Links to the Global Economy
Trade, investment flows, and connectivity link Latin America with the world economy. The patterns of flows of these three channels determine the movement of goods, money, and information within the region and with the rest of the world. The greater the flows, the greater the region's immersion in the global economy. Investment flows have followed the windows of opportunity described above. Because of the long-term nature of investment, the flows do not adjust as quickly to the ups and downs of the region's economy (see Figure 8.3). Instead of three economic cycles, two waves of foreign direct investment can be identified in the period 19902001.12 The first wave of investment flows occurred in the period 19901994. Early investors focused mostly on privatization of infrastructure assets in Argentina, Mexico, and Chile. This first wave of investors was mostly from European companies in the Southern Cone and U.S. investors in Mexico. The second wave of investments took off in 1995 and peaked in 2000. Investment flows in the second wave were three times the value of the first wave. In contrast to the $20 billion flows of the first wave, foreign direct investments increased to close to $80 billion in 1999. Investors in the second wave were U.S. firms poised to become new global players in new markets, such as wireless telecommunications and energy. Although the major destination was Brazil, foreign direct investment in the second wave was regional. Investors continue to invest in Mexico and Argentina but also in such countries as Colombia, Peru, and Venezuela.
Figure 8.3 Waves of FDI in Argentina, Brazil, and Mexico
The third wave of investment is characterized by a downward trend in foreign direct investment flows, which started in 2000. Despite good economic growth in 2000, foreign direct investment fell by 22% in 2000 compared to the year before, and by 19% in 2001. With economic slowdown in the region and the world, some observers predict that the downward trend will continue until 2004, followed by a slow recovery. One reason for the decline is the end of major privatization programs in the region that brought one-time investments. Another reason is weakened investor confidence due to the economic problems in Argentina and the uncertainty of the outcome of elections in Brazil. The third reason is the slowdown in the U.S. economy, which has a major impact on Mexico. Very recent inflows reflect long-planned acquisitions, such as Citibank's purchase of Mexico's Banamex, but not major long-term investments.
As reviewed in Chapter 1, Latin America's trade flows are more intense with the rest of the world than within the region. Although the rhetoric of forming a regional trade agreement of the Americas has dominated the debate in public forums, the reality is that Latin American economies are highly embedded in worldwide trade. Despite more than a decade of efforts to pursue regional integration, the extent of intraregional trade has not reached more than 20% at any time and is recently at 17%.
The region's largest economies, Brazil and Mexico, are in a race to increase their participation in the world economy. As Chapter 1 indicated, Mexico is making an effort to become more globally involved and has developed the most complex web of trade agreements of any country in the world. Brazil, on the other hand, has been preoccupied in becoming a global leader in the export of commodities and building a global competitive industrial platform in a few industries, such as automobiles, light aircraft, and consumer electronics. In fact, Brazil and Mexico, together with the Asian emerging power economies of China and India, may become the emerging-country equivalent of the advanced economies triad of the United States, Europe, and Japan. Figure 8.4 illustrates the links of the United StatesEuropeJapan economic triad with the three leading emerging economies, which include Brazil and Mexico. Trade flows between the two triad systems are already quite substantial. U.S.Mexican trade has become very strong with NAFTA. U.S.China trade, already growing fast, will become even larger with China's entry into the WTO. European trade with China and Brazil is also very strong.
Figure 8.4 Extended Triads: Trade and FDI Flows
Mexico and Brazil are already part of the global value chain of major multinationals in medium-tech electronics, automobiles, and other consumer durables. In Chapter 3 we saw how the degree of integration of the automobile industry in North and South America leads to increasing trade flows of parts and cars. The U.S. and Mexico industrial networks are already highly integrated through NAFTA. European trade and investment have been historically important in Brazil. Most major European multinationals have presence in Brazil and/or Argentina. U.S. multinationals also hold an important presence in the Brazilian car industry, but their subsidiaries have greater links with the European subsidiaries than with the North American production hub. Japan's trade and investment flows in Latin America are more limited to assembly plants in Mexico and the Caribbean, but one can expect a greater participation of Japanese investment in Brazil.
All triad playersthe United States, Europe, and Japanhave major investments and trade flows with China. In the future, Mexico and Brazil will attract investment destined to build export platforms for global markets rather than for domestic market opportunities. The extent to which this new investment would flow to Latin America as opposed to Asia will be determined by the competitiveness of its two major economies, Brazil and Mexico. With large adjustments of the Brazilian currency in 2001, this country has become more likely to attract this type of investment than Mexico, which experienced an appreciation of the peso. Both Latin American countries are in a race with China to attract this level of investment. As reviewed in Chapter 3, the race will be difficult for Latin America, which lags in terms of productivity and quality vis-à-vis other world economies. In recent years, Mexico has been able to move quickly to close the gap in electronics and the automobile sectors. In the future, the trade flows that may emerge under a scenario of a greater integration of the two triads are the MexicoBrazilChina trade.
The losers of a greater integration of Brazil and Mexico with the global economy are Argentina and Chile. In the case of Argentina, several negative factors could deter this country's long-term prospects to participate in one global web trade scenario. Argentina's exports are destined to remain in the region, and the overvalued peso destroyed the competitiveness of Argentinean industry. Furthermore, its recent external debt default will increase the cost of external borrowing for Argentinean firms planning to improve their productivity in the future. In the case of Chile, a model country of the first wave of reforms and investments, its economy is mostly geared toward exporting and exploiting natural resources. Chile has not been able to attract the type of investment for a manufacturing platform that Mexico and Brazil have been able to achieve. Chile is banking on becoming a high-tech platform for the Americas.
With respect to connectivity links, the region is still in the early stages of building regional infrastructure networks. As analyzed in Chapter 4, the effort of the past 10 years has been in building modern telecommunications networks at the national level. Several projects are under way to build subregional city-to-city networks. Major telecommunications firms such as Telefónica and Telecom Italia are behind these major regional projects. Broadband regional networks are also available at the regional level with funding from private investor groups. Internet technology is to a great extent localized. As Chapter 1 indicated, Internet connectivity is mostly local. Major attempts to develop a regional platform for Internet portals have not been successful, and ISP providers are mostly local. Past efforts to develop a regional ISP network by companies such as PSI Net have been halted by the collapse of the global telecommunications and Internet sectors.
Future connectivity flows in Latin America may not only change but may shape new business strategies in the region. Intraregional information, voice, and data flows will surge to unprecedented levels. As discussed in Chapters 1 and 6, global and national bank leaders are focusing their strategies on advantages provided by information technology. The alliance of BBVA and Terra Networks to offer Internet banking may create a new regional electronic banking market. Brazilian bank champions Bradesco and Itaú have built similar core capacity at the national level. Greater use of information technology and the Internet requires increased network capacity to support traffic. The potential for Mexico and Brazil to build such capacity will make these two countries the hubs of connectivity for regional traffic as well as global traffic. Having such capacity will help these two countries integrate further with the global economy triad architecture by providing world-class connectivity with the telecommunications hubs of multinationals. A few other countries, such as Uruguay and Argentina, with very efficient telecommunications networks are also vying to become information hubs for the region.