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Feature 052013 Montealegre

Monday, May 13, 2013

Latin American Nations are on the Upswing and Moving Forward

By Oscar Montealegre

Behind the curtains of the European Crisis, the U.S. sluggish economic recovery, and the geopolitical battles in the Middle East and North Korea, Latin America has quietly displayed economic resiliency and growth in the last few years. Some have dubbed this the "Latin American Decade." Yet, if it is truly to be the long awaited Latin American golden era certain challenges must be tackled to continue fanning the momentum the region has brought forth.

Medellin, once considered the most dangerous city in the world, is now a new city. Although not yet a land of total peace and tranquility, it is far from the gross violence that stained the city for decades. From 1991 to 2010, the homicide rate in Colombia's second largest city plunged an amazing 60 percent. Business and entrepreneurship is thriving, epitomized by three ‘multilatinas'-Latin American companies on the verge of becoming multinationals-making the city their home base. Citibank and Wall Street Magazine recently named Medellin the Most Innovative City in the world, ahead of New York City and Tel Aviv. In essence, Medellin is a microcosm of the current change that is resonating throughout Latin America, triggered by high economic growth, consumer confidence, political stability, and exports.

The bullish attitude towards Latin America has led to pundits and economists declaring a "Latin American decade." This is not a stretch if we look at some headline statistics. For instance between 2000 to 2009, 50 million people joined the middle class in Latin America and the Caribbean, more than 30 million of which come from non-Brazilian countries. Poverty rates have dropped dramatically, from 48 percent in 1990 to 28 percent in 2012-the lowest in three decades, according to the United Nations. Last year alone, growing job income has lifted approximately 1 million people out of poverty. Consequently, unemployment in the region is the envy of the world, nearing record lows in Chile (6 percent), Colombia (10 percent), and Brazil (4.6 percent). Latin America's economies escaped the 2008 global financial crisis almost unscathed, and the IMF reported that Latin America is forecasted to have an average growth rate in the first five years of this decade of 4 percent, compared to 2.7 percent in the United States and 2.1 percent in the European Union.

But not all is rosy in Latin America. Economies are booming, but some believe it is too dependent on commodities. The trap of the Dutch Disease is a concern for Colombia, Ecuador, Peru, and especially Brazil. While consumer purchasing power has increased to unprecedented levels, creating a larger middle class population, inequality is still very high. As of 2012, there were still 66 million people living in extreme poverty-living on less than $1.50 a day. According to World Bank economist Luis Felipe Calva, vulnerability to poverty remains a threat despite the increase of the distribution of income. In the last decades democratic principles have reigned in a region once known for military juntas and dictatorships, but political instability remains. Argentina is heading down a slippery slope where citizens' savings and inflation are at the mercy of the Argentine government; Ecuador's President is clamping down on the media's freedom of speech; and Venezuela is in an uncertain place after the death of Hugo Chavez. Most importantly, if this were to truly be the "Latin American decade," certain fundamental challenges need to be addressed simultaneously, including the frail educational system and inadequate infrastructure network.

Education

Poor educational standards and inequalities are perverse in Latin America. Most middle and high-income families shun public schools, opting instead to send their children to private schools. The public school system in Latin America is much weaker than the U.S.'s, creating a very serious and potentially crippling education crisis. Who the "haves" and "have-nots" are in Latin America is most evident through the prism of education.

Chile is a case in point. Ranked by the World Bank as an upper-middle economy, the country has the second most expensive private university system in the Organization for Economic Cooperation and Development (the U.S. is the most expensive), but with the lowest public expenditure of all OECD countries. Of all the countries in the OECD, Chile has the highest proportion of private funding. Families in Chile carry the cost more than any other developed nation when paying for higher education, up to 85 percent of university tuition. The educational system, from primary to higher education, is governed by a private system (established by former Chilean dictator General Pinochet and the Chicago Boys).

Some argue that the problem fundamentally lies in the approach: the Chilean government views education as a consumer good instead of a universal right. As such, in the last two years student protests have emerged in the streets of Santiago-occupying schools and universities; manifesting their grievances about high tuition costs, high student loan interest rates, and the privatization of education; and most concerning, demanding constitutional reforms to the education system, as students argue that the current system produces and reinforces social inequality.

