Latin America, Overview of Economy, Business and Challenges

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Latin America

An Overview of Economy, Business and Challenges

Introduction

Latin America suffered during the years of 1980-1990 with political instability and low growth rates. Nowadays the situation is different, the region is improving towards economic stability and grater democracy, however the reforms performed during the last decade are still incomplete. High rates of poverty and bad income distribution remain as the main problems of the region. The last few years has shown that Latin America economy is getting stronger and growing at unprecedented rates in the recent decades, making the environment for business much more attractive.

Economic Overview and Challenges

From the middle 1980s to the beginning of the 1990s Latin America was suffering from hyperinflation, which damaged the economic activities. World Bank and International Monetary Fund recommended the fixed exchange rate as an anchor to inflation and as a mean of obtaining economical stability. This policy showed itself very harmful and inefficient socially and economically, and in the end of the nighties Argentina and Brazil experienced major financial crisis. The economic policy strategy was changed to inflation targeting and some years latter the situation improved.

The favorable international context, and the boom of the commodity prices, has given a boost to the Latin American economy. However, the region could not take full advantage of this scenario without the macroeconomic fundamentals stabilized. The region is enjoying sustained current account surplus for the first time in decades and reduction of fiscal debt and increase in international reserves, this more stable macroeconomic environment and the less vulnerability to external shocks has lead to a negative trend on the risk analysis of the region. However, fiscal reform and consolidation remains as one of the biggest issues and challenges for the next few years.

A reduction in public debt is important, because it leads the financial markets to trust more on the country's policies, allowing it continuous access to capital markets. If the debt levels are high it can retard growth. Although some important advances have been done in Brazil, where the debt to GDP ratio was more than 65 percent in 2002, it is sill a little over 50 percent. Mexico also have reduced is debt level by about 10 percentage points from the levels of the late 1990s, but the ratio is still around 45 percent. Bolivia and Uruguay both have debt ratios of around 70 percent of GDP.

With the better performance of the macroeconomic variables in the past few years, the risk of foreign direct investments (FDI) in those countries have dramatically reduced, in consequence to that Brazil, Peru, Mexico and Chile have the Investment Grade from the majority risk analysis banks and institutions. However, there are some exceptions, during the past year Bolivia nationalized the oil and gas companies that were established there. Venezuela, as well, does not present a good business environment for foreign global companies, with threats of nationalization and expropriation. The appearance of populist leaders is a threat to the political stability of the region.

Although recently some countries have been introducing some reforms, it is still a difficult task for the region. To remove obstacle to investments, institutional reforms are still needed. For example, labor laws are out dated, also the social security and welfare policy need to be revised for the new demographic reality of the region. Last, but definitely not least, the tax reform is an urgent measure to the economic growth of the region.

International Trade

The commercial openness of Latin America is relatively small when compared to other regions, it is necessary to increase the liberalization of foreign trade. Despite the political effort made over the last two decades the region is not as integrated as it could be, Mercosur, the regional trade...
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