Risks”, “Improving Competitiveness”, “Continuing the Integration Agenda” and “Re-evaluating the Investment Framework”. At the end of the meeting, participants identified education and infrastructure as the most pressing of the priorities for Latin America. These are the key messages that emerged from the two days of interactive deliberations:
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Foreword – Building a Stronger Latin America in the Global Economy “It is obvious that there are people who benefit from the lack of reforms, who make a lot of money and have a lot of power because of this situation that hurts the great majority.”
“The lack of infrastructure and investment is really the bottleneck to global competitiveness.” Luis A. Moreno President, Inter-American Development Bank, Washington DC; Co-Chair, World Economic Forum on Latin America
Moisés Naím Editor-in-Chief, Foreign Policy Magazine, USA
“The world needs a very clear sign that [the Doha Round] will end in success. But the level of ambition is very low nowadays. The clock is ticking and we just don’t move. The US and EU are just playing poker.” Manuel A. González Sanz Minister of Foreign Trade of Costa Rica
Managing Global and Regional Risks
Improving Latin America’s Competitiveness
Continuing with the Integration Agenda
Economic inequality and social marginalization are the greatest risks facing Latin America. These two problems are hindering the region from improving its competitiveness.
While Latin America lags other emerging markets including East Asia, China, India and Eastern Europe in competitiveness rankings, most countries in the region are making progress in their efforts to catch up.
It is essential for Latin America to deepen integration if it is to be more globally competitive.
• Latin American countries should look inward and assess their own advantages and shortcomings if they are to achieve greater competitiveness and sustainable growth. • Education is the compelling solution to income disparity and social inequity. • Government and business should not ignore the opportunity that exists in mobilizing the region’s poor, both as a source of labour and a potential market. • Political will over vested interests is essential to implementing meaningful reforms.
“We don’t want to take from the rich to give to the poor to make everybody poor; we want everybody to be prosperous.” Ricardo B. Salinas Pliego Chairman, Grupo Salinas, Mexico
• Macroeconomic stability is now widely regarded in the region as a political imperative. • To boost competitiveness, the region needs to focus on improving logistics, reducing bureaucracy and eliminating trade barriers.
• In trade development, emphasis should continue to be made on multilateral and regional initiatives. But with those efforts stalled, bilaterals may be the best alternative.
• Public-private partnerships could help marshal the resources necessary to invest in necessary infrastructure development.
• Infrastructure development, particularly through public-private partnerships, is crucial for regional integration.
• Investment in education is essential, particularly in better training and compensation for teachers.
• The energy sector, particularly non-petroleum products and biofuels, could play a leading role in enhancing regional integration.
• Latin American countries should also aim to exploit their comparative advantages and established niches such as biofuels and renewable energy.
• The region should not let political differences derail integration.
“We need to improve in terms of automation, information technology and the quality of our labour force.” José C. Grubisich Filho Chief Executive Officer, Braskem, Brazil
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• The region must pursue efforts to improve infrastructure links, increase intra-regional trade and boost cooperation in strategic sectors such as energy and tourism.
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“What we see today is an explosion of bilaterals. This is bad for the world, but this is unfortunately the way the Americas are going.” Marcos S. Jank President, Institute for International Trade Negotiations (ICONE), Brazil
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Foreword – Building a Stronger Latin America in the Global Economy “Latin America is in the process of normalizing; it is what many people have been working for, and the financial system is part of that.” John Williamson Senior Fellow, The Institute for International Economics, USA
Re-evaluating the Investment Framework To remedy the region’s poor performance in attracting foreign direct investment compared to other emerging markets, Latin America should tackle major competitiveness shortcomings such as doubts about political stability, investor ignorance and deficiencies in the financial sector.
The Creative Imperative in Latin America “We cannot afford to come up with economic equations without looking at the social side. Unless we invest in the social side, we will not be politically positioned to tackle economic problems.” Jorge Gerdau Johannpeter President and Chief Executive Officer, Gerdau, Brazil; Co-Chair of the World Economic Forum on Latin America
• Businesses in the region should play an active role in diversifying the economy and attacking such competitiveness shortcomings as poor education and low R&D investment. • In devising their strategies and business models, investors should take into account the region’s social context – the need for growth with equity.
