The ‘Ease of Doing Business’ ranking has improved for Latin American countries since 2005, but important regulatory areas such as tax law, contract enforcement, and commercial lending need to be overhauled if the region wants to attract long-term, diversified, and sustainable investment.
Today, doing business in Latin America is significantly easier than a decade ago. Governments in the region are addressing infrastructure challenges and improving critical public goods, such as expanding energy grids beyond urban areas. According to the International Finance Corporation’s (IFC) Ease of Doing Business Index, Colombia, Guatemala, Peru, Costa Rica, and Mexico have made the most progress in improving business regulation standards. However, the regulatory environment is not perfect. Despite clear improvements in the past decade, doing business in Latin America is held back in three areas: receiving credit, tax law transparency, and enforcing contracts.
Most Latin American economies fall under the upper middle income range—the second highest of the four World Bank country classifications. The exceptions are Chile and Uruguay, which are classified as high income countries (per capita). Until meaningful reform in these three issues is prioritized by central governments, it is doubtful that Latin American markets will make the jump from the upper middle income range to high income range and become attractive investment destinations for high-tech, value-added industries.
Markets such as Peru and Paraguay, which depend on foreign investment related to extractive industries, could diversify if they strengthen financial institutions and ease lending.
Brazil would immediately turn heads if it adopted a more business-friendly and simpler tax structure. So far, the Brazilian May 2014 corporate tax reforms have not proved deep enough to attract business or create general confidence in the Brazilian investment climate, whose economic growth estimate was cut to a meager .70%.
For now, large governments (Argentina, Brazil, and Mexico) and smaller governments (Peru and Costa Rica) alike have concentrated their efforts on upgrading basic infrastructure so businesses can expand operations. At this point, Latin American governments have the state capacity to continue upgrading infrastructure, namely roads and train tracks, while focusing on simplifying the tax code for corporations and medium-sized businesses.
Access to the financial system is also imperative, as commercial bank-based lending for entrepreneurs and medium-sized business remains a challenge across the region and even non-existent in some areas. Fast-growing Latin American high-tech and IT industries, which rely on a high degree of entrepreneurialism and venture capitalism, would greatly benefit from easier credit.
In smaller Latin American countries such as Guatemala, Honduras, Nicaragua, and Paraguay, the most pressing problem affecting the ease of doing business is a fragile rule of law. Judges can be easily bribed, and even if they are not, certain economic actors have the resources to achieve settlements extra-judicially. Unenforceable contracts and a weak rule of law highlight a larger problem for the region as a whole—corruption. The IFC Ease of Doing Business Index does not account for control of corruption, which remains a hindrance for increasing long-term foreign investment across the entire region.
Where economies stand in the global Ease of Doing Business ranking.
The illustration above demonstrates the Pacific-Atlantic divide: the Pacific Alliance countries (Chile, Peru, Colombia, Costa Rica, and Mexico) rank considerably better in the Ease of Doing Business Index than the economies facing the Atlantic (Venezuela, Brazil, and Argentina). Chile has the best score, scoring at OECD levels.
Almost all countries in the region have undertaken reforms (Since 2005, 97% of Latin American governments have implemented business regulatory reforms), but deeper, meaningful initiatives need to be spearheaded by central governments to improve the business environment. This deep and meaningful reform includes judicial, financial, and bureaucratic modernization, coupled with massive state-financed investments in infrastructure and public goods. Lastly, corruption needs to be addressed by strengthening the rule of law. Creating a streamlined judicial system in which companies are protected and do not feel the need to bribe to gain access is crucial to achieving a better business environment.
