World Economic Forum On Latin America 2008

World Economic Forum on Latin America Securing a Place in an Uncertain Economic Landscape Cancún, Mexico 15-16 April 2008

Report

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 © 2008 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: 080508

Contents

Page 3 Preface Page 4 Summary: Securing a Place in an Uncertain Economic Landscape Page 9 Global Trends and Economic Shifts Page 13 Asia and Latin America Page 17 Merging Business and the Environment Page 20 Growth through Critical Investments Page 24 Enhancing Innovation in Business and Social Issues Page 28 Acknowledgements

1 | World Economic Forum on Latin America

2 | World Economic Forum on Latin America

Preface

Emilio Lozoya Austin Head of Latin America, Global Leadership Fellow

The World Economic Forum on Latin America this year took place as the world focused with perplexity and concern on the global financial turbulence and its potential risks and serious implications for the world economy. This unique gathering also took place as the region closed a five-year cycle of economic growth of over 5% per annum, income per capita growth of over 3% per annum, international reserves of over US$ 450 billion, poverty rates reduced from 44% to 35%, and FDI inflows having reached US$ 95 billion in 2007. While the region’s economy has performed well, the enormous social challenges it is confronting demand continued efforts to make growth more inclusive. The 500 leaders from business, government and civil society from over 40 countries turned the World Economic Forum on Latin America into an exceedingly relevant gathering. Together this unique multistakeholder group evaluated the trends and changes in the global economy, in the political arena, in trade relations between Asia and Latin America as well as developments affecting investment to stimulate regional growth and the search for innovation in business and social affairs. The agenda included a regional overview of business and political strategies in five spheres: geopolitics; competitiveness; energy security; growth with income distribution; and innovation related to security, climate change and the preservation of biodiversity.

The programme aimed to support regional leaders in their efforts to share perceptions and seek common solutions to the multiple challenges. These include promoting the modern face of Latin America and emphasizing the best of its creative culture, entrepreneurs and economic performance, as well as its achievements in the realm of social issues and in the preservation of its natural riches. The diverse mix of participants set an agenda for 2008 to respond to the financial turmoil, design proactive strategies to ensure economic sustainability and make the decade to begin in 2010 more promising for the region. With the presence of eight heads of state or government, over 40 ministers, secretaries, governors and heads of international organizations, and hundreds of CEOs, the meeting concluded with a shared optimism about the recent macroeconomic achievements and the prospects for a growing middle class, but also stressed the need for urgent action on long overdue aspects, including the need for quality education, for more and better infrastructure, for regional trade, energy and infrastructure integration, for higher saving and investment rates, and the urgency of further structural reforms on the institutional front to allow higher productivity growth and therefore more inclusive economic growth rates.

3 | World Economic Forum on Latin America

Summary: Securing a Place in an Uncertain Economic Landscape

“This meeting will help all of us make a much better Latin America and build a Latin America that looks to the future with optimism.”

“There is now reconciliation between government and business. It’s not anymore ‘economy versus society’; it’s not ‘left versus right’. It’s ‘forward or backwards’.”

Felipe Calderón, President of Mexico Klaus Schwab, Founder and Executive Chairman, World Economic Forum

More than 500 business, government and civil society leaders from over 40 countries gathered in the glistening resort of Cancún on Mexico’s Yucatán Peninsula for the World Economic Forum on Latin America. While the focus was “Securing a Place in an Uncertain Economic Landscape”, the topmost issue on everybody’s mind was how the US downturn and the slowdown in the global economy would affect the region. For all the uncertainty in the markets, participants took comfort in knowing that Latin America’s economic performance in recent years has been its best in decades, mirroring the strength in the global economy. In facing the current slump, said José Sergio Gabrielli de Azevedo, President and Chief Executive Officer, Petroleo Brasileiro, or Petrobras, and a Co-Chair of the meeting, “taking a regional perspective is very important because we have special questions and

4 | World Economic Forum on Latin America

solutions in Latin America and this is one place where we can exchange ideas and develop good perspectives for the future.” President Felipe Calderón of Mexico concluded that the World Economic Forum on Latin America had given the continent “the opportunity to see how much we share and how it is possible to overcome our differences”. He added: “This meeting will help all of us make a much better Latin America and build a Latin America that looks to the future with optimism.” The optimism was certainly palpable but it was mixed with appropriate caution, especially with the prospect of high food and oil prices continuing in the short term. Central American and Caribbean leaders issued a dramatic warning about this “perfect storm” in one plenary session. “The cautious optimism,” concluded Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, “shows the resilience

Which is the most important initiative to make the decade beginning in 2010 more promising for Latin American countries? 1. Education: Construct a quality education system 46.90%

2. Infrastructure and Investments: Boost infrastructure integration and promote intraregional trade 12.50%

3. Security: Reform the criminal justice system to enforce the rule of law and fight crime 10.90%

4. Economic Growth: Deal with the US recession 9.40%

5. Economic Security: Promote access to sanitation, housing, banking and employment 9.40%

6. Energy Security: Meet the growing demand for energy 6.30%

7. Natural Resources: Use water and other natural resources responsibly 3.10%

which has been achieved in Latin America’s economic, political and social development.” There is now, Schwab believed, “reconciliation between government and business. It’s not anymore ‘economy versus society’; it’s not ‘left versus right’. It’s ‘forward or backwards’.” At the World Economic Forum on Latin America, the focus was definitely forward. In a vote in the closing plenary session, participants identified education, specifically the need to construct values and skillsdriven education systems, as the top priority for Latin America to achieve sustainable development and lay the foundation for a promising decade starting in 2010. (See the chart for full results.) The Cancún meeting was organized under five subthemes: “Global Trends and Economic Shifts”, “Asia and Latin America”, “Merging Business and the Environment”, “Growth through Critical Investments” and “Enhancing Innovation in Business and Social Issues”.

Global Trends and Economic Shifts As the pressures of globalization have pushed regions and sub-regions around the world to deepen integration, and the global economic centre of gravity

has been shifting to Asia, the question is whether Latin America will ride the wave or fall behind. Can the region find its identity? • Latin America’s recent economic performance has been its best in decades. But political differences appear to have limited efforts to deepen integration. • While the region’s relationship with the US used to be paramount, strains have emerged due to America’s post-9/11 policies and the ambivalence of many American politicians to the Bush administration’s pro-free trade agenda. Some Latin countries, notably Brazil and Chile, have now forged strong ties with Asia, especially China. • Latin American countries are beginning to feel the benefits of opening up to the global market. Central American nations, in particular, have realized the advantage of pooling resources and populations to create a larger, more competitive combined market. • Testing times lie ahead. In addition to the global economic slowdown and the downturn in the US, Latin American countries are facing a “perfect storm” of high food and oil prices that could weaken their economies and threaten social stability (see Figure 1). • The key is for Latin American nations to work together as a region but also for each country to determine what restructuring and reforms it must implement.

