Watch Out President Chávez : You’re Opening Pandora’s Box!

December 26, 2010

Former Venezuelan President Carlos Andres Perez, who died on Saturday, December 25 in Miami, is said, by President Hugo Chávez, to have led governments from 1974-79 and 1989-93 that violated citizens’ rights and were subservient to US interest. This is what we can politely term ‘the pot calling the kettle black!’ Speaking from the grave through his daughter, Maria Francia Perez, who confirmed that, despite rumors, her father would never have agreed to be buried in Venezuela while the ‘antidemocratic’ government of President Chavez remains in power; the two arch enemies continuing the fight even from different worlds!

After ten years as president, Hugo Chávez has polarized Venezuela even further, and arguably has the “Don’t Cry for Me Argentina” magnetism of Evita Peron, charming the poor with projects like Take El Valle, a hillside slum on the edge of Caracas. Over the past few years it has seen social programs: Cuban medics manning a health clinic, soup kitchens and supermarkets with subsidized rice prices. According to government figures, extreme poverty dropped from 16.9% to 7.9% between 2000 and 2007. These figures are not only challenged by the opposition, but also by failure to address day to day issues like frequent muggings and the soaring price of milk.

Maybe it is the bubbling social consciousness that is being created that is the most important legacy so far, and the gradual awakening of the poor to their rights. Pandora’s box, now opened, and there will be no going back, but for the same poor to then exert their rights. This 21st century socialism, however, like revolutionary Cuba before it is showing similar reactions to overt opponents like those on the Tascón list. They are reported to be excluded from the government’s benefits and even blacklisted. The national identity numbers of more than 2.4 million Venezuelans who had signed a petition for a recall referendum against President Chávez was published, though later recalled, and the continuing persecution of this politically segregated people is suspected. Democracy? Social Reform? Students protested Cuba forty years ago. Looks like Venezuela is the new Cuba right enough.

Meanwhile President Chávez remains the US’s most uncensored critic. What is the US’s reasoning? What does oil have to do with it? (A rhetorical question)

By Pam Mason

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Don’t Cry For Me Argentina

December 23, 2010

In the Peron tradition, Argentina continues to be governed by the few who charismatically engineer smokescreens that seduce its proletariat. For those of us who have traveled to Argentina and fallen in love with its charm, we also want to be able to believe the latest government figures. The charming people we meet there make us want to return and do more business, but the government figures defy belief and make it impossible for the time being to have the confidence to do so without considerable caution.

Superficially at least, Argentina appears to be re-emerging as a global player, providing its own indicators of creditworthiness.  It is a member of the G-20 club, ranks among the top 30 global economies, and it is a stable and peaceful democracy; many of its main economic indicators, including per capita income measured in current dollars (>$9,000), look very healthy for a developing country.

Urban unemployment is stated at around 8%, down from 20%, and many low value-added jobs in inefficient companies have disappeared. Commodity export price booms have created a significant trade surplus and stimulated higher investment and output, most notably in agriculture. Consequently, merchandise export earnings have more than doubled over ten years to $60 billion annually in 2008-2010.

Argentina has therefore seen an unprecedented expansion of government income with revenues at 33% of GDP from that of about 21% in late 1990s, witnessing higher private sector incomes and government spending. Unfortunately, Argentina does not have a market-based exchange-rate regime, as the Argentine Peso would have benefited from the flood of foreign exchange. The Central Bank of Argentina’s interference has weakened the currency by 36% in nominal terms while most Latin American neighbours have appreciated. Instead Argentina has been significantly building its dollar reserves, with $50 Billion in the first six months of 2010. Currently, external debt liabilities are at an all time low of two-and-a-half times the level of reserves, representing a foreign debt level which is compatible with higher sovereign credit ratings.