Chilean President Sebastian Pinera has responded to the student pressure by cutting student interest loans from a ceiling of 8 percent to 2 percent and earmarking $12.8 billion in the 2013 budget towards education spending, an increase of approximately 9 percent from 2012. Chilean students view these changes as minor concessions, demanding that more reforms be implemented soon.

Chile has a highly sophisticated banking sector, a top-down entrepreneurial initiative attracting talent from all corners of the world, and it is the leading exporter of copper and other goods with a sovereign wealth copper fund similar to Norway's oil state wealth fund. Yet Chile has always had to tackle extreme inequality, and although it has made strides in the last ten years, the issue remains on certain fronts. Inequality issues resonate deeply with many other Latin American countries. It will be interesting to see if Chile can take the lead in reforming the educational system, providing a template to neighboring countries, or if it will continue to put a bandage on a larger problem.

Mexico's President Enrique Peña Nieto is tackling education reform by grabbing the bull by its horns. In February, Mexican authorizes arrested the notorious education union leader Elba Ester Gordillo on charges of corruption and embezzlement. No one really cried for the immediate release of the union leader, considered one of the least popular political figures in Mexico.

Mexico's educational system is among the worst in the OECD, and standardized test scores from Mexican students are much lower than other countries of its similar size and scope. To make matters worse, Gordillo, head boss of the 1.7 million-member union, did everything possible to block reforms and maintain the status quo, creating an environment where teaching positions were either sold or inherited, and teacher evaluation tests were fought tooth and nail.

The lack of a modern and quality education in Mexico has hurt Mexico's competiveness. Consequently, if reforms are not implemented in a timely manner Mexico will encounter productivity and economic growth headwinds that will be difficult to evade. Especially now that Mexico is closing the gap in terms of manufacturing with China, it is imperative that it has a well-qualified labor pool to push itself over the hump as a respectable, stable, and growth-orientated country.

Universities in the broader Latin American region do not fare much better. In terms of quantity there is definitely not a problem, but when grading quality, they are not too impressive, to say the least. According to the U.S. News World's Best Universities rankings, no Latin American country ranks in the top 100. Only three Latin American schools are ranked in the top 200 (1.5 percent), two coming from Chile and one from Brazil. In addition, many students pursue degrees in fields that do not correlate with the job demands of the current economic environment (such as sociology, psychology, political science, etc.), lowering human capital competitiveness and forcing companies to look abroad for qualified employees. For instance, journalist Andres Oppenheimer dubbed the Argentine higher educational system as a well-oiled factory in producing psychologists. Apparently, Argentina has the highest number of psychologists per capita in the world-145 practicing doctors per 100,000 habitants-while the U.S. only has 31 per 100,000 and Denmark 85. This is troubling, because Argentina is in desperate need of scientists, agronomists, entrepreneurs, and engineers to jumpstart their troubled economy.

The bright side is that more people in Latin America are pursuing higher education than ever before. According to CEPAL (Comisión Económica para América Latina y el Caribe)-a Latin American statistics agency-in 2008, 38 percent of the Latin American and Caribbean population attended a university, compared to 17 percent in 1990. However, the same agency determined that 2 out of 100 high-income status students do not finish primary education, while 12 out of 100 poor- to low-income students do not complete primary education-a huge gap that illustrates the dichotomy of inequality and education, suppressing upward mobility and opportunity.

Infrastructure

Latin America countries currently allocate 2.5 percent of their gross domestic product towards infrastructure; however according to the Inter-American Development Bank, that figure should double in order to meet much-needed capital for modernizing roads, airports, ports and railways. In short, infrastructure deficiencies are slowing economic growth in Latin America.

Brazil may be suffering the most. According to the World Economic Forum's Global Competitiveness Report, Brazil ranks 107th out of 144 countries, well behind the other BRIC nations. Per the Financial Times, only five percent of Brazilian roads are paved, and on a regular day 89 ships are waiting to dock at one of Brazil's busies ports. Brazil also does not have an inter-city passenger rail system. For example, if in Rio one cannot take a train to San Paulo; the only alternatives are either car or plane, neither of which is cheap.