• Latin America’s attractiveness to investors has been hampered by poor regulation and lingering perceptions that the region is politically unstable. • Governments should combat ignorance about the region with greater transparency and better governance. • Bottlenecks need to be unblocked. In particular, deficiencies in the financial sector, including the difficulty small and medium size enterprises have in accessing capital, must be addressed.
“We are progressing fast in Brazil. In very short time, we will be investment grade. It will be very important to reduce the cost of capital to have more liquidity. When the cost of capital becomes reasonable, Brazilian companies should boom” David Feffer President, Suzano Holding, Brazil
During the World Economic Forum on Latin America, government, business and civic society leaders considered how the region can achieve and sustain high economic growth with equitable income distribution. This continued discussions held at the World Economic Forum Annual Meeting 2006 in Davos. Throughout the consultation process, the focus has been on discerning the “creative imperative” in approaching the challenge of building a stronger Latin America in the global economy. Participants in Davos, São Paulo and around the world have worked to come up with innovative solutions and approaches and to set priorities for action that would constitute an agenda for Latin America to enhance its global competitiveness. Some of these proposals were included in a list of ten recommendations for social and economic change that were issued in a communiqué at the closing session of the World Economic Forum on Latin America. After reviewing them, participants voted to focus over the next year on education – specifically teacher training and improving the quality of schools – and on employing publicprivate partnerships to invest in much needed infrastructure in rural areas, underdeveloped regions and urban slums.
The following is a selection of creative approaches that participants discussed in São Paulo: • Education: Train and properly compensate teachers to raise the quality of schools. Do not simply extend the mandatory school year. • Infrastructure and Investment: Employ public-private partnerships to channel investment into urgently needed infrastructure. • Business Model: Deepen the effective reach of existing regional business models by finding ways to tap the human resources and consumer potential of the poor. • Social Equity: Develop safety net programmes that are fiscally sustainable, while promoting other progressive policies including efficient tax collection, universal social security and home ownership financing schemes. • China: Turn China’s emergence from challenge to opportunity by taking advantage of China’s low-cost environment through business process outsourcing and its need for natural resources, which Latin America possesses in abundance. • Financial Services: Provide innovative products such as securitized instruments (mortgages, real estate investment trusts, debt) that help small and medium-sized companies access funding by bringing down the cost of capital and increasing liquidity. • Trade: Ensure that bilateral agreements go beyond commitments made at the multilateral level, while maintaining focus on multilateral and regional initiatives. • Competitiveness: Fight investor ignorance with increased transparency and better governance by using such tools as competitiveness assessments and regionwide and cross-regional benchmarking.
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Managing Global and Regional Risks
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The risk posed by inequality and exclusion “is nothing new,” observed Moisés Naím, Editor-inChief, Foreign Policy Magazine, USA. “But now it has more political potency and a greater economic effect.” Noted David Rothkopf, President and Chief Executive Officer, Garten Rothkopf, USA: “The consequences of inequality can be recast as disenfranchisement, political polarization and, perhaps most sensitively, as a class culture.”
very high
Programmes like Brazil’s Bolsa Familia, Mexico’s Oportunidades and Colombia’s Familias en Acción are credited with beginning to weave a safety net under the poorest of the poor. Beyond social programmes, “Education, education, education,” as Ricardo Young Silva, President, Ethos Institute, Brazil, put it, is high on the agenda. At least some answers to questions about longterm sustainable growth and increased global competitiveness may lie precisely in the human resources that are now wasted by poverty and exclusion. “We cannot afford to come up with economic equations without looking at the social side,” said Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil, and CoChair of the World Economic Forum on Latin America. Said President Lula: “People in Latin America used to say there was a paradox, that you had to grow first to invest in social programmes later. We believe that spending money on the poor is an investment.” World Economic Forum on Latin America
been done.” He noted one key reason: “It is obvious that there are people who benefit from the lack of reforms, who make a lot of money and have a lot of power because of this situation that hurts the great majority.”