The problem is that the current administration is delusional if it believes that the rational among us, those not in the ‘Don’t Cry For Me Argentina’ camp, are convinced.  Argentina, for the present and immediate future, has lost its allure. When private pension funds are ‘nationalised’ to save them, effectively hijacked, what could foreigners expect? A rhetorical question and most of us don’t suffer from memory loss.

Argentina is the only G-20 member government that is in default on its loan obligations to its fellow members – and it has been in default to them for nearly a decade. Potential foreign investors in, and lenders to, Argentina are likely to get ensnarled in the claims as a concession to any future accord between Argentina and its official creditors. Argentina bears the burden of the debts to the Paris Club – $7 Billion, $1 Billion arbitration awards, with many pending through the ICSID (84% of all cases brought against any of the G-20 member nations) and $850 Million protracted arrears to foreign commercial banks and suppliers. It is the only G-20 member that refuses to abide by its treaty obligations to the International Monetary Fund (IMF), blatantly committing transnational financial crimes. Until debts are settled international credibility, as a trusted player, is a tarnished reality. Argentina has to step up and pay up.

The international comparative platform further supports the conclusion that Argentina remains a stealth operator and a relatively oppressed and non-business nor investment friendly place. Argentina ranks 115th in the World Bank’s “Ease of Doing Business” category, out of a total of 183 economies, 87th in the World Economic Forum’s Global Competitiveness Report 2010-2011, out of a total of 139, and 105th place out of 178 countries in Transparency International’s 2010 Corruption Perceptions Index and is 135th out of 179 countries in the Heritage Foundation-Wall Street Journal 2010 Index of Economic Freedom.

Therefore, there is clearly a great deal of country risk that is not captured by the Argentinean government produced indicators. Steady now in rushing to invest in Argentina! Argentina has been on a spending spree with this inherited revenue leaving little to meet the existing or what would become new public indebtedness. The IMF, producing more comprehensive figures, configured on an accrual rather than cash basis, has realistically included all payments due to be made by the government and revealing operating deficits not surpluses.

Then there are the serious accusations concerning the accuracy and integrity of official inflation data generated by Argentina. Notably, the IMF’s leading publication, the World Economic Outlook, refers to Argentina as the only country in the world whose inflation and GDP statistics need to be accompanied by a footnote explaining that the numbers cited have been challenged by private analysts.

Government inflation figures showing an average of 8.4% per year while independent analysts challenge them with an average of 20.5% and some suggesting as high as 30%. Argentina, being the only G-20 country to refuse inspection of its books by the IMF, does nothing to refute this. This translates to prices not having risen by 50% but 130% since 2006 and infers unsound and imprudent fiscal and monetary policies featuring unsustainable exchange rates which eventually, once the ‘Don’t Cry for Me Argentina’ camp has come out of its trance, will turn emotive tears and compliance into national social and political unrest.

Despite substantial market and default risks, Argentina has nevertheless managed to raise $3 billion through to the end of October 2010, offering bond yields mostly in the range of 9½% to 12½% while European and American bonds unattractively offer only 1 to 5%. The problem is that these attractive returns are based on high risk, single B rated credits. Replacing a culture of capital flight, some global investors are also making a showing in stock purchases and equity investments there, and should be credited with bravery as well as short term memory loss.

Santa Claus is apparently savvier than some, avoiding exporting to Argentina this Christmas, as he knows that he may not get his sleigh back and Rudolph might even become Christmas lunch. But, being a smart Santa, he’ll be keeping an eye on Argentina as Christmas has not permanently ended there; it will be celebrated again, just not quite sure when. Until then, we will indeed not forget Argentina. While we all enjoy the sentiment of the song, we are waiting for the Argentinean people to forego it, for its leaders to acknowledge that statesmanship is more than entertaining the masses and to open up to global opportunities that will give the country back its self respect.

Now sing along with Evita … I mean President Kirchner … err … whoever … (will bow out myself if you don’t mind!)

