Doing Business In South America
According to United Nations Economic Commission for Latin America and the Caribbean, an economic growth rate of 5.3% is estimated for 2006, equivalent to a per capita increase of 3.8%. This marks the fourth consecutive year of economic growth, and the third consecutive year of rates exceeding 4%, after an average annual growth rate of only 2.2% between 1980 and 2002. Growth continues to fall short of other developing regions, however. With the international environment remaining favorable, the volume of goods and services exports was up by 8.4% for the region as a whole and the main export prices rose, which translated into a terms-of-trade improvement equivalent to over seven percent.
According to the World Bank in 2006 Latin America had higher export revenues and volumes given the record-high commodity world prices than the previous year. Total GDP growth averaged 4.4% in 2005 and it is expected to grow 4.6% in 2006. The biggest exporter in the region is Mexico; in 2005 Mexico alone exported 213.7 billion USD, roughly equivalent to the exports of all members of Mercosur combined (including Venezuela), which totaled 214.5 billion USD. In the same year, Mexico also had the largest Gross National Income (GNI) of 753 billion USD and the largest income per capita in the region, 7,310 USD. However, adjusted to purchasing power parity (PPP) instead of using nominal exchange rates, Brazil's Gross Domestic Product (GDP) was the largest in the region (1.701 trillion USD) though Argentina's income per capita in PPP was the largest (13,920 USD).
As a result of these income gains, and of increased remittances from abroad, growth in national income (7.2%) again exceeded GDP expansion. In addition, other factors, such as growing investor and consumer confidence after several years of sustained growth, real interest rates that remained relatively low despite recent hikes in many countries, a stronger boost to public spending, an expansion in total wages driven by rising employment and a modest upturn in real wages, have helped to make domestic demand into an additional engine for growth. In fact, domestic demand rose by 7.0%, with gross domestic investment up by 10.5% and consumption by 6.0%.
Public spending rose in several countries as a result of larger investments in physical and social infrastructure and higher current spending. But since fiscal revenues climbed even more steeply, the prevailing picture shows central governments with higher primary surpluses (up from 1.7% to 2.2% of GDP as a simple average of 19 countries) and narrower overall deficits (from 1.1% to 0.3% of GDP). Alert to changes in international interest rates and to the effects of surging domestic demand and rising fuel prices, many countries' monetary authorities raised benchmark rates, especially in the first half of the year. In most cases, this did not slow economic activity, given the abundant liquidity. Nevertheless, inflation decreased in most of the countries and, in weighted terms, it came down from 6.1% in 2005 to 4.8% in 2006. Many countries had to deal with downward pressure on the exchange rate because of large inflows of foreign currency generated by stronger export prices or remittances. They took different steps to contain the effects of these inflows but, overall, most local currencies appreciated slightly (3.5% on average).
Fueled by sustained economic growth, job creation continued, especially in waged employment. A half percentage point increase in the employment rate was partially offset by a rise in labor market participation. As a result, open unemployment continued the downward trend begun in 2004, albeit more slowly, with a drop of 0.4 percentage points taking the rate to 8.7%. In contrast to the pattern of the last few years, real wages also benefited from increased demand for labor in 2006 and formal sector wages rose by some 3% as a regional average.
The value of the region's merchandise exports rose by 21% and its imports by 20%. Together with higher transfers (over US$ 9 billion net), this improvement of the balance of trade in goods was more than enough to offset the widening deficit on the factor and non-factor services accounts. Hence, the balance-of-payments current account surplus increased from 1.5% of GDP in 2005 to 1.8% in 2006. The capital and financial account surplus was smaller than the previous year, at US$ 230 million. This result reflected external debt-reduction policies, together with the development of domestic financial markets and the accumulation of assets abroad. It also reflected a sharp fall in net foreign investment, which owed much to the Brazilian acquisition of a Canadian firm, while capital flows into the region in the form of foreign direct investment were down slightly in comparison to 2005. The average region-wide performance masks large differences between and within countries. In particular, the international environment has affected exporters of high-demand natural resources, especially in South America (and petroleum-exporting countries in other subregions), in a very different way to the other Latin American and Caribbean countries.
In the light of the risks for the region's future economic development, particularly the risk of a hard or soft landing in the global economy, many countries in the region have taken steps to reduce their vulnerability. Such measures include adopting more flexible exchange-rate regimes, paying down foreign debt, restructuring debt in favour of longer profiles and fixed rates, building up international reserves, strengthening fiscal accounts and reducing the dollarization of their financial systems. Nevertheless, there is no doubt that a global economic slowdown would seriously affect the region's growth and the wellbeing of its population.
Economic expansion is expected to slow slightly in 2007, with the regional GDP growth rate projected at around 4.7%. If these projections are borne out, the region's per capita output will show a cumulative gain of some 15%, or 2.8% per year, in the period 2003-2007.
Inequality and poverty continue to be the region's main challenges; according to the ECLAC Latin America is the most unequal region in the world. Moreover, according to the World Bank, nearly 25% of the population lives on less than 2 USD a day. The countries with the highest inequality in the region (as measured with the Gini index in the UN Development Report) in 2006 were Bolivia (60.1) Colombia (58.6), Paraguay (57.8) and Chile (57.1), while the countries with the lowest inequality in the region were Nicaragua (43.1), Ecuador (43.7), Venezuela (44.1) and Uruguay (44.9). One aspect of inequality and poverty in Latin America is unequal access to basic infrastructure. For example, access to water and sanitation in Latin America and the quality of these services remain low.
The major trade blocs or agreements in the region Mercosur and the Andean Community of Nations (CAN). Minor blocs or trade agreements are the G3 and the Central American Free Trade Agreement (CAFTA). However, major reconfigurations are taking place along opposing approaches to integration and trade; Venezuela has officially withdrawn from both the CAN and G3 and it has been formally admitted into the Mercosur (pending ratification from the Brazilian and Paraguayan legislatures). The president-elect of Ecuador has manifested his intentions of following the same path. This bloc nominally opposes any Free Trade Agreement (FTA) with the United States, although Uruguay has manifested its intention otherwise. On the other hand, Mexico is a member of the NAFTA, Chile has signed a FTA with the United States, and Colombia's and Peru's legislatures have approved a FTA with the United States and are awaiting its ratification by the US Senate.
