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International Business Report (IBR)

Are two Latin Americas emerging?

Madeleine Blankenstein on the Atlantic-Pacific split


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 and I want 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 hampering businesses in their search for growth. Brazil has been named as one of the ‘fragile five’ economies whose currencies could suffer most from investor flight as the US Federal Reserve tapers its huge quantitative easing programme. Meanwhile, Argentina and Venezuela have imposed a range of foreign exchange and price controls to cool inflation and capital flight. By contrast, business leaders in Mexico, which pushed through a series of tough energy, education and competition reforms last year, like peers across the Pacific side, remain relatively untroubled by government and central bank action.

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 does not completely stack up; for example, Brazilian businesses are more bullish than Mexican peers about increasing profits this year, and with 100 million inhabitants now in the middle class, there are still many business opportunities to explore. Also Brazil’s government is not really in the same league as Argentina and Venezuela when it comes to interventionism – it is a true democracy and it is hoped that the elections in October will establish a new more open economic framework. However, the Atlantic and Pacific – or inward and outward – reactions to globalisation hold true. While the Pacific side is signing free trade agreements with the rest of the world, the Atlantic side is limiting foreign investment and access to its markets, through monetary and fiscal policies.

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.