5 | World Economic Forum on Latin America

From left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime Minister of Trinidad and Tobago; Susan L. Segal, President and Chief Executive Officer, Council of the Americas, USA; Manuel Zelaya Rosales, President of Honduras; Álvaro Colom Caballeros, President of Guatemala; Eduardo Sojo Garza-Aldape, Secretary of the Economy of Mexico

Asia and Latin America

Figure 1: Commodity Price Rises While metals and oil have risen sharply since 2003, agricultural prices have shown a more recent rise

China and India have become global economic forces at the same time that Mexico and Brazil have themselves appeared on the radar screens of corporate strategists and investors. Some Latin American countries such as Brazil and Chile have already developed strong trading links with Asia.

Real commodity prices** (100=Jan 2003)

450 400 Copper 350 300 Iron Ore

250 200

Oil*

150

Wheat Maize (corn)

100 Soybeans 50 Jan 03

Jul 03

Jan 04

Jul 04

Jan 05

Jul 05

Jan 06

Jul 06

Jan 07

Jul 07

Jan 08

* West Texas Intermediate crude oil ** Prices in constant US$, base month January 2008

Source: IMF

“This is a perfect storm. We were on the right path but how long can we withstand the situation? We have to feed our people and commodities are becoming scarce.”

• Confronted by the challenges of food and energy security and rising inflation, China is a natural trading partner for the resource-rich countries of Latin America. • Some economies, notably Brazil, Chile and Colombia, have focused on deepening relations with Asia. Lingering unease with embracing Asia remains in nations such as Mexico, which competes more directly with China. Latin America is still a relatively closed region. • Latin America should avoid depending too heavily on commodities trade with the resource-hungry economies in Asia. That said, China’s strong growth could help the region weather the current global slowdown and a recession in the US. • The challenge for Latin American economies is to use the rise of China and India as catalysts for change and restructuring to put themselves in a better competitive position in the global economy. There is no room for complacency.

Elias Antonio Saca, President of El Salvador

6 | World Economic Forum on Latin America

F

M

Making the Most of Rising Commodity Prices Central American leaders warned that the impact of climbing food and oil prices could undo the recent gains their economies have made. “This is a perfect storm,” said Elias Antonio Saca, President of El Salvador. “How long can we withstand the situation? We have to feed our people and commodities are becoming scarce. This scandalous storm might become a hurricane that could upset not only our economies but also the stability of our countries.” At the same time, these hikes in commodity prices have created some short-term wins in the region. The trade balance is substantially positive, but inflation could tip the balance and push lower-income households further into poverty. This situation poses a conundrum: Latin American countries, rich in natural resources, should be benefiting from price increases, but should governments be tackling the issue of potentially crippling inflation?

“The situation of rising commodity prices is really a mixed bag for Latin America,” said Luis Andrade, Director, McKinsey & Company, Colombia. “The trend seems to be positive overall, but threats are looming, particularly on the inflation side.” Price controls “will not work”, according to Felipe Larraín Bascuñán, Professor of Economics, Catholic University of Chile. “An important public policy issue is how to help small farmers take advantage of price rises,” he said. Governments should invest in new technology, training and financial incentives. It is time to rethink the productivity agenda, concluded John C. Compton, Chief Executive Officer, PepsiCo Americas Foods, PepsiCo, USA. “We are looking at transformational changes in our production and plan to become net zero users of commodities such as energy, water and electricity,” he said. “We used to talk about reuse and recycle, now we are talking about replenishing. We want to put these inputs back into the environment.”

Merging Business and the Environment Latin America is at the forefront of many of the global debates over environmental issues such as climate change, alternative fuels, deforestation and the impact of urbanization. It is natural that businesses in the region should now be addressing these concerns.

“Taking a regional perspective is very important because we have special questions and solutions in Latin America and this is one place where we can exchange ideas and develop good perspectives for the future.” José Sergio Gabrielli de Azevedo, President and Chief Executive Officer, Petroleo Brasileiro Petrobras, Brazil; Co-Chair of the World Economic Forum on Latin America

• “Environmental sustainability” is regarded as a mainstream prerequisite for successful infrastructure development. Even the war on the drug trade has a “green” edge, as the rainforests are threatened by encroaching coca producers. • The biofuels debate is heating up, as food prices mount. Once touted as a clean-energy panacea, these renewables are now criticized for their use of large amounts of water and land that might otherwise go to growing more food staples. • Brazil is leading the way in developing a new generation of biofuels that may be more environmentally sound. • With oil prices set to remain high, the demand for biofuels will increase, spurring a diversification of sources and the development of better products. Biofuels will not become a substitute for petroleum.

7 | World Economic Forum on Latin America

From left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime

Minister of Trinidad and Tobago; Susan L. Segal, President and Chief Executive Officer, Council of the Americas, USA; Manuel Zelaya Rosales,

Growth through Critical Investments Latin America needs to deploy its capital resources more wisely. To do so will require measures to increase transparency and openness in labour and financial markets. The aim of such structural reforms would be to increase the productivity of the region’s economies. • Business, government and civil society leaders again stressed the importance of better education, identifying the need for values and skills-driven education systems as the top priority for the region. This means encouraging students to take more practical courses such as the hard sciences and to improve the quality of teaching. • The dysfunctional effects of the informal sector on the larger economy must be addressed. These extend beyond the loss of tax revenues and the unfair advantages to firms that do not play by the rules. Workers in the informal sector retire to a life of hardship. In light of these problems, there are opportunities for financial institutions to provide new services such as microfinancing to small enterprises. • The absence of working capital and high taxes account for a significant proportion of failures among small and medium-sized enterprises, suggesting that governments should examine tax regimes to enhance the viability of SMEs and limit informal-sector growth. • Regulatory reform is essential in many Latin American economies to enhance the access of SMEs to needed capital, to create more transparency and competition, and to allow for more competition in inefficient or low-productivity sectors. 8 | World Economic Forum on Latin America

• Infrastructure development will require enormous outlays of capital. The needs are such that publicprivate partnerships are essential to raise sufficient capital. Attracting private investment, however, will require reforms including measures to ensure a level playing field and a stable regulatory environment.

Enhancing Innovation in Business and Social Issues Instead of struggling to come up with new concepts or fresh ideas for addressing the region’s economic insecurity, Latin America should focus on implementing on a larger scale some of the many solutions that are leading to real changes at the local and national levels. • The good news that has buoyed confidence in Latin America is part of a continuum dating back decades, running through a dramatic transition from a continent of corrupt military dictatorships to a vibrant region where democracy reigns and free trade is the norm. • There are harsh realities. Political unrest is growing in many countries. In some cases, there has been a backlash against opening markets and free trade. • Support for social entrepreneurship could become an important way to promote the free market while at the same time addressing poverty. Microfinancing could also bolster efforts to address widening income gaps. But better regulation, supervision and monitoring of the sector are required. • To combat the problem of criminal gangs in some communities, innovative solutions such as work programmes have proven effective.

