Windows of Opportunities
Latin American economic growth in 2001 was a mere 0.6% and the forecast for 2002 is 1.1%. The slowdown of the world's economy in 2001 reduced demand and depressed prices for the region's key commodities, such as copper, oil, and coffee. In addition, declining consumer confidence depressed local demand in many key markets in the region. Although interest rates have decreased in international financial markets, Latin American governments and firms have seen their costs of borrowing increase due to a higher risk premium stemming from a perception of problems ahead for the region. As a result, Latin America went from a good growth performance in 2000 of 4.1% to rapid deterioration in 2001 in reaction to global economic malaise and local problems. The important factor to note here is the rapid change from a positive to a negative scenario in a matter of a few quarters.
We looked at the long-term economic performance of the region since 1990 and found that the region underwent three major cycles of recession and recovery (see Figure 8.2). The first cycle lasted from 1990 to 1994 and ended abruptly as the region adjusted to the devaluation of the Mexican peso in December 1994. This first cycle had a period of four years of continuing growth. The second cycle started in 1996, peaked in 1998, and ended in 1999 with a major devaluation of the Brazilian Real. This cycle lasted three years. The third cycle had a good start in 2000 and ended abruptly in 2001 with the slowdown in the world economy and the impact of the tragic events of September 11. This cycle had a duration of one year. The main point here is that the world and Latin America in particular are adjusting more rapidly to major events in a very short time span.
Figure 8.2 Cycles of Growth and Foreign Direct Investment in Latin America
The upturn of the economic cycles in Latin America present windows of opportunity to invest in the region. The first window of opportunity lasted over a long period. The long cycle of economic growth in the region was mostly fueled by market reforms and privatization programs in Argentina and Mexico. First movers in this window of opportunity not only had time to build their strategies but were insulated from competition, as the Telecom Argentina case discussed in Chapter 4 illustrates. The second window of opportunity came about when countries like Argentina quickly recouped from the impact of the Mexican peso devaluation in 1995 and Brazil launched the plan Cruzado in 1994. A second wave of investors descended on Latin America, but this time the main target was Brazil's privatization and economic reforms. These investors had two years of economic growth (19961997). New investors had a shorter time to set up their strategies before facing a generalized slowdown that began as early as 1998 in certain countries (e.g., Brazil). New investors faced first-movers who had become the incumbents and local firms that were in the process of transforming their businesses. The third window of opportunity is very short. In contrast to the first two windows of opportunity, the major driver in this cycle is technology. Latin America's strong growth of Internet, wireless, and other information technology attracted many specialist firms that were riding the high-tech bandwagon before its collapse.
If the first two years of the twenty-first century are an indication of what lies ahead, Latin America's economic roller coaster will be more intense and its cycles of recovery and recession will be rather short. Under this scenario, firms contemplating investing in Latin America have to prepare an entry plan and be quick to adapt to changing circumstances. Under another scenario, Latin America may be entering into a cycle of low but stable growth. Argentina may once more provide a glimpse of how the latter scenario may evolve. The social unrest in Argentina at the end of 2001 that brought down a weak president and a powerful economic minister may be an indication that the political and social problems will be at the forefront of the problems that Latin American governments may have to confront in the next decade.
If the twentieth century brought economic transformation of the region, the next decade will be a time of political and social innovation. The challenges for many Latin American countries rests in resolving the fundamental trade-offs between erratic economic growth and stability, maintaining a free market system and protecting local industry in the context of a global economy, and promoting an active role of the state without interfering in the economy. Resolving these issues will require formidable coalitions and consensus in many countries, as no one political leader has the fortitude to dissemble a decade of reforms and changes. These coalitions will not be able to reverse past reforms, but they will limit and shape them to smooth the intensity of their impacts on society. In this respect, the ability of future Latin American governments will rest on generating innovative economic and social policies and garnering enough political support to gain their acceptance.
The most vulnerable countries that may confront the dilemma of volatile growth or stability are those that face large external financing gaps and presidential elections. Brazil is such a country where these trade-offs have to be resolved soon. With external financing requirements estimated at $80 billion in 2002, 310% of international reserves, Brazil is experiencing a quick reduction of foreign investment inflows, and the Real lost 40% of its value in 2001. Other countries where the electoral vote may decide whether to continue with the status quo or revert to a more protectionist stand are Argentina, Colombia, Costa Rica, and Ecuador.
Thus in the future, investment volatility may have a source more in the political system than in the economic system. In contrast to previous windows of opportunity where the volatility stemmed mostly from the vulnerability of Latin American economies to global financial shocks, future volatility may be based on a change of economic policies or even government intervention in the economy to support more socially responsive measures.