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World Economic Forum onLatin America

Building a Stronger

Latin America in the Global Economy

São Paulo, 5-6 April 2006

Preface 3

Foreword 4

The Creative Imperative in Latin America 7

Managing Global and Regional Risks 8

Improving Latin America’s Competitiveness 10

Continuing with the Integration Agenda 12

Re-evaluating the Investment Framework 14

Priorities for Action in Latin America 16

Acknowledgements 18

1

Contents

World Economic Forum on Latin America

The views expressed in this publication do notnecessarily reflect those of the World EconomicForum.

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World Economic Forum on Latin America Web report:http://www.weforum.org/summitreports/latinamerica2006 (HTML)

The electronic version of this report allows access to a richer level of content from themeeting including weblogs, photographs and session summaries.

The report is also available as a PDF:http://www.weforum.org/pdf/SummitReports/latinamerica2006.pdf

Other specific information on the World Economic Forum on Latin America, São Paulo,5-6 April 2006 can be found at the following links:

http://www.weforum.org/latinamerica

http://www.weforum.org/latinamerica/programme

http://www.weforum.org/latinamerica/indepth

http://www.weforum.org/latinamerica/partners

http://www.weforum.org/latinamerica/competitiveness

3

Preface


In an election year in many countries across the region, the World Economic Forum onLatin America provided a platform, at a critical moment, for leaders to discuss thechallenges and the opportunities facing the region in the years to come. Representing 24countries, 300 participants from business, government, academia, media and civil societygathered in São Paulo on 5-6 April 2006 to reflect on Building a Stronger Latin America inthe Global Economy. Special attention was placed on how Latin America could achievesustained and equitable growth.

Based on Forum tools brought to the meeting (Global Risks, Global Competitiveness,Global Scenarios), concrete recommendations emerged from the gathering. Consensuswas reached on Regional Risks, Competitiveness Challenges, and Priorities for Action inLatin America. The results are incorporated in this publication. In the closing plenary,participants voted to focus over the next years on education – specifically teacher trainingand improving the quality of schools – and on using public-private partnerships to investin infrastructure in rural areas, underdeveloped regions and urban slums.

The Forum would like to once again take this opportunity to thank the Co-Chairs of theWorld Economic Forum on Latin America in São Paulo, who provided valuable insightand support for the programme. They were: Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, BrazilLuis A. Moreno, President, Inter-American Development Bank, Washington DC

We now look forward to building a new partnership with the region. This will provide youand us at the World Economic Forum with essential guidelines to continue to engagewith the region in specific initiatives and address the relevant issues in our forthcomingAnnual Meeting in Davos as well as in our next World Economic Forum on Latin Americaroundtable during 2007.

Peter Torreele Sylvie Naville Managing Director Associate Director,

Latin America

Improving Latin America’s Competitiveness

While Latin America lags other emerging marketsincluding East Asia, China, India and EasternEurope in competitiveness rankings, mostcountries in the region are making progress intheir efforts to catch up.

• Macroeconomic stability is now widelyregarded in the region as a political imperative.

• To boost competitiveness, the region needs tofocus on improving logistics, reducingbureaucracy and eliminating trade barriers.

• Public-private partnerships could help marshalthe resources necessary to invest in necessaryinfrastructure development.

• Investment in education is essential,particularly in better training and compensationfor teachers.

• Latin American countries should also aim toexploit their comparative advantages andestablished niches such as biofuels andrenewable energy.

Continuing with the Integration Agenda

It is essential for Latin America to deepenintegration if it is to be more globally competitive.

• The region must pursue efforts to improveinfrastructure links, increase intra-regional tradeand boost cooperation in strategic sectorssuch as energy and tourism.

• In trade development, emphasis shouldcontinue to be made on multilateral andregional initiatives. But with those effortsstalled, bilaterals may be the best alternative.

• Infrastructure development, particularly throughpublic-private partnerships, is crucial forregional integration.

• The energy sector, particularly non-petroleumproducts and biofuels, could play a leadingrole in enhancing regional integration.