Global Trends and Economic Shifts

From left to right: Moisés Naím, Editor-in-Chief, Foreign Policy Magazine, USA; Rafael Fernández de Castro, Academic Dean, Autonomous Technological Institute of Mexico (ITAM), Mexico; Thomas A. Shannon, Assistant Secretary, Bureau of Western Hemisphere Affairs, US Department of State, USA; José Miguel Insulza, SecretaryGeneral, Organization of American States (OAS), Washington DC; Fernando Araújo Perdomo, Minister of Foreign Affairs of Colombia; Jim Kolbe, Senior Adviser, McLarty Associates, USA

It may be worrisome that the issue of Latin America’s regional identity remains so vexing in this age of globalization, even though Latin American economies are more in sync than they have ever been, despite political differences. “The last four years have been the best [economically] since 1492,” quipped Moisés Naím, Editor-in-Chief of Foreign Policy Magazine. Intraregional trade has grown (and in 2006 accounted for 20% of all trade; see Figure 1), yet, intraregional friction has risen. “We are looking at blocs in Latin America in a way we never did before,” he said. “There are deep divisions. This will define a lot of what will happen” in the run-up to the next decade.

Figure 1: Growth in Latin American Trade Intra-regional trade growing faster than trade with the US 450 400 Latin America trade (100=2002)

As global trends of regional integration and market opening intensify and the economic centre of gravity shifts with increasing pace to the dynamic emerging economies of Asia, the question is whether Latin America is riding the wave or falling behind. In one session, Colombia’s Minister of Trade, Industry and Tourism Luis Guillermo Plata, a World Economic Forum Young Global Leader, noted that the Andean Pact and the European Community were launched at about the same time. Today, he observed, the Andean Community of Nations, as the South American trade bloc is now known, is a weak alliance, while the European Union has common passports and a common currency used by a majority of its members. Recalling that Latin America has been described as a “lost continent”, Plata asked participants: “What can we do so potential trading partners and investors can find us again?”

China*

350 300 250

Latin America 200

Total US

150 100 2002

2003

2004

2005

2006

* includes trade with Hong Kong and Macao

Source: IMF Direction of Trade Statistics

Historically, of course, the determining geopolitical relationship for the region has been with the United States. But some of America’s post-9/11 policies and the ambivalence of many US legislators towards the Bush administration’s strong support for free trade and free-trade agreements with countries in the region have created strains even though, as Peter Hakim, President of Inter-American Dialogue, observed, “the substantive [Bush] agenda has been pretty good” for Latin America. Washington, acknowledged Thomas A. Shannon Jr, Assistant Secretary of the Bureau of Western Hemisphere Affairs in the US State Department, has had to attend to the damage to its standing in the region. “Because of democratization, the opening of markets and globalization,” he

9 | World Economic Forum on Latin America

“The situation of Latin America to deal with what’s happening with the world economy has never been stronger.”

“If I am asked to give advice [on trade and immigration] to the next [US] president, I will say to stick with the Bush agenda.”

Alejandro Baillères, Chief Executive Officer, Grupo Nacional Provincial, Mexico; Co-Chair of the World Economic Forum on

Peter Hakim, President, Inter-American Dialogue, USA

Latin America

reckoned, “Latin American countries have options they didn’t have before. We are not the only ones around. This is a competitive environment.” Indeed, as Brazil and Chile have certainly shown, the emergence of China and India have served up enormous opportunities for Latin America across the Pacific and could lead to a surge in investment from Asia into the continent. This new partnership could help them weather this period of global economic stress as the US looks set to dip into recession. That some Latin American economies have to some extent “decoupled” from the US is an indication that the region may have reached a new level of maturity in its development. As Carmen Gisela Vergara, Minister of Commerce and Industry of Panama, explained, some countries such as her own are only beginning to see the value of opening up to the global market. Despite misgivings within the local business community, Panama signed a number of agreements in an effort to boost job creation and investment. Last year, the economy grew by more than 11%.

10 | World Economic Forum on Latin America

“The situation of Latin America to deal with what’s happening with the world economy has never been stronger,” said Alejandro Baillères, Chief Executive Officer of Grupo Nacional Provincial of Mexico and a Co-Chair of the World Economic Forum on Latin America (see Figure 2). “This is a good opportunity to showcase Latin America,” agreed fellow Co-Chair William R. Rhodes, Chairman, President and Chief Executive Officer, Citibank NA, Citi, USA. “Obviously, Latin America is not as dependent on the US economy as it used to be, say, a decade ago.” There was certainly fresh confidence on display in the session that brought together top leaders of Central America. “Twenty years ago, Central America was at war,” said Elias Antonio Saca, the President of El Salvador. “Now much has changed. Central America acts as a bloc. We have set ideologies aside and we are agreeing on issues such as a customs union. We are gradually implementing the European Community model. It took Europe 50 years to do it. We are implementing it quite quickly.” Added Jaime Morales Carazo, Vice-President of Nicaragua, who pointed out that he had been a leader of the Contra forces in his

country but agreed to join the administration of Sandinista leader Daniel Ortega Saavedra: “We now favour dialogue and agreement rather than intransigence and exclusion. We are freeing ourselves from our dependence on the past.”

President of Honduras: “The world economy is being tested and is at risk. International organizations need to develop urgent measures. We are not asking for donations but short-term lines of credit for food and alternative, renewable and clean energy. Either globalization is a trick – or it is an opportunity.”

Figure 2: Latin America's Economic Volatility Region has shifted from low economic growth and high volatility, to high growth and low volatility 6%

Percentage points

Latin America GDP growth 4

2

Standard deviation*

0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007F

2008F

* Standard deviation of GDP growth rates for 18 Latin American countries

Source: IMF (2007)

Refreshingly, the Central American leaders were candid about the storm clouds they now see on the horizon – the double threat of climbing food and oil prices. “This is a perfect storm,” warned Saca. “We’re on the right path but how long can we withstand the situation? We have to feed our people and commodities are becoming scarce. This scandalous storm might become a hurricane that could upset not only our economies but also the stability of our countries.” Added Manuel Zelaya Rosales, the

“Obviously, Latin America is not as dependent on the US economy as it used to be, say, a decade ago.” William R. Rhodes, Chairman, President and Chief Executive Officer, Citibank NA, Citi, USA; Co-Chair of the World Economic Forum on Latin America

11 | World Economic Forum on Latin America

From left to right: Antonio Bonchristiano, Co-Chief Executive Officer, GP Investimentos, Brazil; Daniel S. Och, Chairman and Chief Executive Officer, Och-Ziff Capital Management Group, USA; Hutham S. Olayan, President and Chief Executive Officer, Olayan America Corporation, USA; Felipe Larraín Bascuñán, Professor of Economics, Catholic University of Chile; William R. Rhodes, Chairman, President and Chief Executive Officer, Citibank NA, Citi, USA, and Co-Chair of the World Economic Forum on Latin America

That is the question that confronts all of Latin America today as its economies gaze into that globalization mirror and decide whether to go through the lookingglass and take a plunge into what looks to be a promising pool of opportunities but could result in being something far less inviting. Consider Mexican President Felipe Calderón’s predicament as he assesses how to navigate his country through the downturn in its NAFTA partner to the north. “Our correlation with the US economy can turn from being a great advantage to becoming a great disadvantage,” he accepted. “When the US catches a cold, Mexico gets pneumonia. My role as president now is to figure out what we will get when the US catches pneumonia.” The next several months of economic volatility will likely be tough for Mexico and the rest of Latin America, but it is critical for the region not to get lost once again but to look forward together, and for each country to decide what it must do to readjust, restructure and renew itself so that the next decade is a promising one. Concluded Calderón: “The key is for Latin America to decide how to speed up growth and to grow with harmony and fairness.”