Top ten risks affecting the region
China’s rise Organized crime Regulation Income inequalities
US twin deficit
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Using the Gini Index of inequality in the distribution of income and consumption, a World Bank study found that at the end of the 20th century Latin America and the Caribbean measured nearly 10 points greater inequality than Asia and 17.5 points than OECD countries. Another study by the InterAmerican Development Bank found that extreme poverty worsened in many Latin American countries during the early years of the current decade. This stands in contrast to strides made in China and India to lift over 100 million people out of extreme poverty.
In spite of that well-placed political will, the task won’t be easy. “It is not uncommon to come up with answers like education, institution building, reducing corruption and fighting inequality,” said Naím. “It is all true, and it has all been said before. But over the last 20 years not much has
Regional political instability Oil price Environmental degradation
Natural disasters Climate change
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Compared to global rankings, corruption and organized crime also rank higher as risks in Latin America than elsewhere. In turn, China is more often classified as an opportunity than a threat, except to Mexican industry, and concern over international terrorism is downplayed.
While cooperation from the global community is certainly welcome, Latin Americans are prepared to tackle their own problems. “The problem with South America is that we have looked to the United States and Europe and admired their wealth, and we have looked to China and admired its growth, but we haven’t thought about what we should be doing ourselves,” said Luiz Inacio Lula da Silva, President of Brazil. “It is like someone who envies his neighbour’s new television set instead of trying to figure out how to buy his own TV.”
> Severity
The twin curses of economic inequality and social marginalization loom as the greatest risks facing Latin America. “Business can no longer survive in a failed society,” said Ivan F. Zurita, Chief Executive Officer, Nestlé Brasil, Brazil.
Closing Plenary on “Priorities for Action”: Co-Chair Jorge Gerdau Johannpeter, World Econommic Forum Managing Director Ged Davis and Co-Chair Luis A. Moreno
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Update 2006: Global Economy
Managing Global and Regional Risks
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medium
high
very high
> Likelihood Geopolitical
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Societal
Environmental
Economic
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Improving Latin America’s Competitiveness Most Latin American countries have made great strides to improve their competitiveness. They have quelled hyper-inflation, restructured and paid down debilitating foreign debts, and privatized sundry state-owned firms. Import tariffs have been slashed, exports are up and nearly every country is more integrated into the global economy than it was a decade or two ago. Some governments have embarked on regulatory reforms designed to unleash the creative energy and job creation capacity of small businesses. “I am impressed by the acceptance across the region of macroeconomic stability as a political imperative,” said Anoop Singh, Director, Western Hemisphere Department, International Monetary Fund (IMF). No longer, he added, are such policies imposed from abroad. “This is an amazingly important development,” he said.
Improving Latin America’s Competitiveness
Yet, seen from a global perspective, the region’s progress pales by comparison. On the World Economic Forum’s Global Competitiveness Index (see Figures 1 & 2), the Latin American country average lags behind scores for China, India, Eastern Europe and the East Asian NICs (Hong Kong, Singapore and Taiwan) . In 1980 Latin America boasted more extensive networks of productive infrastructure like roads, electricity and telecommunications than the countries of East Asia. Since then the Asian “tigers” scampered ahead and now lead by a factor of three to two, according to a World Bank report. A child entering school today in Argentina or Brazil can expect to complete 16 years of study, according to a UNESCO study, but the quality of education leaves much to be desired; a 32-country study by the OECD measuring 15-yearolds’ abilities in math, science and their native language ranked Brazil and Mexico well behind the global average.