‘Don’t cry for me Argentina
The truth is I never left you
All through my wild days
My mad existence
I kept my promise
Don’t keep your distance

And as for fortune, and as for fame
I never invited them in
Though it seemed to the world they were all I desired
They are illusions
They’re not the solutions they promised to be
The answer was here all the time
I love you and hope you love me

Don’t cry for me Argentina’

(Lyrics: ‘Don’t Cry For Me Argentina’)

Author: Pam Mason


Is Venezuela Headed to Become Cuba?

December 22, 2010

On September 28, 2010 voting took place for the National Assembly, due to commence on January 5th 2011; the result of the election is that the opposition, who decided to boycott the last elections in 2005 and thus handed President Hugo Chavez complete control of the Assembly, gained approx. 40% of the 165 seats (note that the opposition in fact gained more than 50% of the popular vote, but blatant gerrymandering by Chavez before the election meant that they ended up with proportionately fewer seats.

Since the elections tensions have risen in Venezuela in recent weeks as Chavez has been put into an uncomfortable position as he requires a two-thirds majority to pass important legislature, and that will be very difficult given the seats to be controlled by the opposition.

There have been a series of articles published that express increasing concern that we would like to examine here and ask the question as to whether Venezuela really is headed to become Cuba? This is taking place at a time when Cuba, which is highly dependent on significant transfers of oil of around 100,000 barrels per day from Venezuela to balance its finances, appears to be headed in a different direction.

The economy, after several years of rapid growth, has been the worst hit in Latin America and is not forecast to start growing again until 2012, inflation at 28% is one of the highest rates in the world, and there is a significant budget deficit – Oil production, on which Venezuela depends for FX and government revenue, appears to be in significant decline and the state company, PDVSA, is poorly run and over staffed. In addition, importers face a plethora of highly bureaucratic obstacles to obtain FX through three different schemes (in addition to a black market for those brave or desperate enough).

On December 17 Chavez used his control of the Assembly to put through an Enabling Law, called a Christmas gift to Chavez by the Economist Intelligence Unit. The Enabling Law has been put in place just before the opposition take their seats using the pretext of recent floods in Venezuela, and in essence allows Chavez to rule by decree, without the support of the National Assembly, for 18 months. According to the BBC “His new powers extend beyond relief and reconstruction to cover areas including infrastructure, banking and finance, rural and urban land use, telecommunications, defence and security.”

On December 20 the BBC has also reported that the Venezuelan parliament has voted to tighten internet rules, which could lead to further censorship in a country where several news organizations that Chavez believes are favoring the opposition have been harassed or even closed down.

Miguel Octavio, who runs a great weblog in English on Venezuela called The Devil’s Excrement (which is a term coined by a Venezuelan poet for oil in case you are wondering), is very concerned and goes so far to say “To all those that always say that Venezuela is a democracy under Chavez, the President’s proposal that the Enabling Bill extend for up to 18 months is simply a Constitutional coup and a disregard for the mandate given by the people to the new National Assembly that will be sworn in on Jan. 5th.”

Armando Duran, Resident Fellow at the University of Miami’s Center for Hemispheric policy has just published a paper “Cuba and Venezuela: Long Live the Revolution!” in which he concludes “Under the Cuban banner of “socialism or death,” now begins a new stage in the transition from representative democracy to totalitarian socialism in Venezuela, with unknown consequences for the rest of Latin America.”

Chavez himself faces presidential elections just before the Enabling Law ends in 2012, and now observers at looking at his administration to see whether any semblance of democracy survives. The real test will come if Chavez loses the popular vote in 2012, as it seems unlikely that he will hand over power peacefully. There is far greater risk of violent confrontation between supporters of Chavez and the opposition and social unrest in the months ahead.


Does Lula Have The Highest Approval Rating Of Any President Leaving Office?

December 17, 2010

We just saw a comment stating that Brazil’s President Luiz Inacio Lula da Silva, better known as simply Lula and due to leave office shortly after two terms, has the highest approval rating of any president on the planet and that managed to get us thinking if there were any truth to what we initially believed was a tongue in cheek comment.