12 | World Economic Forum on Latin America

“Because of democratization, the opening of markets and globalization, Latin American countries have options they didn’t have before. We are not the only ones around. This is a competitive environment.” Thomas A. Shannon Jr, Assistant Secretary, Bureau of Western Hemisphere Affairs, US Department of State, USA

Asia and Latin America

“If China keeps on growing, Latin America will do well.” Ricardo Hausmann, Director, Center for International Development, and Professor of the Practice of Economic Development, John F. Kennedy School of Government, Harvard University, USA

The discussion of Latin America’s relations with Asia focused on the implications of China and India’s rise at the same time that Mexico and Brazil have themselves entered into the consciousness of investors and corporate global strategists. Attention was also paid to the success some countries, notably Brazil, Chile and Colombia, have had in forging strong trading links across the Pacific. Yet the talk was still mainly armchair analysis about tremendous opportunities that must be grasped rather than about inspiring success stories and exciting initiatives already under way. “Latin America and India have about a fourth of the world’s population, but only about 2% of its commerce,” Humberto Ribeiro, Executive VicePresident, Politec, Brazil, remarked. Added Rodolfo Alborelli, Managing Director, Head, LAR, and Chief Executive Officer of Standard Chartered Bank in Argentina: “What’s needed now is a learning process on both sides.”

“China’s insertion in the global economy is an undisputed reality for academics, business people and policy-makers today. Latin America should benefit from this wake-up call, seizing the financing opportunity brought about by China’s rise.” Javier Santiso, Director and Chief Development Economist, Organisation for Economic Co-operation and Development (OECD), Paris

But learning has to come by doing. The presence of senior Chinese business leaders in Cancún, including Guo Shuqing, Chairman of China Construction Bank, the second largest state-owned Chinese commercial bank, and a Co-Chair of the World Economic Forum on Latin America, was evidence of China’s commitment to deepen ties. China’s FDI in Latin America is currently about US$ 20 billion but could increase to US$ 110 billion in ten years, said Yang Kaisheng, Vice-Chairman of the Industrial and Commercial Bank of China (ICBC), the largest state commercial bank, in one session. “We are here because of Latin America’s economic development and social progress,” Guo said at a press conference. With the Chinese economy expanding rapidly to the

13 | World Economic Forum on Latin America

point of overheating and China looking to invest more abroad to provide an outlet for excess liquidity, Latin America is a natural partner for the Chinese as they address the mounting challenges of food and energy security and rising inflation, he explained.

Figure 1: Exports to China

to expand it to include certain service sectors by early next year. Santiago launched a preferential trade pact with India in 2006 and proposed turning that into an FTA during the recent visit of Indian President Pratibha Patil to Chile (see Figure 2). These are encouraging signs that some Latin American political and business leaders want closer commercial connections with Asia.

Latin America's exports of fuels and mining products to China up nearly tenfold in six years

China's imports from Latin America (US$, billions)

$35 Manufactures CAGR: 28%

30 25

Agricultural products CAGR: 24%

20 15

Fuels and mining products CAGR: 46%

10 5 0 2000

2001

2002

2003

2004

2005

2006

Source: WTO

For now, Asia-Latin America relations remain based on exports from West to East of raw materials, manufactured products heading in the other direction (see Figure 1). Brazil is one country that has taken pole position in the race to connect with the Chinese market, establishing what Beijing’s leaders call a “strategic partnership” in trade on a heavy flow of iron ore and soybeans to China. Chile and China signed a free-trade agreement (FTA) in 2005, agreeing in April

14 | World Economic Forum on Latin America

“We are here because of Latin America’s economic development and social progress.” Guo Shuqing, Chairman, China Construction Bank, People's Republic of China; Co-Chair of the World Economic Forum on Latin America

The Latin America Question The best videos submitted to the site were screened in the closing session of the World Economic Forum on Latin America. Watch answers to the Latin America Question in English (http://youtube.com/latinquestion), Spanish (http://mx.youtube.com/preguntalatina) and Portuguese (http://br.youtube.com/questaolatina). Watch plenary sessions on the Forum’s channel on YouTube at http://youtube.com/worldeconomicforum

More than 200,000 people around the world joined the discussions at the World Economic Forum on Latin America through video debates hosted on YouTube. Viewers sent in their responses to the Latin America Question: “What key action do you think countries, companies or individuals should take to make Latin America a better place in 2008?” The presidents of Guatemala, Costa Rica and the Prime Minister of Trinidad and Tobago were among 70 participants who also added their voice to the open dialogue about the future of the region. “The interaction via YouTube’s video platform offered us a unique possibility to open our debates to a global audience,” said Emilio Lozoya Austin, Head of Latin America and Global Leadership Fellow at the World Economic Forum.

Figure 2: Exports to India Chile now accounts for nearly one-third of Latin American exports to India $7,000 India imports from Latin America (US$, millions)

But there remains lingering unease. Mexico, for example, tends to view China’s rise with concern, as investment is lured away from manufacturing plants just south of the US border. Yet Chinese automakers are eyeing opportunities to make cars in Mexico for export to the US and other markets. Ironically, as Guo pointed out, “Mexico is relatively open but many of the other countries [in Latin America] are not.” He observed that the region seemed to be relatively more globalized before the 20th Century than it is now. “Latin America was very globalized and changed China’s economy,” he reckoned.

The Latin America Question builds on the Davos Question launched for the World Economic Forum Annual Meeting 2008 in Davos, which has been watched by over 8 million people on YouTube.

6,000 5,000

Other

4,000

Mexico

3,000 Chile 2,000 Argentina 1,000 Brazil 0 2003

There is of course another concern on Latin American minds as they weigh the implications of closer ties with Asia, particularly China. It would perhaps be too easy to fall into a tempting dependency relationship, with the continent’s resource-rich economies relying heavily on trading raw materials to feed the hungry Chinese giant. China needs to keep growing at a high rate to maintain social stability and create necessary jobs. “If China keeps on growing, Latin America will do well,” said Ricardo Hausmann, Director of the Center for International Development and Professor of the Practice of Economic Development at Harvard University’s John F. Kennedy School of Government.

2004

2005

2006

Source: Government of India, Ministry of Commerce & Industry, Department of Commerce

But the slowdown in the US and the global economy could pose risks. Some Latin American countries, such as Chile whose exports match China’s import requirements, will perform well in the short term, while those whose exports compete with China’s, such as Mexico, may run into some trouble, Hausmann warned. Huang Haizhou, Managing Director of China International Capital Corporation (Hong Kong), wondered “whether Chinese demand will be enough to support commodity prices” and keep Latin American economies buoyant during this global economic slump.