• The region should not let political differencesderail integration.

5

What was immediately palpable when participantsgathered in São Paulo for the World EconomicForum on Latin America was the fresh confidenceevident in the region, particularly in Brazil, a countrythat has overcome macroeconomic trauma andvolatile politics to emerge motivated and self-assured in its stability and growth prospects. Inmore than two dozen sessions and privatemeetings, business, government and civil societyleaders from Latin America and around the worldreviewed the state of the region and franklydiscussed both its advantages and shortcomings.

The highlight of the event was the spirited addressby Luiz Inacio Lula da Silva, President of Brazil, whogave an upbeat assessment of the region and hiscountry as they face the challenge of “Building aStronger Latin America in the Global Economy”, themeeting’s theme. In a session that lasted nearly twohours and included a question-and-answer period,Lula neatly covered each of the meeting’s four sub-themes, key challenges facing the region:“Managing the Impact of Global and RegionalRisks”, “Improving Competitiveness”, “Continuingthe Integration Agenda” and “Re-evaluating theInvestment Framework”.

At the end of the meeting, participants identifiededucation and infrastructure as the most pressing ofthe priorities for Latin America. These are the keymessages that emerged from the two days ofinteractive deliberations:

Managing Global and Regional Risks

Economic inequality and social marginalization arethe greatest risks facing Latin America. These twoproblems are hindering the region from improving itscompetitiveness.

• Latin American countries should look inward andassess their own advantages and shortcomings ifthey are to achieve greater competitiveness andsustainable growth.

• Education is the compelling solution to incomedisparity and social inequity.

• Government and business should not ignore theopportunity that exists in mobilizing the region’spoor, both as a source of labour and a potentialmarket.

• Political will over vested interests is essential toimplementing meaningful reforms.

4

Foreword – Building a Stronger LatinAmerica in the Global Economy


World Economic Forum on Latin AmericaWorld Economic Forum on Latin America

“When our region raises itshead and negotiates onequal terms with richcountries without arrogancebut with humility andperseverance, we willachieve more than when wewere just crying out andweeping. We are ready todo that now.”

Luiz Inacio Lula da SilvaPresident of Brazil

“It is obvious that thereare people who benefitfrom the lack of reforms,who make a lot ofmoney and have a lot ofpower because of thissituation that hurts thegreat majority.”

Moisés NaímEditor-in-Chief, ForeignPolicy Magazine, USA

“The lack of infrastructureand investment is really thebottleneck to globalcompetitiveness.”

Luis A. MorenoPresident, Inter-AmericanDevelopment Bank, WashingtonDC; Co-Chair, World EconomicForum on Latin America

“The world needs a veryclear sign that [the DohaRound] will end insuccess. But the level ofambition is very lownowadays. The clock isticking and we just don’tmove. The US and EUare just playing poker.”

Manuel A. González SanzMinister of Foreign Trade ofCosta Rica

“We don’t want to take from the rich to give to the poorto make everybody poor; we want everybody to beprosperous.”

Ricardo B. Salinas PliegoChairman, Grupo Salinas, Mexico

“We need to improve in terms of automation, informationtechnology and the quality of our labour force.”

José C. Grubisich FilhoChief Executive Officer, Braskem, Brazil

“What we see today is an explosion of bilaterals. This isbad for the world, but this is unfortunately the way theAmericas are going.”

Marcos S. JankPresident, Institute for International Trade Negotiations (ICONE), Brazil

Re-evaluating the Investment Framework

To remedy the region’s poor performance inattracting foreign direct investment compared toother emerging markets, Latin America shouldtackle major competitiveness shortcomings such asdoubts about political stability, investor ignoranceand deficiencies in the financial sector.

• Latin America’s attractiveness to investors hasbeen hampered by poor regulation and lingeringperceptions that the region is politically unstable.

• Governments should combat ignorance about theregion with greater transparency and bettergovernance.