Sure enough we quickly found an article in the Washington Post ‘Brazil’s Silva sees record approval rating’ and saw that Lula has a whopping 87% approval rating according the Ibope polling institute, up from an already very high 83% a year ago. We checked a few other sources and they all appear to confirm that Lula is leaving office with an unusually high approval rating and held this during his second term, which is no mean feat; presidents have hit higher numbers than this, for example during times of crisis, but not for an extended period.

We had a further look around the world and could not find any higher ratings so we would be interested to hear if anyone knows of any. Looking at the US, President Bill Clinton left office with a 65% approval rating, which appears to have been the highest in the post war US Presidential ratings measured by the Wall Street Journal; in comparison the fondly remembered President Ronald Reagan’s approval rating peaked around 68% during his entire two terms and was considerably lower than this when he left office.

Other notables include Colombian President Alvaro Uribe who left office with a 75% approval rating, and of course South Africa’s President Nelson Mandela had 72% (although this was still a post apartheid country so this may in fact be an even more impressive number).


The Cultural Dimension of Doing Business in Latin America

December 15, 2010

The Cultural Dimension of Doing Business in Latin America!
There is no doubt that doing business with another country is a challenge, and when there are cultural differences as well, it can seem formidable. Although different Latin American countries have certain similarities, there are also some profound cultural differences, some of which are comforting to USA and UK exporters. Since all aspects of consumer behavior are culture bound, there is an increased need to identify and integrate this interaction and its’ impact on global advertising and marketing. Geert Hofstede’s work can be used to explain the differences between countries and act as a guide in increasing global efficiency in marketing. Geert Hofstede summarises cultural comparisons very elegantly and is quoted below (www.geert-hofstede.com).

Across all Latin American markets there are profound cultural similarities that in turn pertain to business operations with US and UK enterprises. High Uncertainty Avoidance and often Low Individualism prevail (see below for definitions of these terms). Based on studies and data, the large majority of predominantly Catholic countries (those with Uncertainty Avoidance as their highest ranking Dimension) have a low tolerance for ambiguity. The combination of Catholicism and the cultural dimensions shown in the Hofstede Graph on his website reinforce a philosophy predicated in the belief that there is an absolute “Truth.” As Geert Hofstede explains about peoples with a high Uncertainty Avoidance Index, their attitude is, “There can only be one Truth and we have it.” This creates a highly rule-oriented society that institutes laws, rules, regulations, and controls in order to reduce the amount of uncertainty within the population.

USA: There are only seven countries in the Geert Hofstede research that have Individualism (IDV) as their highest Dimension: USA (91), Australia (90), United Kingdom (89), Netherlands and Canada (80), and Italy (76).

The high IDV ranking for the United States indicates a society with a more individualistic attitude and relatively loose bonds with others. The populace is more self-reliant and looks out for themselves and their close family members. The next highest Hofstede Dimension is Masculinity (MAS) with a ranking of 62, compared with a world average of 50. This indicates the country experiences a higher degree of gender differentiation of roles. The male dominates a significant portion of the society and power structure. This situation generates a female population that becomes more assertive and competitive, with women shifting toward the male role model and away from their female role. (World averages shown above for comparative purposes with USA are: Power Distance Index [PDI] 55 – IDV 43 – MAS 50 – Uncertainty Avoidance Index [UAI] 64 – Long-Term Orientation [LTO] 45).