15 | World Economic Forum on Latin America

From left to right: Wang Jinzhen, Vice-Chairman, China Council for the Promotion of International Trade (CCPIT), People's Republic of China; Juan Quirós, Vice-President, Fiesp, Brazil; Daniel Servitje, Chief Executive Officer, Grupo Bimbo, Mexico; Daniel J. Brutto, President, UPS International, UPS, USA

The critical question, however, is not whether China’s high demand for commodities keeps Latin America’s economies humming. The key issue is how Latin American economies each come to terms with China’s long-term economic rise. The stress of the global economic slowdown could prove a catalytic test. The hard times may prompt those economies that are more challenged by China’s emergence to pursue valuable and necessary restructuring, putting them in a better position in the long run to compete with neighbours who may weather the storm but could lapse into complacency as a consequence. As Daniel Servitje, Chief Executive Officer of Grupo Bimbo of Mexico, pointed out, the challenge for Latin American countries is to get into the “fast lane” to Asia as Chile and Colombia have managed to do. Governments should raise awareness of the opportunities that China and India hold and not dwell on perceived threats. The rise of China and India, as well as the other Asian economies, should make Latin American economies want to become better and more competitive and not to take cover. “We are used to looking at the national league, not the World Cup,” Servitje concluded. But now “we must overcome our complacency.”

16 | World Economic Forum on Latin America

Merging Business and the Environment

“Biofuels are not going to be a substitute for petroleum – not at the amount that would be needed in the next 50 years.” José Sergio Gabrielli de Azevedo, President and Chief Executive Officer, Petroleo Brasileiro Petrobras, Brazil; Co-Chair of the World Economic Forum on Latin America

“Looking ahead to 2030, according to IADB data, aggregate energy demand in Latin America will increase by 75% and electricity generation capacity will need to increase by 144%. Are we going to be able to meet this challenge?” José Miguel Insulza, Secretary-General, Organization of

Latin America finds itself at the forefront of many of the global debates over environmental issues like climate change, alternative energy, deforestation and the multiple challenges facing megacities. Once limited to the dichotomy of development vs conservation, the discussion is becoming more complex, subtle and sophisticated. With advances in greenhouse gas (GHG) emission reductions, carbon credits, biofuels, ecotourism and certification of origin, to name a few examples, business people are beginning to devise ways to make money from green products and practices. And many ecologists are beginning to accept and even advocate market-based solutions to environmental problems. Regarding climate change initiatives towards a robust post-2012 regime, according to participants' votes, business would most like to be involved in: a) cutting direct GHG emissions; b) investing in R&D on future technologies; c) raising awareness among employees and consumers; and d) looking to build political support for stronger efforts.

American States (OAS), Washington DC

At this World Economic Forum on Latin America, the newfound mainstream status of the environment was evident in the way it popped up in places that would have seemed odd just a few years ago. Until recently, any debate over infrastructure development would have either ignored the environment or lambasted greens as obstructionists. In Cancún, “environmental sustainability” became a consensus choice as a prerequisite for successful infrastructure development. The war on drugs also received a green makeover. The rain forest is threatened, not only by the illegal logging, but also by the depredations of coca producers, said Alvaro Uribe Velez, President of Colombia. As a result, the nation’s efforts to halt the drug trade have an environmental as well as a social facet, he said.

17 | World Economic Forum on Latin America

Nowhere were the more nuanced deliberations more apparent than in the session on biofuels. Once touted as a clean and renewable panacea, then derided as a villain, stealing tortillas from the poor and land from the rainforests, biofuels received a level-headed hearing at the meeting. The discussion delved into complexities like water usage – suggesting that consideration be given to whether biomass crops need large amounts of water, whether natural rainfall is sufficient in places chosen for cultivation and, if irrigation is needed, in an analysis of the energy expended in pumping. Figure 1: World’s Largest Biofuels Producers Brazil and Colombia both among the world's top-10 producers of biodiesel and fuel ethanol

Brazil

France China

Italy Spain India

Other

States, Mexico, Central America and other parts of the Americas (see Figure 1). Technological barriers are lower than generally recognized, said Luiz Fernando Furlan, Chairman of the Board, GALF Empreendimentos, Brazil. Brazilian gasoline refineries use ethanol as an additive in the nation’s petrol, to the tune of 22%, and even imported cars run well. Brazilian-made cars have flex-fuel engines which allow them to use 100% ethanol as fuel. As the so-called first generation of fuels struggles to attain a critical mass of distribution, second generation fuels are already being developed. They include butanol, which has a higher energy density than ethanol and does not absorb water, thus reducing corrosion on car engines. Another promising branch of new research can be found in cellulose enzyme technology that produces ethanol or butanol from bagasse, the heavy pulp left over after sugar has been extracted from cane.

Colombia Canada Germany

US

Share of top-10 countries' biofuels* production, 2006

* Includes biodiesel and fuel ethanol

Source: "Renewables 2007: Global Status Report", Ren21

With a programme dating to the 1970s and nearly ideal conditions in terms of climate and land availability, Brazil became the world leader for the first generation of biofuels, using ethanol refined from sugar. Colombia was another early adopter, and similar incentives are being implemented in the United

18 | World Economic Forum on Latin America

Douglas Albrecht, President, Celulosa Argentina, predicted that oil prices will remain high, which will further boost the demand for biofuels. But José Sergio Gabrielli de Azevedo, President and Chief Executive Officer, Petroleo Brasileiro Petrobras, Brazil, a CoChair of the World Economic Forum on Latin America, urged caution in the short term. “Biofuels are not going to be a substitute for petroleum – not at the amount that would be needed in the next 50 years,” he said. “But they will play a more important role. There will be a diversification of sources. There are limitations now. The second and third generation technologies will be important, but the third generation technology probably won’t come in less than five years.”

ENERGY VISION UPDATE 2008 Solving the Energy Puzzle through Innovation

World Economic Forum in partnership with Cambridge Energy Research Associates

Solving the Energy Puzzle Tapping the full potential of Mexico’s oil and gas resources hinges on overhauling the controls governing their extraction. A controversial energy reform bill presented by President Felipe Calderón to parliament is a big step in this direction. The proposals aim to give Mexico’s state-owned oil company, Pemex, greater freedom in operating, budgetary and investment decisions, as well as greater freedom to work with third parties. Without reform, the state monopoly is constrained to operate alone and Mexico may well forgo considerable economic opportunities and face declining oil production. Mexico lags behind other oil-producing countries like Norway and Brazil that have reformed their upstream sector, progress Pemex and Calderón could draw from in the process of defining Mexico’s “winning” model. “Without privatizing Pemex, the reform grants it access to state-of-the-art technology and complementary investment to multiply its execution capacity, as other national oil companies have already done,” Calderón warned.

the growing energy dilemma facing the world: how to deliver secure, affordable, low carbon energy to a global population that is expected to grow from 6.4 billion today to more than 8 billion by 2030. The World Economic Forum’s report, Solving the Energy Puzzle through Innovation, which addresses this question head on, formed the basis of the discussion. High energy prices combined with concerns about energy security and climate change are stimulating the most widespread drive for innovation the energy sector has ever seen. Investment in renewable energy and energy efficiency exceeded US$ 110 billion in 2007. However impressive the investment in clean technology may be, it is only a fraction of annual investments in energy. Therein lies both a tremendous challenge and a tremendous market opportunity. Innovative companies will capitalize on these opportunities. How many of them will come from Latin America?

