I read a fascinating article in the Wall Street Journal the other day which suggested that my region could broadly be thought of as two separate entities. On the Pacific side, you have the economies such as Colombia, Chile, Mexico and Peru, which embrace free trade and free markets. And on the Atlantic side, you have Argentina, Brazil and Venezuela, economies where governments have adopted a much more interventionist approach.
Instinctively this struck me as true, rather than simply a neat piece of journalism. The Pacific Alliance economies recently signed an agreement scrapping the majority of tariffs on goods and services traded within the bloc. While the Atlantic economies are members of Mercosur, Latin America’s other big trade group, which tends to be much more protectionist. But does the data back up the story?
We used our International Business Report (IBR) and Global Dynamism Index (GDI) to delve a little deeper into this split. You can read the full results in our "Focus on Latin America", but I just wanted to share some of the highlights with you.
In essence, our report concurs with the ‘Two Latin Americas’ theory. Forecast GDP growth rates for 2014 are telling: as a group, the Pacific economies are expected to grow by 4.3% this year, with those on the Atlantic side posting expansion expectations of around half that. And if the ongoing Trans-Pacific Partnership talks, which include Chile, Mexico and Peru as well as the US, Japan and others, are successful this divergence could widen over coming years.
According to the IBR, business confidence dropped by 43 percentage points (pp) across the region over the past 12 months, while global business optimism has climbed 23pp. But while Brazilian business confidence dropped to an all-time low heading into 2014, peers in Chile, Mexico and Peru remain in the top eleven globally. Brazil is the regional giant, accounting for 40% of regional output, but despite gearing up to host the FIFA World Cup there is significant social unrest around poor quality infrastructure and high inflation, not to mention the extraordinary cost of doing business here.
Economic uncertainty, currency volatility, inflation, and bureaucracy across the Atlantic side of Latin America are hindering businesses in their pursuit of growth. Brazil has been named one of the 'fragile five' economies, with its currency vulnerable to investor flight as the US Federal Reserve reduces its massive quantitative easing program. Meanwhile, Argentina and Venezuela have imposed foreign exchange and price controls to curb inflation and capital flight. In contrast, business leaders in Mexico, which implemented tough reforms in energy, education, and competition last year, remain relatively untroubled by government and central bank actions.
And there are signs that the Pacific economies are doing more to improve their investment attractiveness compared with Atlantic peers. Chile (2nd overall), Peru (24) and Mexico (31) all rank higher than Brazil (42) in the GDI 2013, which ranks the business growth environment improvements economies have made over the past 12 months. Argentina ranks down in 53rd place.
In some ways, the Pacific-Atlantic split doesn’t fully apply. For example, Brazilian businesses are more optimistic than Mexican peers about increasing profits this year, and with 100 million people now in the middle class, many opportunities remain. Brazil's government isn’t as interventionist as Argentina or Venezuela; it’s a democracy, and the hope is that the upcoming elections will establish a more open economic framework. Nonetheless, the distinction between the Atlantic and Pacific responses to globalization is clear. While the Pacific side signs free trade agreements, the Atlantic side limits foreign investment and market access.
Only time will tell which approach works best for the people and businesses of Latin America, but my money is on the Pacific side reaping the benefits of their more open approach. In 2010, when Brazil was growing by 7.5%, the government held up its model of economic development as an example for the rest of the world. I wonder how many economies view Brazil as the blueprint for success today?
Madeleine Blankenstein is a partner at Grant Thornton Brazil.