The United States was included in the group of countries that had the Long Term Orientation (LTO) Dimension added. The LTO is the lowest Dimension for the US at 29, compared to the world average of 45. This low LTO ranking is indicative of society’s belief in meeting its obligations and tends to reflect an appreciation for cultural traditions. The next lowest ranking Dimension for the United States is Power Distance Index (PDI) at 40, compared to the global average of 55. This is indicative of a greater equality between societal levels, including government, organizations, and even within families. This orientation reinforces a cooperative interaction across power levels and creates a more stable cultural environment. The last Geert Hofstede Dimension for the US is Uncertainty Avoidance (UAI), with a ranking of 46, compared to the world average of 64. A low ranking in the Uncertainty Avoidance Dimension is indicative of a society that has fewer rules and does not attempt to control all outcomes and results. It also has a greater level of tolerance for a variety of ideas, thoughts, and beliefs.

UK: Is virtually a carbon copy of USA!

We now take a look at a selected number of Latin American countries according to Geert Hofstede’s Dimensions : Argentina, Brazil, Chile, Colombia, El Salvador, Guatemala, Mexico, Peru, Uruguay.

One striking difference between the Latin American countries examined and the US and the UK is the high Uncertainty Avoidance Index (UAI) ranking:

Country UAI
Argentina 86
Brazil 76
Chile 86
Colombia 80
El Salvador 94
Guatemala 101
Mexico 82
Panama 86
Peru 87
Uruguay 100
Average Latin America 85

This high Hofstede Dimension of Uncertainty Avoidance (UAI) across Latin America indicates societies with a low level of tolerance for uncertainty. In an effort to minimize or reduce this level of uncertainty, strict rules, laws, policies, and regulations are adopted and implemented. The ultimate goal of this population is to control everything in order to eliminate or avoid the unexpected. As a result of this high UAI characteristic, the society does not readily accept change and is very risk adverse.

Another difference is the low Individualism (IDV) ranks for a number of the Latin American markets:

Country IDV
Chile 23
Colombia 13
El Salvador 19
Guatemala 6
Mexico 30
Panama 11
Uruguay 36
Average Latin America 21

The scores on this Dimension indicate that the societies are Collectivist as compared to Individualist. This is manifest in a close long-term commitment to the member ‘group,’ be that a family, extended family, or extended relationships. Loyalty in a collectivist culture is paramount, and over-rides most other societal rules and regulations. The society fosters strong relationships where everyone takes responsibility for fellow members of their group.

Other noteworthy points on the Hofstede Dimensions for Latin America include the following:

Brazil: Brazil has a slightly higher Individualism (IDV) rank of 38 compared to the average Latin population score of 21. However, virtually all the Latin countries are considered to be collectivist societies as compared to individualist cultures. This is manifest in a close long-term commitment to the member ‘group,’ be that a family, extended family, or extended relationships. Loyalty in a collectivist culture is paramount, and over-rides most other societal rules.

Colombia: The Power Distance (PDI) ranking of 67 indicates a level of inequality of power and wealth within the society. Colombia has one of the higher masculinity rankings in Latin America (64). This indicates the country experiences a higher degree of gender differentiation of roles. The male dominates a significant portion of the society and power structure.

Guatemala: Guatemala also is tied with Panama for the highest Power Distance (PDI) ranking among Latin countries with a 95, compared to an average of 70. This is indicative of a high level of inequality of power and wealth within the society. This condition is not necessarily subverted upon the population, but rather accepted by the culture as a whole.

Guatemala has the lowest Individualism (IDV) ranking at 6, compared to other Latin countries (average 21). Of special note is that Guatemala has the largest divergence of Power Distance (PDI) to Individualism (IDV) of any country surveyed in the world, with a difference of 89 (PDI-95 minus IDV-6 = 89). Panama is next with 84 and Malaysia third with 78.

Mexico: Mexico has the second highest Masculinity (MAS) ranking in Latin America (69). This indicates the country experiences a higher degree of gender differentiation of roles. The male dominates a significant portion of the society and power structure. This situation generates a female population that becomes more assertive and competitive, although not at the level of the male population. Another Dimension in which Mexico ranks higher than other Latin neighbors is Power Distance (PDI) with a rank of 81, compared to an average of 70. This is indicative of a high level of inequality of power and wealth within the society. This condition is not necessarily subverted upon the population, but rather accepted by the culture as a whole.