Stimulating cross-learnings was high on the agenda of several private and public energy sessions at the World Economic Forum on Latin America. Participants expanded their discussion to look at the role of innovation to help solve

19 | World Economic Forum on Latin America

Growth through Critical Investments

“This is an opportunity to exchange ideas with interested people from Latin America and all over the world to see how we can help the region to develop. We see a lot of potential for people to come and invest and get good returns.”

“What do we need to compete with China? Productivity. And that will only come with structural reforms.” Alejandro Baillères, Chief Executive Officer, Grupo Nacional Provincial, Mexico; Co-Chair of the World Economic Forum on Latin America

José Antonio Fernández Carbajal, Chairman and Chief Executive Officer, FEMSA, Mexico; Co-Chair of the World Economic Forum on Latin America

With a few exceptions, notably infrastructure, Latin America doesn’t need to throw more money at its problems. Instead it needs to free up sources of capital and invest more wisely. In addition to the now perennial call for better education at the World Economic Forum on Latin America, participants advocated reforms designed to increase transparency and openness in labour and financial markets. They defended tax and regulatory changes to decrease the incentives for small and medium sized enterprises (SMEs) to take refuge in the informal sector – legendary for its low productivity. “What do we need to compete with China?” was the rhetorical question posed by Alejandro Baillères, Chief Executive Officer, Grupo Nacional Provincial, Mexico, a Co-Chair of the World Economic Forum on Latin America. His answer: “Productivity. And that will only come with structural reforms.”

20 | World Economic Forum on Latin America

Such mundane proposals run counter to the predominate “big idea” syndrome in the region, according to which messianic leaders have historically taken it upon themselves to pursue populist and ideologically-loaded solutions with enormous negative consequences on some of the nations and their people. Against that backdrop, a healthy dose of political realism is refreshing. “It isn’t a question of what would be the ideal reform for Petroleos Mexicanos [Pemex] or labour legislation, but what would be the next possible step that you can realistically take,” pointed out Baillères. For starters, the business, government and civil society leaders in Cancún repeated the now commonplace mantra of better education, which trails OECD countries for instance (see Figure 1). “It is the number one issue,” said Oscar Arias Sánchez, President of Costa Rica, noting the low proportion of teenagers who go on to university. “If we don’t educate people, it will be very difficult to have progress.” He added: “The quality and amount of education we have does not allow us to escape from the feudalism where a lot of Latin Americans still live.”

Building Cities

Figure 1: Educational Performance Latin America trails behind OECD countries in math and reading skills

500

Reading

400

Mathematics

Assessment of 15-year-olds' performance, 2006

600

300 Argentina

Colombia

Brazil

Mexico

Uruguay

Chile

OECD average

Source: OECD (2007)

The once generic discussion of education seemed more focused this time around. There was consensus on the need to build a “values and skills-driven educational system”. In practical terms, this translated into specific calls to encourage university students to take more practical courses and for public schools to reward good teaching. The lack of students majoring in the hard sciences hinders economic growth in Mexico, said Julio A. de Quesada, President, Consejo Ejecutivo de Empresas Globales (CEEG), Mexico. He added: “We have too many bankers and lawyers and not enough engineers.” (See Figure 2.) Baillères cited merit pay for teachers as a potentially achievable goal that would help improve the quality of education.

Participants explored the complex challenges facing the growing urban areas in the region, which include three of the world’s megacities: Buenos Aires, Mexico City and São Paulo. They broke into six working groups to develop recommendations for mechanisms and initiatives that promote urban development reform and environmentally, socially and economically sustainable patterns of settlement: • Establish an institutional technical body independent of elected political officials that has the authority and resources to create long-term plans (10 years and more) and policies for urban development • Establish strong legislative frameworks, which are key to guide and monitor public and private sector collaboration and investment in urban projects • Develop public policies that modify per capita consumption of water and other resources through market mechanisms with the aim to educate citizens as to the importance of conservation efforts • Maintain essential networks and services. Such maintenance requires coordination and cooperation among all federal, state and city authorities • Explore new and creative ways to slow immigration to the urban areas. This will inevitably require significant investment in and attention to rural populations • Explore the feasibility of establishing small-scale networks or “cells” of citizens in city neighbourhoods that would take on the responsibility of maintaining water, transportation, recycling and energy systems using alternative, sustainable methods where possible • Instil civic values and an understanding of sustainability and the lifestyle changes it may require through public education and especially the use of the media

21 | World Economic Forum on Latin America

Figure 2: Engineering Graduates

Figure 3: Old-age Dependency Ratios in Largest Latin American Countries Burden of ageing populations to be greatest in Chile and Mexico 40%

300

200

100 Mexico Rest of Latin America

0 China

European Union

Latin America

South Korea

United States

35 30 25 20 15 10 5

1950 2008 2050

400 Old-age dependency ratio (population over 65 as percentage of people age 15-64)

Number of engineering graduates, 2004 (thousands)

Latin America produces more engineers than the United States

0 Peru

Venezuela

Colombia

Argentina

Brazil

Mexico

Chile

Note: Latin America includes 15 nations in South and Central America for which data are available, most recent year

Source: NSF Science and Engineering Indicators 2008

Several sessions touched on the deleterious effects of the informal sector on the larger economy, and they extend far beyond the oft-decried loss of tax revenues and unfair competition for firms that play by the rules. For instance, the working poor often do not enjoy pension benefits because they either work for enterprises that pay no tax or benefits or work for legal companies but negotiate not to pay pension contributions, said Pamela Cox, Vice-President, Latin America and the Caribbean, World Bank, Washington DC. This translates not only into personal hardship when people retire, but reduces the consumer base among seniors. Chile and Mexico are forecast to carry the largest burden of ageing populations in the region (see Figure 3). Informality also inhibits the growing efforts by dedicated banks and divisions of larger financial institutions to provide microfinancing to small companies.

Source: United Nations (2007)

A study conducted of his bank’s clients revealed that two factors – the absence of working capital and high taxes – account for 40% of SME failures, reported Ricardo Villela Marino, Chief Executive Officer, Itaú Latin America, Brazil. Microfinancing is designed to help address the first problem, but entrepreneurs are often ineligible for any bank loans because they take their firms into the informal sector to evade the tax burden. “Governments should lower taxes on SMEs to reduce the incentive for those companies to go into informality,” said Villela Marino. Joaquim Levy, Secretary of Finance, State of Rio de Janeiro, Brazil, argued that state officials can reduce informality by simplifying tax systems. Simplification can jump start a virtuous cycle to bring more working poor into the pension system and boost tax revenues. Regulatory reform of the capital markets could also help SMEs access much needed cash, offered Manuel J. Balbontin, Founder and President, Compass Group, USA. “Capital market reforms are not rocket science,” he noted. “What we need are different mechanisms so that we can build a highway between the large pools of capital in the region and SMEs.”