• Bottlenecks need to be unblocked. In particular,deficiencies in the financial sector, including thedifficulty small and medium size enterprises havein accessing capital, must be addressed.

• Businesses in the region should play an active rolein diversifying the economy and attacking suchcompetitiveness shortcomings as poor educationand low R&D investment.

• In devising their strategies and business models,investors should take into account the region’ssocial context – the need for growth with equity.

During the World Economic Forum on LatinAmerica, government, business and civic societyleaders considered how the region can achieveand sustain high economic growth with equitableincome distribution. This continued discussionsheld at the World Economic Forum AnnualMeeting 2006 in Davos. Throughout theconsultation process, the focus has been ondiscerning the “creative imperative” inapproaching the challenge of building a strongerLatin America in the global economy.

Participants in Davos, São Paulo and around theworld have worked to come up with innovativesolutions and approaches and to set priorities foraction that would constitute an agenda for LatinAmerica to enhance its global competitiveness.Some of these proposals were included in a listof ten recommendations for social and economicchange that were issued in a communiqué at theclosing session of the World Economic Forum onLatin America. After reviewing them, participantsvoted to focus over the next year on education –specifically teacher training and improving thequality of schools – and on employing public-private partnerships to invest in much neededinfrastructure in rural areas, underdevelopedregions and urban slums.

The following is a selection of creativeapproaches that participants discussed inSão Paulo:

• Education: Train and properly compensateteachers to raise the quality of schools. Donot simply extend the mandatory schoolyear.

• Infrastructure and Investment: Employpublic-private partnerships to channelinvestment into urgently neededinfrastructure.

• Business Model: Deepen the effectivereach of existing regional business modelsby finding ways to tap the human resourcesand consumer potential of the poor.

• Social Equity: Develop safety netprogrammes that are fiscally sustainable,while promoting other progressive policiesincluding efficient tax collection, universalsocial security and home ownershipfinancing schemes.

• China: Turn China’s emergence fromchallenge to opportunity by takingadvantage of China’s low-cost environmentthrough business process outsourcing andits need for natural resources, which LatinAmerica possesses in abundance.

• Financial Services: Provide innovativeproducts such as securitized instruments(mortgages, real estate investment trusts,debt) that help small and medium-sizedcompanies access funding by bringingdown the cost of capital and increasingliquidity.

• Trade: Ensure that bilateral agreements gobeyond commitments made at themultilateral level, while maintaining focus onmultilateral and regional initiatives.

• Competitiveness: Fight investor ignorancewith increased transparency and bettergovernance by using such tools ascompetitiveness assessments and region-wide and cross-regional benchmarking.

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The Creative Imperative inLatin America

World Economic Forum on Latin America World Economic Forum on Latin America

“Latin America is in theprocess of normalizing; it iswhat many people havebeen working for, and thefinancial system is part ofthat.”

John WilliamsonSenior Fellow, The Institute forInternational Economics, USA

“We cannot afford to comeup with economic equationswithout looking at the socialside. Unless we invest in thesocial side, we will not bepolitically positioned totackle economic problems.”

Jorge Gerdau JohannpeterPresident and Chief ExecutiveOfficer, Gerdau, Brazil;Co-Chair of the World EconomicForum on Latin America

“We are progressing fast in Brazil. In very short time, wewill be investment grade. It will be very important toreduce the cost of capital to have more liquidity. When thecost of capital becomes reasonable, Brazilian companiesshould boom”

David FefferPresident, Suzano Holding, Brazil

The twin curses of economic inequality and socialmarginalization loom as the greatest risks facingLatin America. “Business can no longer survive in afailed society,” said Ivan F. Zurita, Chief ExecutiveOfficer, Nestlé Brasil, Brazil.

Compared to global rankings, corruption andorganized crime also rank higher as risks in LatinAmerica than elsewhere. In turn, China is moreoften classified as an opportunity than a threat,except to Mexican industry, and concern overinternational terrorism is downplayed.

