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Extraordinary Opportunities—and Significant Challenges—Await Investors

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Latin American and the Caribbean have vast potential because of a young workforce, abundant natural resources, and a moderate capital influx. Despite historic opportunity, the region lacks strong institutions to control crime and corruption and regulate business. Without internal government reforms, competitiveness will be weak and economic growth could suffer.

Jan24_Final_online_HR_GUATEMALA_1-148Business analysts and investors have been keeping an eye on Latin America and the Caribbean (LAC). Some see great  opportunity in the region’s growth, while others fear the next collapse. Which issues are affecting short-term growth, and how have they been influenced by global trends?

Demographic trends, including an aging population and increased urbanization, mean that social and economic policies must support and anticipate these changes to compete in the global economy.

Many LAC nations are positioned to take advantage of historic opportunity if the region can get a handle on crime and corruption, weak and contradictory business regulations, and the changing needs of the global economy. At a glance, current trends include the impact of shifts in imports and exports, changing demographics, and the immediate effects of climate change.

OPTIMISM REPLACED BY FEAR?
Thanks to monetary and financial restraint, Latin America did not suffer as much as some other regions during the  recent global financial crisis. Many Latin American countries now stand with stable currencies, low national debts, and an opportunity to attract much-needed foreign investment if the region can address key external trends and internal problems. The United Nations Economic Commission on Latin America and the Caribbean (ECLAC) predicted an average annual increase of 3.8 percent in GDP from 2010 to 2020. Another study shows GDP in Latin America nearly doubling from 2012 to 2020, from US $5.95 billion to nearly US $10.4 billion.

In 2013, China became the number-one destination for South American imports, surpassing the United States. LAC exports reached US $112 billion in 2013, which represented a record 2 percent of GDP, even as commodity prices fell. The World Bank, which has been cautiously optimistic about growth in the region, is now eyeing the slowdown in China, and fears permeate many Latin American economies, which have been heavily dependent on Asia over the last decade. In fact, trade with China dropped by 2 percent in 2014. China’s pledge to invest US $250 billion in Latin America over the coming decade may ameliorate fears in some economies.

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INTERNAL IMPLICATIONS
Weak governments throughout the region have put a strain on economic growth. With inconsistent sentencing laws and fragile courts, crime and corruption are a problem for both citizens and investors. Moreover, weak institutions have led to contradictory business regulations that frequently dissuade business development.Residents of Latin America and the Caribbean are disillusioned with the justice system and law enforcement’s inability to catch and punish violent offenders.

Citizens and government officials alike see the need for pragmatic reform to combat issues like corruption and weak legal systems. The Latin American and Caribbean voter tends to focus less on political ideologies and more on choosing leaders who present practical solutions to pressing problems. LAC governments have focused on strengthening courts and law enforcement by creating new institutions that serve as supervisory organizations. Laws have also been implemented to promote and protect civic participation.

A POPULATION IN FLUX
Countries in the LAC region are going through a transitional phase in population. This phase, known as age structural transition (AST), is characterized by reduced fertility rates. In the middle of the 20th century, the average number of children per woman in Latin America was six. Now, that number has dropped to about two. As a result, overall population growth rates are projected to decline from 1.5 percent in 2010 to about 0.75 percent in 2020.

While this demographic trend offers opportunity on the fiscal front, there is a subgroup of the population whose needs are quite different. Central American countries have a sizable indigenous population—especially when compared to other nations in the Western Hemisphere. Unlike other demographics, where fertility rates are dropping, indigenous peoples are actually experiencing population growth.

Indigenous populations have a strong foothold in rural areas where land is often used for large-scale farming and ranching, as well as extractive industries. To incorporate this demographic into the changing modern economy, public officials must develop an understanding of this subgroup’s needs and promote policies to better their quality of life without eradicating their customs and unique culture. One study showed that inclusion of African-descendant and indigenous populations might increase the GDPs of Guatemala, Peru, Bolivia, and Brazil by up to 36.7 percent.

CLIMATE AND COMMERCE
One trend that could affect business operations in the near future is climate change. Governments and corporations need to anticipate the impact of rising sea levels affecting shipping ports and existing infrastructure along with sea level changes displacing coastal populations.

Of primary concern to those with a more short-term outlook are changing rainfall patterns, which will affect the agricultural industry, as well as rural populations who lack access to clean water. Forecasts show that a 2° C increase in global temperatures could reduce precipitation up to 30 percent. Hydroelectric generation will also be affected by changing precipitation patterns. Climate change could also bring about extreme weather, including stronger and more frequent hurricanes and droughts.

FORGING A PROSPEROUS FUTURE
If LAC nations can take advantage of the “window of opportunity” that exists in the age structural transition and dedicate funds and programs toward producing an educated, healthy, and skilled workforce, the region could emerge ready to forge its place in the global economy. The challenges, however, include raising the socioeconomic status of indigenous groups and Afro-Caribbean populations along with strengthening government institutions. Law enforcement and the judicial system will require significant reforms to reduce crime in urban areas and give investors and workers faith in the rule of law. Cracking down on crime and corruption will take sweeping measures, but it is necessary for reducing the power of black markets and creating space for legitimate commerce.

To enact progress, public institutions, government entities, and perhaps even outside influence from experts could help prioritize tangible objectives that take advantage of foreseeable strengths while improving obvious weaknesses. One clear avenue of progress is to strengthen manufacturing and technology-based industry; another is to include those who are currently being left out of the economy. With such measures, a collapse in China may play less of a role in the region’s future than is currently feared.

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