Brazilian leaders have responded accordingly, announcing last December a $26 billion investment towards port infrastructure. Through this plan the Brazilian government is hoping to reduce logistics cost by as much as 30 percent. Currently, the cost of exporting a container from Brazil is twice the price as from China, and 50 percent more than India. When ranking the quality of port infrastructure in Brazil, it only tops nine other countries in the Global Competitiveness Report. These are not the qualifications an emerging super power wants to have. Although Brazil is beginning to address their infrastructure ills in ports, roads, rail, and airports, one variable of the equation is glaringly missing: the shortage of private investment. Brazilian and international enterprises are concerned that Brazil has peaked, and concerned with the byzantine tax structure, excessive red tape, and an over-valued currency.

Recently, at an IADB meeting in Panama, Latin American financial leaders finally admitted that incorporating the private sector into financing infrastructure needs is a next step, concluding that $200 billion a year is needed to continue the region's economic momentum. If this were to be achieved, economists forecast that the GDP in the Latin American region can potentially increase as much as 2 percent. In addition, if Latin America were to earmark anywhere between 4 to 6 percent of GDP to infrastructure investment, it could possibly be on par with East Asia within 20 years. Some countries in Latin America are already paving a head start, acknowledging that investment toward infrastructure rather than trade should be the main focus.

Colombia, the new star in the Latin American region, has proposed a $100 billion investment with approximately half coming from the private sector. Similar to Brazil though, Colombia has major infrastructure deficiencies. The topography in Colombia is no help-the country alternates between extensive mountain chains and flatter areas blanketed with jungles. For instance, traveling from Bogota to Cali (Colombia's third largest city) takes approximately 14 to 16 hours, whereas if roads were improved it could possibly shave off at least a third of that time. Thus, logistics costs continue to climb, denting Colombia's competitiveness for the long-term. However, because of Colombia's recent rise-through high growth, low inflation, and business friendly policies that have enabled the country to become competitive in the global markets-domestic and international investors are eager to invest money into Colombia's infrastructure, especially roads, major city airports, and the two ports facing the Pacific and Atlantic oceans.

The first step to remedy the infrastructure problem in Latin America is that it must be depoliticized. Peru is following this path with their new metro railway in Lima, with plans of further expansion. Paraguay is on the same trajectory, via the legislature, in establishing a law that allows more space for public-private partnerships. In short, if Latin American wants to be taken as seriously as their Asian counterparts, infrastructure investment cannot be overlooked.

Latin America, like other emerging markets, possesses tremendous capacity, but it has many challenges ahead besides education and infrastructure. Corruption and crime remains a dire problem. For instance, Venezuela's Caracas is considered one of the most dangerous cities in the world, having more violent deaths than Baghdad. Mexico continues to combat drug related crime and violence, which has severely damaged the tourism industry and investor confidence. Colombia is not off the hook just yet, the FARC guerillas are still ever-present in isolated jungle areas, but the current peace talks being held in Cuba and Norway will hopefully end the nearly half-century war once and for all.

Ecuador's President Rafael Correa has spent massively in his last two terms on social plans, health care, education, and infrastructure, lifting the economy to impressive levels; however, it is still too early to declare if it is politically stable and business friendly enough to attract foreign investment. Bolivia is sitting on half of the world's lithium, a metal primarily used for electronic batteries; however, nationalization and radical left wing policies and protectionism continue to affect the Andean nation.

Like any other region, Latin American does have her own abundance of obstacles, but this time solutions are not as far-fetched. Latin American countries have political and economic equity to work with. The region is seeing an emerging class coming out of poverty-similar to China's stunning rise-complimented with urbanization, democracy, and economic reforms. Latin America does not have a monopoly on the decade, but it unquestionably has potential.

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This article, titled "The Latin American Decade in Motion," was originally published in the May/June 2013 print edition of The Diplomatic Courier, and on its Internet edition on May 7, 2013. The Diplomatic Courier: A Global Affairs Magazine, Washington, DC. Republished with permission.

Oscar Montealegre is a Los Angeles-based Diplomatic Courier contributor specializing in Latin American markets, finance, economics, and geopolitics. He holds an MA in International Relations, a BA in Journalism, and a Certificate in International Trade and Commerce.


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