“While current levels of annual investment in [Latin America and Caribbean] infrastructure are around 2.5% of GDP, it is estimated that the region needs to invest 4-6% of GDP for the next 20 years to achieve demand growth and maintain existing services.” Luis A. Moreno, President, Inter-American Development Bank, Washington DC

22 | World Economic Forum on Latin America

Many sessions highlighted the need for regulatory changes aimed at creating more transparency and competition. Roberto Teixeira da Costa, Member of the Board, Sul America, Brazil, noted that although Brazil is a regional leader in many aspects of capital markets, the country shares at least one important challenge with its neighbours – unpredictability. “Unpredictability is the name of the game in Latin America,” he said. “We have been working towards more transparency, which is important for domestic and foreign investors. Most important is good governance.” In host country Mexico, the most notable deregulation proposal on the table is President Felipe Calderón’s proposed liberalization of the public monopoly in the petroleum sector. Eduardo Sojo Garza-Aldape, Secretary of the Economy of Mexico, outlined a less controversial but no less ambitious effort the administration is pursuing in partnership with the Organisation for Economic Co-operation and

“You need the participation of the state but it is a strategic role so that all can benefit from the market.”

Figure 4: Latin America's Competitiveness in Logistics Only Argentina is among the world's 50 top countries in terms of the ease and affordability of arranging international shipments 125

124

Most of the above-mentioned proposals can be implemented without significant outlays of public or private money. The exception to that rule is infrastructure development (see Figure 4). For many observers, infrastructure is the lifeblood of competitiveness. The problem of crumbling and insufficient infrastructure has been at the top of all regional business agendas for several years. Governments have taken note and started devoting significant efforts to boost private investment and are pledging more public funds. However, Latin America represents only about 3% of global infrastructure demand. This means investment has started to increase, but not at the rate needed to close the gap between needs and investment.

74

75

Brazil

Colombia

66

Venezuela

Peru

63

Philippines

52

54

Poland

49

53

Mexico

50

43 25

26

28

China

Nicaragua

Russia

Paraguay

Costa Rica

0

Argentina

Development that will analyse the Mexican economy sector by sector to define policies to improve competitiveness and productivity. Already the government has made piecemeal but significant changes in port regulations and the liquid natural gas market, he pointed out. “The country has moved forward with reforms, but one aspect has been overlooked – microeconomic reforms,” he said. “These would mean moves to create more competition and deregulation.”

94 82

75

Czech Republic

Mexico

Malaysia

Eduardo Sojo Garza-Aldape, Secretary of the Economy of

Country rank on international shipments (of 150 countries)

113 100

Source: "Connecting to compete: Trade logistics in the global economy", World Bank (2007)

Participants discussed the potential for public-private partnerships and what is needed to attract private investment for infrastructure development. Ideas included: (1) using Mexico’s ambitious infrastructure programme, and its expertise in crafting concession agreements, as a model; (2) creating social legitimacy for infrastructure development by avoiding collateral damage, reducing cost overruns, accepting the need for transparency and insisting on environmental sustainability; (3) encouraging governments to provide stable regulatory environments for investors; and (4) pushing companies to practise corporate social responsibility, for instance by adhering to labour laws and using local suppliers when feasible.

23 | World Economic Forum on Latin America

Enhancing Innovation in Business and Social Issues

“If there is a lack of security, people don’t invest. We have decided to get rid of terrorism, this scourge of 40 years – and we have to do it.” Alvaro Uribe Velez, President of Colombia

“If we don’t educate people, it will be very difficult to have progress. The quality and amount of education we have does not allow us to escape from the feudalism where a lot of Latin Americans still live.” Oscar Arias Sánchez, President of Costa Rica

Latin America doesn’t need a Next Big Thing but rather should focus on replicating, supporting and implementing all the little ideas that have been percolating to make real changes on the local and national levels. “For the first time we may have access to solutions for most of our problems of economic insecurity,” said Martin Burt, Founder and Chief Executive Officer, Fundación Paraguaya, and a Social Entrepreneur. Burt’s comment reflected the sense of optimism that pervaded the World Economic Forum on Latin America. This optimism engendered confidence that the region can finally address some of its longstanding and deeply rooted problems. Participants addressed a broad range of issues related to economic inclusion, income distribution and social welfare, and several key themes emerged: (1) the profit motive is part of the solution rather than part of the problem; (2) companies, governments and civil society organizations must work together; (3) institution building is key, both at the macro

24 | World Economic Forum on Latin America

society/government level and the micro level within firms; and (4) the chronic problem of bad quality education must be tackled. The upbeat nature of the meeting stemmed partly from the near euphoria over the region’s recent macroeconomic performance, which has been about as good as it has ever been since the dawn of systematic statistical analysis. Paul Rice, President and Chief Executive Officer, TransFair, USA, a Social Entrepreneur, reminded participants that today’s good news is part of a continuum dating back decades: 30 years ago, brutal and corrupt military dictatorships lorded over much of the region, armed conflict was commonplace and politicians customarily meddled in markets. Today the landscape has improved considerably, he noted. Throughout most of the region, democracy reigns and press freedom has been established, free trade is the norm, civil society is stronger, the middle class is bigger and environmental consciousness has taken hold.

Yet amid all that good news lie some harsh realities. Political unrest, involving sometimes violent street protests, is growing in many countries. Murder rates are higher than other parts of the world (see Figure 1). It is surprising, noted Moisés Naím, Editor-in-Chief, Foreign Policy Magazine, USA, “how good the economy has been in Latin America and how bad the politics have been. If the politics have been bad when the economy has been good, it is interesting to imagine – if you think there will be a slowdown – what the politics will be like when the economy is bad.” Added Rice, “We have a lot to celebrate, but the trickle down approach does not work,” as social problems and poverty stubbornly refuse to go away. He commented, “there has been a backlash against free trade, the rise of so-called socialism and increasing social unrest. I suggest that time is short. Many of the advances of the last 20-30 years could be reversed.” Figure 1: Homicide Rates Murder rates in many Latin American countries high compared to other parts of the world 6

US Philippines

8

Thailand

8

Uganda

9

Latvia

9

Sri Lanka

10 13

Mexico Kazakhstan

17

Manuel Zelaya Rosales, President of Honduras

Rather than reverting to the old and what he called ineffective approaches of aid and government intervention, Rice suggested support of social entrepreneurs as the standard bearer for a new-style anti-poverty campaign. “Social entrepreneurship exists in every community,” he said. “There is a lack of critical ingredients but not a lack of will.” Key elements of the approach would include: (1) improved access to markets, including those for value-added products and niche markets like organic foodstuffs; (2) better access to capital for small and medium enterprises that have progressed beyond the micro-financing stage; and (3) increased capacity building services, including helping small firms develop organizational and managerial skills and create value-added products.

20

Russia

26

Guatemala

32

El Salvador

33

Venezuela

34

Jamaica

48

South Africa 0

10

20

30

Murders per 100,000 population (most recent year) Source: CTS

“The world economy is being tested and is at risk. We are not asking for donations but short-term lines of credit for food and energy. Either globalization is a trick – or it is an opportunity.”