Panama: Panama has Power Distance (PDI) as the highest ranking Hofstede Dimension at 95. This score of 95 is tied with Guatemala as the highest Power Distance of all Latin American countries, where the average is 70. (see the Latin Graph below). This high Power Distance (PDI) ranking for Panama is indicative of a high level of inequality of power and wealth within the society. This condition is not necessarily forced upon the population, but rather accepted by the society as part of their cultural heritage.

Panama has a relatively low Individualism (IDV) ranking at 11, compared to other Latin countries average of 21. Of note is that Panama has the second largest divergence of Power Distance (PDI) to Individualism (IDV) of any country surveyed in the world, with a difference of 84 (PDI-95 minus IDV-11 = 84). Guatemala is first with 89 and Malaysia third with 78.

In many of the Latin American countries, including Panama, the population is predominantly Catholic. The combination of Catholicism and the cultural dimensions shown in the Hofstede Graphs above, reinforce a philosophy predicated in the belief that there is an absolute ‘Truth”. As Geert Hofstede explains about peoples with a high Uncertainty Avoidance Index, their attitude is, “There can only be one Truth and we have it.”

Peru: Peru is noticeably very close to the average of all other Latin American countries on each of the country’s Hofstede Dimensions (see Latin America Hofstede Graph below) whereas others have some noticeable variations.

Explanation of the Indexes:

Power Distance Index (PDI) that is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders. Power and inequality, of course, are extremely fundamental facts of any society and anybody with some international experience will be aware that all societies are unequal, but some are more unequal than others’.

Individualism (IDV) on the one side versus its opposite, collectivism, that is the degree to which individuals are integrated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word ‘collectivism’ in this sense has no political meaning: it refers to the group, not to the state. Again, the issue addressed by this dimension is an extremely fundamental one, regarding all societies in the world.

Masculinity (MAS) versus its opposite, femininity, refers to the distribution of roles between the genders which is another fundamental issue for any society to which a range of solutions are found. The IBM studies revealed that (a) women’s values differ less among societies than men’s values; (b) men’s values from one country to another contain a dimension from very assertive and competitive and maximally different from women’s values on the one side, to modest and caring and similar to women’s values on the other. The assertive pole has been called ‘masculine’ and the modest, caring pole ‘feminine’. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are somewhat assertive and competitive, but not as much as the men, so that these countries show a gap between men’s values and women’s values.

Uncertainty Avoidance Index (UAI) deals with a society’s tolerance for uncertainty and ambiguity; it ultimately refers to man’s search for Truth. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth; ‘there can only be one Truth and we have it’. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more phlegmatic and contemplative, and not expected by their environment to express emotions.

Long-Term Orientation (LTO) versus short-term orientation: this fifth dimension was found in a study among students in 23 countries around the world, using a questionnaire designed by Chinese scholars It can be said to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift and perseverance; values associated with Short Term Orientation are respect for tradition, fulfilling social obligations, and protecting one’s ‘face’. Both the positively and the negatively rated values of this dimension are found in the teachings of Confucius, the most influential Chinese philosopher who lived around 500 B.C.; however, the dimension also applies to countries without a Confucian heritage.


Mexico: NAFTA & Its Disappointing Economic Performance

December 13, 2010

The North American Free Trade Agreement, better known by its acronym, NAFTA, came into force over almost 17 years ago to create a free trading bloc composed of Canada, Mexico and the US. It’s therefore an apt time to look at Mexico’s economic performance and its outlook.