South African Minister of Trade and Industry Mandisi Mpahlwa and Brazilian Minister of Development, Industry and Trade Luiz Fernando Furlan in discussion during the session “Competing in the Global Economy”
Figure 1: Regional comparators for goods market efficiency
A. Good markets: distorsions, competition and size
Source: World Economic Forum, Global Competitiveness Report 2005-2006
Figure 2: Regional comparators for labor market efficiency
B. Labor markets: flexibility and efficiency
Rather than lament lost opportunities, many Latin American policy-makers are looking on the bright side. “There is good news on two fronts,” said Luiz Fernando Furlan, Minister of Development, Industry and Trade of Brazil. “First, Brazil’s competitiveness is growing. There are signs of that in foreign trade, which is up by 20% a year over the last three years. And second, there is room to improve our competitiveness in terms of improving logistics, reducing bureaucracy and eliminating domestic barriers.” Many countries are banking on public-private partnerships (PPPs) to boost infrastructure development. In Brazil the new legislation for PPPs includes a guarantee fund to calm the skittish nerves of private investors who might otherwise be wary of joining forces with the government. “Without investment in infrastructure, we’ll remain spectators for the next 100 years,” said Luiz Inácio Lula da Silva, President of Brazil. Education has become a mantra for many Latin American reformers, but guaranteeing high quality instruction for the poor majority is proving more difficult than building classrooms and tracking down truants. Training for teachers and higher salaries to recruit better candidates into the profession
represent two elements of the solution to the equality equation. “We don’t need one great business executive; we need hundreds of great executives. We don’t need a few good engineers; we need thousands of good engineers,” said President Lula. One road to success is to further specialize in areas where the region already enjoys a competitive advantage. Latin America and especially Brazil are well positioned to become global leaders in biofuels and renewable energy, and the United States and other countries are keen to explore partnerships in the region to develop them. Furlan has met with officials from California, Japan, South Africa and elsewhere to discuss initiatives in the biofuel realm. New investments in the cultivation and refining of sugarcane, Brazil’s raw material for ethanol production, are booming. Meanwhile Argentina is offering incentives for biofuel development from soybeans, said Martín P. Redrado, President of the Central Bank of Argentina.
“There is a very serious energy agenda that we can work on together,” observed E. Anthony Wayne, US Assistant Secretary of State for Economic and Business Affairs. “We are embarking on a programme to diversify our energy sources and change the mix, and Brazil is a leader in ethanol production.” A potential outgrowth of efforts in biofuel could be a broader expansion in biotechnology. “There are only three countries in the world that have decoded the genome of a living organism, and Brazil is one of them,” said Furlan. “And we are rich in biodiversity.” “Over the years, the price paid to producers for ethanol has dropped from US$ 100 a barrel to US$ 30 a barrel without subsidies. It has become competitive with gasoline.” Jose Goldemberg Secretary for the Environment, Government of the State of São Paulo, Brazil
Source: World Economic Forum, Global Competitiveness Report 2005-2006
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Continuing with the Integration Agenda “In an ideal world, we would go multilateral, but that world does not exist. Bilaterals, however, should be WTO plus.” Manuel A. González Sanz Minister of Foreign Trade of Costa Rica
Deeper integration of Latin America is essential for global competitiveness, particularly in the face of greater cooperation among countries in other regions and the rise of China and India. Yet the immediate outlook for closer relations among Latin American economies is poor. While intra-regional commerce has mushroomed, the Free Trade Area of the Americas (FTAA) and a Mercosur-EU arrangement have stalled at a time when progress is imperative, given the World Trade Organization’s flagging Doha Round. And while recently across the region, democracy has spread, macroeconomic stability has increased, the investment climate has improved and confidence has palpably risen, this celebrated convergence of favourable factors has not translated into significant practical integration.
