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It was clear: The private sector held the key to reform and perhaps even prosperity in Latin America. Several experts at the conference could agree on that. But the task of inspiring and involving the private sectorwhen profits all over Latin America are plummeting and many stalwarts, such as the multinationals, are scaling back or pulling out altogetheris more difficult.
According to The Wall Street Journal, U.S. companies reported that in the first nine months of 2002 they lost $500 million in South America. This marked their first loss in the region in ten years.
On its face, the economic dynamism that exists in Latin America now seems to come from local and regional forces, not international inflows as was the case before, observed Sylvia Maxfield, a panel moderator and professor of management at the Simmons Graduate School of Management in Boston. The companies that will succeed in Latin America in the foreseeable future are regional operations that can compete worldwide, such as Mexico's Grupo Modelo, famed for Corona beer, and Brazilian aircraft manufacturer Embraer, said Nicolás AguzÃn, head of Latin America Investment Banking Advisory for JPMorgan, and a panelist in the session "Financing the Latin America of the 21st Century."
Those certainties were things that I shared, and those enigmas are what are keeping me up at night. |
Ricardo Hausmann, John F. Kennedy School of Government |
Local companies find themselves in a new position: In the 1990s they were potential sellers to international companies; now they are potential buyers, he added. "New" regions for business such as Central America are starting to look attractive again.
At the conference, other specialists in the economics and business of Latin America tried to offer hope in the form of concrete suggestions for solving specific problems of financial infrastructure, policy, and corruption. Their advice was tempered with a strong dose of realism. One encouraged newly graduating MBA students to consider putting their skills to use in government rather than in traditional business.
But as keynote speaker Ricardo Hausmann soberly concluded, the economic reforms that seemed so promising and successful during the 1990s probably did not get to the core of the problems facing Latin American countries. While the 1990s was a time of certainty, the present is clouded by enigmas.
"Those certainties were things that I shared, and those enigmas are what are keeping me up at night," admitted Hausmann, a professor of the practice of economic development at Harvard's John F. Kennedy School of Government and a native of Venezuela. Later he added, "We simply have to keep on trying. Eventually we'll get it right."
The current downturn raises frightening questions for everyone, Hausmann said. There are political costs, a collapse in growth expectations and a collapse in the economic policy consensus. Observers who take a simplistic route claim the downturn is due to two factorsa lack of education investment and a lack of internal savingsbut Hausmann argued that education has been improving. Even East Asians, supposedly big savers, could not forestall the Asian financial crisis of 1998.
Hausmann proposed two separate hypotheses for the regions' ills: innovation and finance. Both of his ideas are works in progress, he cautioned with a smile.
You can change the government, but the same people are there. |
Luis Moreno Ocampo, Transparency International |
For innovation, the ticket out of trouble needs to be the appearance of new activities, not the expansion of old activities, Hausmann suggested. "Little details"such as instituting and protecting intellectual property rightsare important for spurring new growth. Innovation is a costly process, but current conditions make it hard for an individual innovator to claim the rewards of a new product or service. "Rich companies" enjoy IP rights, government procurement, and public subsidies for research, but individuals do not, he said.
In addition, he proposed, there needs to be a compelling public reason to promote the growth of innovation. Much of a country like Israel's leadership in high technology is due to its defense industry's need for innovation, Hausmann explained. For Latin America, that translates to the need for "activist" government policies for innovation and subsequent long-term growth.
In laying out his finance hypothesis, Hausmann suggested that Latin America's woes are linked to the inability of Latin Americans to access international financing in their local currency. Latin Americans are told they lack fiscal discipline, yet borrowing dollars is very risky. Attention to this currency detail is fundamental and might help countries avoid crisis in the first place, he said.
Concrete steps he is developing with two colleagues include the creation of a new index. The World Bank and other international financial institutions would issue debt in emerging markets; countries such as the U.S. that maintain the world's five major currencies would issue debt denominated in the index.
The oil and glue
No discussion of business in Latin America would be complete without examining corruption. Corruption is the "oil and glue" of the system in much of Latin America, asserted Luis Moreno Ocampo, a member of the advisory committee of Transparency International. Ocampo, currently a visiting professor at Harvard Law School, was the prosecutor in numerous trials related to Argentina's democratic transition.
In developing countries the government is unable to run an efficient public sector and the private sector is unable to think about it, said Ocampo. He stressed that real change can't come "from the inside" but needs the private sector to change the rules. "Of course we need to change the public and private sectors, but we need to start with the private sector first," he said.
As things stand now, he said, "You can change the government, but the same people are there." It is like trying to change a party by changing the food even though the guests all remain the same, he observed.
Latin American countries that want to change their public systems need businesses to align profit and values, he said. The critical challenge comes in offering incentives to make that possible. His suggestions included encouraging capital markets to align incentives and values, and changing the arena of public procurement with publicly available information.
"Use the market forces to change this system," he said, and the costs of public procurement could be reduced by as much as 50 percent.
The 9th Latin American Business Conference was held at Harvard Business School on February 7 and 8, 2003. It was organized by the Harvard Business School Club Ibero-Americano. This year's theme was "Latin America: The Road Ahead: Trends, Opportunities, and Strategies in a Changing Environment."