Last Wednesday, December 8, the University of Miami’s Center for Hemispheric Policy held  a conference on Mexico with a number of distinguished speakers and key points included the following:

  • Mexico has seen the lowest growth rate in Latin America since 2000, with recessions in 2001-2003 and 2008-2009.
  • Mexico has in fact seen an average of one economic recession in each of the past 6 presidential terms, or one every 6 years.
  • Although Mexico has recovered in 2010 it has still not regained its economic level to that before the crisis, and the outlook for 2011-2018 is quite muted for an emerging economy with GDP growth of around 3% per annum, a very mediocre performance. Pamela Starr of the University of Southern California said that Mexico would “muddle through,” neither joining the BRICs nor becoming a failed state.
  • The growth engine at present is non-oil exports, but the question is why low productivity and the domestic economy are not growing faster – Lack of credit penetration is a key issue at only 14% of GDP (compared to around 45-50% in Brazil and 94% in Panama) and a significant amount of this credit is channeled to the export sector and therefore the domestic economy is deprived of credit. Credit has not recovered since the Tequila Crisis in 1994-95.
  • On the positive side, external debt is very low (around 12% of GDP) and there is a solid financial situation, but the size of the US deficit and lack of consensus on how to resolve it moving forward will impact on Mexico.
  • Important and significant reform in Mexico appears to have ended with NAFTA, but much work is still needed particularly with public sector, labor, education, energy, etc.
  • Monopolistic concentration in several sectors decreases competition and productivity and domestic investment.
  • NAFTA has without doubt integrated Mexico significantly into the US economy. Chip Brown, Chief Economist for Latin America with Banco Santander, said that Mexico was a polygraph of the US, using the analogy of Jefferson’s antique copying device, but that it lags behind; US country risk is therefore impacting on Mexico.
  • A significant amount of trade between the US and Mexico involved the automobile industry, which has been particularly hard hit in the crisis, and an important element is the export of manufactured automobile parts from the US to Mexico, and their subsequent reexport to the US as parts of completed vehicles from assembly plants along the border.
  • Mexico together with Chile has more free trade agreements (FTAs) than any other global markets, but in Mexico’s case over 80% of exports are to one single market, the US (although this is down from >90% in 2000). Over 80% of Mexico’s exports are manufactured, so it has not seen any of the benefits of the commodity boom that many other Latin American markets have experienced (in comparison only 40% of Brazil’s exports are manufactured), and also competes against China.
  • Luis Rubio, Chairman of the Center of Research for Development (CIDAC) asked if NAFTA would pass today, which is a pertinent question given the impact that China has had on trade with the US since NAFTA came into effect, and commented that there is some talk in Mexico about reexamining NAFTA.
  • The effect of organized labor in the US is still important: the Teamsters have effectively prevented Mexican truck drivers from delivering to final destinations in the US, thereby raising freight rates and preventing free movement of trade as seen in say the European Union.
  • Labor is an interesting topic in Mexico: in the US with total unemployment of 9.8% the figure for those with a high school diploma education and above is only 5.1%, but in Mexico the inverse is true and there is a higher unemployment rate for those with higher education qualifications. The issue in Mexico is the quality of employment rather than unemployment (and underemployment is an issue that afflicts all of Latin America).
  • Job creation in Mexico is around 400k jobs per annum, and previously another 400k jobs have been created in the US, but the latter have been badly affected by the crisis (and the construction industry in particular) and of course on the whole have been for undocumented (or illegal) workers.
  • Oil in Mexico is running out, and it represents 5% of GDP and around a third of government revenue. There are more reserves, but the state oil company Pemex, which controls the oil production, does not have the ability to tap them. Pemex is state owned by regulation, and is generally considered overstaffed and inefficient.
  • No discussion on Mexico could take place without mentioning security and the drugs war. No one believed that Mexico would become a failed state, or that Hillary Clinton’s comments about the ‘Colombianization’ of Mexico was a fair comparison,  but nevertheless the current situation is one of concern. There have been over 30,000 deaths to date, and of these >90% of these were cartel/gang members; this is not inconsistent with an insurgency (as seen in Colombia previously) but rather a high crime turf war. The cartels want a compliant government and are not targeting the capital, the state airline, running for office, etc.
  • We have not discussed Wikileaks yet on this site, but it is possible that the recent revelations may damage bilateral relations between Mexico and the US. One contentious issue raised at the forum is that both countries lack leverage against the other because of their addictions: the US because of its addictions to drugs, the NRA (and the associated arms exports to Mexico) and cheap immigrant labor, and Mexico because of its addictions to NAFTA and the Merida Initiative against the drug cartels.