negotiated faster than multilateral deals but can result in a messy jumble of inconsistent commitments. The best agreements are typically forged among the bigger economies, leaving small ones disadvantaged. “In an ideal world, we would go multilateral, but that world does not exist,” Manuel A. González Sanz, Minister of Foreign Trade of Costa Rica, conceded. “Bilaterals, however, should be WTO plus.” With infrastructure, the main impediment is the lack of private sector participation due to risk. Funding requirements are so high that governments alone cannot provide the necessary capital to remedy Latin America’s infrastructure deficit. But according to the World Bank, the value of infrastructure projects with private investment fell from a record US$ 71 billion in 1998 to US$ 16 billion in 2003. As in other developing regions, besides traditional concession schemes such as the build-operate-and transfer (BOT) arrangement, an increasingly popular
Continuing with the Integration Agenda solution is the public-private partnership (PPP) which allows for risk to be shared between government and private actors. Brazil has been at the forefront of PPP deployment in Latin America, with legal frameworks for such partnerships in place in some dozen states and at the federal level. Risk management becomes even more difficult with cross-border infrastructure investment. For this reason, Latin American countries have to negotiate regional agreements along the lines of Europe’s Energy Charter Treaty in which over 50 nations participate. The energy sector may play a leading role in enhancing regional integration. Brazil this year joins the ranks of the half dozen Latin American countries that are net exporters of petroleum, allowing the region to cooperate more in developing energy markets and alternative fuels. A planned US$ 25 billion gas pipeline network will link natural gas reserves in Venezuela with Brazil, Argentina, Bolivia, Paraguay and Uruguay.
This “project of the century,” as Lula dubbed it, could be a major catalyst for cross-border cooperation and regional cohesion. Politics, however, could get in the way. Many participants warned of a growing political divide. “The hemisphere has split between countries that want greater participation in the global economy and those that reject the global environment,” warned Eric Farnsworth, VicePresident, Council of the Americas, USA. Others observed that the wave of populism emerging in some countries threatens regional harmony. “We are in a dangerous situation,” cautioned Boris Fausto, Historian and Professor, Political Science, University of São Paulo, Brazil. Despite such risks, the logic of deeper regional integration remains compelling and the pressures to pursue it are building rapidly, the stakes rising every day. Indeed, Latin America cannot afford to talk for another century. It must act now.
Take infrastructure. Last year, the World Bank reported that the rate of infrastructure spending in Latin America had been halved since the 1980s, falling to 2% of GDP, compared with 4%-6% in East Asian middle-income countries and inadequate regional supply chains raised export costs by 15% to 34%. The Bank called on countries in the region to triple spending on infrastructure to make up for years of under-investment and poor maintenance. “If we don’t have the bridges, highways, railroad and energy facilities, we will just keep talking for another century about the need for integration and it won’t happen,” said Brazilian President Luiz Inacio Lula da Silva. The priority therefore is to accelerate efforts to improve infrastructure quality and links, boost intraregional trade and promote cooperation in such areas as energy, tourism and investment. On the trade front, countries are discovering each other. “We were manic about the US buying from us,” President Lula explained. “But we forgot that our neighbours could also buy from us.” With regional efforts stymied and the Doha Round in trouble, Latin American countries are focusing on bilateral accords, which can go further and be 12
Plenary Session on “Competing in the Global Economy”: E. Anthony Wayne, US Assistant Secretary of State for Economic and Business Affairs; Henrique de Campos Meirelles, Governor of the Central Bank of Brazil; Martín P. Redrado, President of the Central Bank of Argentina; Alan P. Larson, Senior Strategic Adviser and Director, World Economic Forum; Senior Adviser, Covington and Burling, USA; Mandisi Mpahlwa, Minister of Trade and Industry of South Africa; Luiz Fernando Furlan, Minister of Development, Industry and Trade of Brazil
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Re-evaluating the Investment Framework “Investment is function of confidence. Investors have to be able to see what lies ahead. Our countries, however, are perceived as politically unstable.” Rosario Cordoba Director, Revista Dinero, Colombia
In the area of investment, the priorities for Latin America are clear. First, the region must find ways to boost foreign direct investment (FDI), which has lagged other regions. Second, the continent must diversify the business and investment opportunities it offers beyond natural resources and commodities, particularly in light of the emergence of China as both a market opportunity and a formidable competitor. Third, Latin America should tackle bottlenecks that hinder its ability to raise and sustain high growth with equitable income distribution. These include: a skills deficit, the lack of infrastructure, the immaturity of the region’s capital markets, regulatory unpredictability, the tax burden, high interest rates, and lingering perceptions that Latin America is politically unstable.