40

50

Microfinancing is of course still useful for entrepreneurs at early levels of development. And in Latin America it is shedding an image as a novel form of assistance to become a service offered by dedicated banks and divisions of larger financial institutions. Microfinance institutions not only provide

25 | World Economic Forum on Latin America

loans to the poor, but they offer savings accounts to customers that regular banks won’t touch. The minimum deposit at Mexico’s Banco Azteca, part of the Grupo Salinas, is five dollars, thus providing a reasonable and more secure opportunity for people who would otherwise stuff cash under the mattress, said Ricardo B. Salinas Pliego, Chairman, Grupo Salinas, Mexico. Many banks also give their customers debit cards, thus further integrating them into the mainstream of society. As the segment grows, regulators are beginning to examine its practices – especially the interest rates it charges, which are far higher than those levied by traditional banks for conventional customers. Given the idiosyncratic nature of its business and cost structure, micro-bankers argue that regulators should treat them differently from traditional institutions. “It isn’t apples and oranges,” said Salinas. “It is apples and pineapples, way more different.” Added Christopher Rodrigues, Executive Chairman, International Personal Finance, United Kingdom: “Bad regulation should be avoided at all cost. But we defend supervision. Good supervision drives bad practices out of the market.” When critics raise ethical questions about higher interest rates for the poor, noted Carlos Danel, Co-Chief Executive Officer, Banco Compartamos, Mexico, a Young Global Leader, “The question they are really raising is not about interest rates but whether it is ethical to profit from the poor.

26 | World Economic Forum on Latin America

To me it sounds like discrimination. It is the same kind of exclusion and discriminatory practices that have kept people in poverty.” Other innovative best practices received an airing in Cancún. For instance, the CEO of a large rum distillery in one of the most violent states in Venezuela recounted his company’s experience with gangs which continually assaulted employees in neighbouring communities. His company devised an “admittedly risky programme” of providing work to violent gang members. To their surprise, scores of gang members presented themselves for training and work. The company eventually brokered a peace between rival gangs and, in a relatively short time, the crime rate in the county dropped 90%. “We all know the importance of family but we didn’t understand the fact that gangs are families, providing the identity, sense of belonging and discipline when society fails to provide these needs.”

Education: The Cornerstone of Latin America’s Future Business, government and civil society leaders identified the need to construct values and skills-driven education systems as the top priority for Latin America to achieve sustainable development. “It is the number one issue,” said Oscar Arias Sánchez, the President of Costa Rica, noting the low proportion of teenagers who go on to university. “If we don’t educate people, it will be very difficult to have progress.” The “entry level skills gap” in education was a topic of in-depth discussion in Cancún. Educators, labour leaders and government ministers are struggling with the huge – and widening – gap between the need for technicians and engineers and the availability of suitable new graduates. Demographics are working against bridging this gap: engineers are ageing and retiring while students are choosing more “glamorous” careers such as law. From the business perspective, the “perfect engineer” must understand local and international standards and codes, be equipped with hands-on experience, understand the balance between the commercial realities of the private sector and the public good, as well as have a well-rounded education in the softer subjects. From the academic perspective, business must become creatively involved if institutions are to turn out graduates with suitable entry-level skills. Participants debated whether today’s shortcomings stem from the basic education system, and agreed that a lack of learning skills is pervasive across the region. Employees’ capacity to learn and to solve problems is key if companies – and Latin America – are to boost competitiveness.

In a vote, participants identified the most important initiatives to be implemented in the next 20 months to bridge this gap and make the next decade more promising for academic institutions: • Complement technical skills with problem solving and attitude skills as subjects – 35% • Encourage the joint design of curriculum planning by academia and business – 20% • Design partnerships with companies for on-the-job training as part of the curriculum – 20% • Brand new schools to attract top students – 10% • Partner with major corporations to bridge the skills gap – 10% • Support faculty/teachers spending time in companies – 5% The most important initiatives to be implemented in the next 20 months to make the next decade more promising for business include: • Become more involved in basic education to promote the quality of education – 31.8% • Compensate in order to motivate professionals and book job satisfaction at the workplace – 18.2% • Motivate executives to spend more time in academia – 18.2% • Develop training programmes as a means to reduce costs on human resources turnover – 13.6% • Encourage meritocracy through initiatives – 9.1% • Make engineering more glamorous for young professionals – 4.6% • Encourage recent engineering graduate students’ repatriation – 4.6%

27 | World Economic Forum on Latin America

Acknowledgements

The World Economic Forum wishes to recognize the support of the following companies as Partners or Supporters for the World Economic Forum on Latin America:

Strategic Partners Alcoa ArcelorMittal Audi Bombardier The Boston Consulting Group BT CA Cisco Systems DuPont Goldman Sachs Infosys Technologies Kudelski Group Manpower Merck & Co. Merrill Lynch PepsiCo PricewaterhouseCoopers Renault-Nissan UPS Volkswagen WPP Zurich Financial Services

Regional Partners Banco Hipotecario Cambridge Energy Research Associates (CERA)

Meeting Supporters FEMSA Iberia Group

The World Economic Forum wishes to thank the Government of Mexico for serving as host country to the third World Economic Forum on Latin America, and in particular ProMexico, the Mexican agency for export and foreign investment promotion. The World Economic Forum also thanks Canal Once, Mexico, in collaboration with ProMexico, the host broadcasters of this event, and The Coca-Cola Company for providing beverages.

28 | World Economic Forum on Latin America

29 | World Economic Forum on Latin America

Contributors

Emilio Lozoya Austin is Head of Latin America and a Global Leadership Fellow at the World Economic Forum. The World Economic Forum on Latin America was under his direct responsibility. Julio Estrada is Associate Director, Latin America. Jacques Marcovitch is Professor, University of São Paulo, Brazil, and Senior Adviser at the World Economic Forum. Paula Verholen is Senior Community Relations Manager, Latin America. Antonio Human is Community Relations Manager, Latin and North America. Rosanna Mastrogiacomo is Senior Event Manager, and was the meeting Coordinator.

Report Writers Alejandro Reyes William Hinchberger Samantha Tonkin, Senior Media Manager at the World Economic Forum, worked with them to produce this report. Editing and Production Kamal Kimaoui, Associate Director, Production and Design Fabienne Stassen Fleming, Senior Editor

Photographer Sergio Ochoa

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. Session summaries are available on our website at: www.weforum.org/latinamerica2008/summaries

The World Economic Forum would like to recognize the support of PricewaterhouseCoopers in compiling data and statistics for this report.

30 | World Economic Forum on Latin America

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: www.weforum.org/pdf/summitreports/latinamerica2008 (HTML) The electronic version of this report allows access to a richer level of content from the meeting, including photographs and session summaries. The report is also available as a PDF: www.weforum.org/pdf/summitreports/latinamerica2008.pdf Other specific information on the World Economic Forum on Latin America in Cancún, Mexico, on 15 and 16 April 2008, can be found at the following links: www.weforum.org/latinamerica2008 www.weforum.org/latinamerica2008/programme www.weforum.org/latinamerica2008/partners www.weforum.org/latinamerica2008/summaries www.weforum.org/latinamerica2008/regionalupdate www.weforum.org/latinamerica2008/private www.weforum.org/latinamerica2008/essays www.weforum.org/latinamericaprivate/knowledgeconcierge2008 www.pbase.com/forumweb/latin_america_2008 www.youtube.com/latinquestion

31 | 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)