Without doubt there are opportunities for trade with Mexico, especially as it looks to diversify from its dependence on the US, and it is important not to label Mexico as part of a homogenous unit with say Latin America (and Brazil in particular). One interesting point raised has been to encourage the already significant sector of US retirees to live in Mexico, producing a “win-win” situation for both nations by creating opportunities for development of services in Mexico and lowering care costs for the US.


Why is UK trade with Latin America so poor?

December 7, 2010

William Hague, the UK Foreign Secretary, recently gave the Canning House lecture in London (see the YouTube Canning House lecture video and a transcript at this link: Canning House lecture) where he talked candidly about the relationship between Britain and Latin America.

Here are some key points from the speech:

  • In 1808, 40% of British exports were sent to Latin America. By the First World War, 50% of foreign investment in Latin America came from Britain, more than 20% of its trade was with Britain. Today UK exports to Latin America make up only 1% of all international exports to the region.
  • The UK exports over three times more to Ireland than to the whole of Latin America – a region of 576 million people and a GDP of $5 Trillion.
  • UK trade with Brazil – a country of almost 200 million people – is less than half that with Denmark.
  • Chile and Argentina are only the UK’s 43rd and 49th largest export markets respectively.
  • Germany exports nearly four times as much to Latin America as the UK, and France and Italy have also left the UK behind in this respect over the last twenty years.
  • UK diplomatic presence in the region has diminished: four British Embassies in the region have been closed since 1998 alone.
  • A number of UK companies have been successful in Latin America, including HSBC, BG Group, AstraZeneca, Balfour Beatty, Rolls Royce and Anglo-American.
  • Since 2000, 40 million people in Latin America have been lifted out of poverty, 72 million jobs have been created, and 17 million people have overcome illiteracy.

Referring to the UK’s more recent past with Latin America, the Foreign Secretary quoted a former British Ambassador in Brazil who described the problem as follows:  “in all too many circles in the UK…there is small imaginative conception of the fact that….no part of the world is developing more quickly than Latin America…Unless we are prepared in these days of rising competition to allow ourselves to be frozen out of this market by our more enterprising rivals, we must encourage in ourselves a more competitive outlook [and] adopt more positive policies”. Very tellingly these words were said over 50 years ago, but they are just as true today.

The UK Trade & Investment team recently published a report “From Surviving to Thriving: Doing Business Overseas” (available for download by clicking the link) as part of the focus of the new UK Coalition government to double exports within the next five years (similar to the Obama initiative in the US). The report does a good job of explaining the advantages of trading internationally (improved credibility, less dependency on the domestic economy, higher revenue, ability to spread risk and faster growth) and it also indicates that UK companies trade less with Latin America than any other region in the world (including Africa).

So whereas it is good to see a senior member of the UK government pledging more support for trade with Latin America there is a long hill to climb before it becomes on par with Germany, France and Italy, the three other major EU economies. Similar to their counterparts in the US, many UK companies (and SMEs in particular) need to believe that there is demand for Britain brands in Latin America and that the region as a whole is set for sustained growth and further reform and offers plenty of opportunities for their goods and services.

Yes, Latin America is different to the EU and the US, which are the UK’s major trading partners, its customs rules and bureaucracy require stringent procedures and patience, communication can be more difficult because of perhaps less English spoken than in other parts of the globe, the business model and products will probably have to be modified to increase the chances of success, but the region offers a growing market of consumers and businesses eager to sample international brands.