While Latin America has benefited from the spread of democracy, perceptions of instability are exacerbated by anxieties about growing populist movements in some countries. The large number of presidential elections this year has stoked worries further. “The problem of political risk in Latin America today is much more about stable political coalitions and quality of governments,” said José Miguel Insulza, Secretary-General, Organization of American States (OAS), Washington DC That is perhaps the biggest challenge that Latin American countries hoping to boost FDI have to face. While Chile, Brazil and Mexico have managed to differentiate themselves from the pack, most other countries have failed to avoid the tar brush of poor governance. The region must combat ignorance about Latin America and the tendency of many investors to take a simplistic approach. Greater transparency and better governance are the most obvious ways to achieve this.
Re-evaluating the Investment Framework Each country individually, and the region collectively, should use competitiveness assessments to address specific shortcomings. There are many bottlenecks that have to be tackled. In financial services, for example, small and medium size enterprises need better access to capital. This would require a range of reforms to bring down the cost of capital and enhance liquidity including changes in the tax regime, adjustments to collateral and bankruptcy rules, better prudential regulation, the establishment of credit bureaus and the launching of innovative risk mitigation instruments. The region should work together to develop a capital markets hub. “If you are able to have one single financial centre for Latin America, then liquidity will be much greater and companies won’t migrate to raise capital,” explained Guillermo de la Dehesa, Vice-Chairman, Goldman Sachs Europe, Spain. Finally, businesses in the region have an active role to play. They can enhance the investment
climate by investing more in R&D, partnering the government in education and healthcare programmes aimed at boosting competitiveness, and developing new sectors that leverage Latin America’s comparative advantages. For example, the region can take a leading role in Spanishand Portuguese-language outsourcing and IT services. Businesses should also be encouraged to incorporate the social context in their investment strategies. This means combining the need to grow with social responsibility, according to Ivan F. Zurita, Chief Executive Officer of Nestlé Brasil. Nearly three-quarters of their consumers in Brazil are in the lower middle class or low income brackets. To reach these customers, Nestlé set up sales and distribution networks in slum areas. This is the sort of business model innovation that investors must adopt to make inroads in today’s Latin America.
According to the United Nations, in 2004, US$ 67.5 billion in FDI flowed into Latin America and the Caribbean – mainly to Brazil, Mexico and Chile. This was a rise of 44% over the year before, but only accounted for 29% of total investments going to developing economies, only slightly greater than China’s share (26%). This was significantly lower than the level at which the region used to enjoy in the 1990s. The fall in attractiveness mainly concerns factors ranging from poorer infrastructure quality and investment to problems with the management of public finances. Additionally, unpredictable politics, arbitrary regulations and slow bureaucracies aggravate the situation. “Investment in the region is insufficient and very low because countries, with the exception of Chile, have poor regulation,” Rosario Cordoba, Director, Revista Dinero, Colombia, explained. “Investment is a function of confidence. Investors have to be able to see what lies ahead. Our countries, however, are perceived as politically unstable.” Opening Plenary on “Risks and Opportunities for Regional Development”: Peter Torreele, Managing Director, World Economic Forum; Ricardo B. Salinas Pliego, Chairman, Grupo Salinas, Mexico; Claudio Lembo, Governor of the State of São Paulo, Brazil; José Miguel Insulza, Secretary-General, Organization of American States (OAS), Washington DC; Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil; Gilberto Kassab, Mayor of São Paulo, Brazil; Guillermo Perry Rubio, Chief Economist, Latin American and Caribbean Region, World Bank, Washington DC
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Priorities for Action in Latin America
The aim of the Priorities for Action* is to consolidate options and propose solutions to the regional challenges. Latin America’s leaders recognize the need to renew and reinforce their commitment to improve the state of their region and the world. To compete globally, countries should pool their strengths to achieve the scale necessary to build better infrastructure, deepen regional agreements and strengthen regional institutions and governance. During the World Economic Forum on Latin America, participants were asked to address the following question: How can we achieve equitable distribution of income with economic growth? Figures below refer to participants’ responses on social and economic priorities for action and represent percentages of the total audience at the Closing Plenary. Together with the ideas collected prior to the roundtable the following priorities for action were identified: Social Priorities for Action
2. Safety Net: Increase demand actions through vouchers and/or conditional cash transfers such as the Oportunidades (Mexico), the Bolsa Familia (Brazil) or the Familias en Acción (Colombia). 3. Housing: Enhance access to housing through schemes that support demand, which complements the purchasing power of low income households. Banks and governments should promote the use of mortgage insurance and find ways to extend the tenure of mortgages. 4. Education: More emphasis and resources should be put on the training of teachers and quality education than in extending mandatory periods of education for children. Educators should be appropriately compensated. Resources should be employed to improve school system management at all levels. 5. Employment: Increase the supply of skilled labour so that the high value-added sectors of the economy can grow and improve income distribution, while ensuring long-term growth. Enhance the efficiency of the labour market, while protecting the rights and well-being of the employee.
