The relationship in Latin America between governments and business in 2014 will be defined primarily by the interaction of democracy and natural resource economics. Here is an overview of key issues to watch.
1. Democracy:
Seven presidential elections will be taking place in Latin America in 2014 (Costa Rica, El Salvador, Panama, Colombia, Uruguay, Bolivia, & Brazil). These presidential elections present three possible implications:
- Leftist/Social Democratic ruling parties in Brazil and Bolivia could be replaced by pro-business parties, which would push for pro-foreign direct investment and free trade policies.
- These elections show that regimes in the region are not just democratic but also stable. Political parties are ushered in and out based on legitimate popular consent.
- Fundamentally, Latin American democracies are still weak and their legitimization by popular consent does not indicate that judicial institutions are strong. Strengthening state capacity continues to be a problem for Latin American democracies, and until they do so, Southeast Asia will be a more attractive investment option for multinational corporations.
2. Natural Resources:
Latin America has enough natural resources to sustain its own growth and have enough available to export (copper, oil, natural gas, fresh potable water, timber, gold, silver, aluminum, and a plethora of agricultural products, among others) to the developed world and accumulate capital surpluses.
Governments on the left and right are well aware of this advantage. In the early 2000s, we saw governments invest in natural resource extraction as a result of skyrocketing world prices for the aforementioned commodities. However, mismanagement and disorganization of natural resource revenues emerged in the past decade, and corruption has increased in countries with higher natural resource exports.
The coming years will show if the governments of Ecuador, Argentina, Venezuela, and Bolivia (all with proven gas or oil reserves) follow a more responsible and efficient natural resource profit distribution scheme, like the one employed by the Chilean government. Latin America’s disorganized natural resource exporting regime and hasty nationalization of oil extracting corporations raise a yellow flag for investors in 2014.
The Latin America ‘To Watch’ List
Colombia: The Colombian government will be entering the deeper and substantial parts of the peace negotiations with FARC rebel forces. Although negotiations have been excruciatingly slow, many acknowledge that the country is transitioning towards peace. A peaceful Colombia demonstrates higher state capacity and provides added investment opportunities for multilateral organizations. If peace is brokered, the country’s oil company (Ecopetrol) will be able to examine oil reserves never explored before in territories now occupied by FARC forces. These possible oil reserves are in the same geographical fault lines as the Venezuelan oil wells.
Mexico: The proposed economic and political reforms are expected to enhance Mexican economic competition, but violent drug cartels with extra-judicial provincial authority show how the central government and courts are incapable of enforcing control. Pena Nieto has proposed many reforms, but he has been silent about properly reforming Mexico’s weak and ineffective judicial system. Drug cartels remain a serious threat for investment. These groups operate in the industrial northern states of the country, which are the drivers of the Mexican manufacturing economy. Pena Nieto’s proposed economic platform is an obvious attempt to jumpstart a slowing economy that is threatened by international competition and broad public distrust.
Brazil: Brazil’s worker’s party (PT) had a tumultuous 2013. The PT weathered widespread protests and sluggish economic growth. Look for center-right parties to make a run for the presidency in the 2014 elections with a more business friendly platform. The PT has survived 2013 due to successful social programs and low unemployment, but as the election nears, the main opposition party (PSDB) as well as other smaller center right parties are expected to use the widespread public discontent as an electoral rallying point.
Venezuela: Like Brazil’s Dilma Rouseff, Nicolas Maduro has survived a very trying year. Venezuela had one of the world’s highest inflation rates and faced a shortage of basic products such as toilet paper and milk in many cities throughout the country. Although the ruling party won municipal elections last month, Maduro faces a highly organized opposition coalition comprised of 30 parties that rally on two main principles: anti-chavismo and a better business environment.
As of now, Maduro relies on populist tendencies such as government bonuses to public sector employees to sustain acceptable popularity ratings. Raging inflation and uncontrollable corruption tied with economic woes are very relevant worries for the ruling party. Look out for an even stronger opposition movement against Maduro and Chavismo in 2014. The political situation in Venezuela is expected to become more radical and fragmented, which will hurt business prospects even more. A definite red flag for investors is raised in Venezuela for 2014.