Priorities for Action in Latin America
Economic Priorities for Action 1. Institutional Reform and Innovation: Set up a public-private agency to concentrate national efforts on attracting investors and promoting innovation. Offer tax credits for R&D spending in the private sector. 2. Tax Reform: Increase the tax base, simplify the fiscal system and reduce tax evasion by investing in information systems. Institutions need to be strengthened to ensure that these funds are invested efficiently and to minimize the possibilities of corruption and political manipulation. 3. Infrastructure and Investment: Publicprivate partnerships (PPPs) and similar concessions should be set up to focus on building necessary infrastructure over the long term, particularly in rural areas, regions that are underdeveloped and urban slums. Governments should implement appropriate regulation and increase capital expenditure.
1. Equal Access: Promote active social policies in favour of low income households, reconciled with macroeconomic stability, sound fiscal policies and efficient tax collection. An important role should be to enhance access by low income families to basic healthcare, good quality education from pre-school level and universal social security.
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World Economic Forum on Latin America
World Economic Forum on Latin America
4. Financial Services: Improve access of small enterprises and producers to financial services (“bancarización”, credit, insurance). This would require better creditor rights, credit bureaus, prudential regulation and innovation in financial products. Promote risk mitigation instruments to help SMEs access long-term financing in local currencies. 5. International Trade: Actively engage in negotiations to promote fair trade of manufactured and non-manufactured products.
Each country should focus, through stable political coalitions and quality of its government, on unblocking the constraints that are impeding it from achieving equitable income distribution and sustained growth.
*The Priorities for Action in Latin America were presented to participants on 6 April 2006 in the Closing Plenary of the World Economic Forum for Latin America in São Paulo. Co-Chairs and participants voted on the base of their willingness to engage in the implementation of such priorities.
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Acknowledgements The World Economic Forum would like to thank its Partners for their valuable support of the World Economic Forum on Latin America, São Paulo, 5-6 April 2006:
Strategic Partners Audi HP KPMG Kudelski Group Merck & Co. Nestlé New York Stock Exchange PepsiCo Zurich Financial Services
Regional Partners Banco Hipotecario SA Grupo Salinas
Official Carrier Iberia The World Economic Forum would also like to thank the Government of São Paulo and ApexBrasil for their support and TV Cultura as host broadcaster.
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World Economic Forum on Latin America
Contributors Peter Torreele is Managing Director of the World Economic Forum. Sylvie Naville is Associate Director, Latin America. Emilio Lozoya is a Global Leadership Fellow and Manager, Latin America. Jacques Marcovitch is Professor at the University of São Paulo and Senior Adviser to the World Economic Forum. Chantal Adamson is Senior Event Manager. Vidhi Tambiah is Associate Director, Global Agenda, at the World Economic Forum. He worked with William Hinchberger and Alejandro Reyes to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the World Economic Forum on Latin America in São Paulo. Session summaries are available at: www.weforum.org/ Alicia Bartlett, Icon Design Associate Director, Editing: Nancy Tranchet Design and Layout: Kamal Kimaoui, Associate Director, Production and Design Photographs: Julio Vilela
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World Economic Forum on Latin America
The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)
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