Using the Gini Index of inequality in the distributionof income and consumption, a World Bank studyfound that at the end of the 20th century LatinAmerica and the Caribbean measured nearly 10points greater inequality than Asia and 17.5 pointsthan OECD countries. Another study by the Inter-American Development Bank found that extremepoverty worsened in many Latin American countriesduring the early years of the current decade. Thisstands in contrast to strides made in China andIndia to lift over 100 million people out of extremepoverty.

The risk posed by inequality and exclusion “isnothing new,” observed Moisés Naím, Editor-in-Chief, Foreign Policy Magazine, USA. “But now ithas more political potency and a greater economiceffect.” Noted David Rothkopf, President and ChiefExecutive Officer, Garten Rothkopf, USA: “Theconsequences of inequality can be recast asdisenfranchisement, political polarization and,perhaps most sensitively, as a class culture.”

While cooperation from the global community iscertainly welcome, Latin Americans are prepared totackle their own problems. “The problem with SouthAmerica is that we have looked to the United Statesand Europe and admired their wealth, and we havelooked to China and admired its growth, but wehaven’t thought about what we should be doingourselves,” said Luiz Inacio Lula da Silva, Presidentof Brazil. “It is like someone who envies hisneighbour’s new television set instead of trying tofigure out how to buy his own TV.”

Programmes like Brazil’s Bolsa Familia, Mexico’sOportunidades and Colombia’s Familias en Acciónare credited with beginning to weave a safety netunder the poorest of the poor. Beyond socialprogrammes, “Education, education, education,” asRicardo Young Silva, President, Ethos Institute,Brazil, put it, is high on the agenda.

At least some answers to questions about long-term sustainable growth and increased globalcompetitiveness may lie precisely in the humanresources that are now wasted by poverty andexclusion. “We cannot afford to come up witheconomic equations without looking at the socialside,” said Jorge Gerdau Johannpeter, Presidentand Chief Executive Officer, Gerdau, Brazil, and Co-Chair of the World Economic Forum on LatinAmerica. Said President Lula: “People in LatinAmerica used to say there was a paradox, that youhad to grow first to invest in social programmeslater. We believe that spending money on the pooris an investment.”

In spite of that well-placed political will, the taskwon’t be easy. “It is not uncommon to come upwith answers like education, institution building,reducing corruption and fighting inequality,” saidNaím. “It is all true, and it has all been saidbefore. But over the last 20 years not much has

been done.” He noted one key reason: “It isobvious that there are people who benefit fromthe lack of reforms, who make a lot of moneyand have a lot of power because of this situationthat hurts the great majority.”

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World Economic Forum on Latin America World Economic Forum on Latin America

Update 2006: Global Economy Closing Plenary on “Priorities for Action”: Co-Chair Jorge Gerdau Johannpeter, World Econommic Forum Managing Director Ged Davis and Co-ChairLuis A. Moreno


Top ten risks affecting the region

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Environmental degradation

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Natural disasters Climate change

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Regulation Income inequalities

China’s riseOrganized crimeUS twin deficit

Regional political instability

Most Latin American countries have made greatstrides to improve their competitiveness. They havequelled hyper-inflation, restructured and paid downdebilitating foreign debts, and privatized sundrystate-owned firms. Import tariffs have been slashed,exports are up and nearly every country is moreintegrated into the global economy than it was adecade or two ago. Some governments haveembarked on regulatory reforms designed tounleash the creative energy and job creationcapacity of small businesses.

“I am impressed by the acceptance across theregion of macroeconomic stability as a politicalimperative,” said Anoop Singh, Director, WesternHemisphere Department, International MonetaryFund (IMF). No longer, he added, are such policiesimposed from abroad. “This is an amazinglyimportant development,” he said.

Yet, seen from a global perspective, the region’sprogress pales by comparison. On the WorldEconomic Forum’s Global Competitiveness Index(see Figures 1 & 2), the Latin American countryaverage lags behind scores for China, India, EasternEurope and the East Asian NICs (Hong Kong,Singapore and Taiwan) . In 1980 Latin Americaboasted more extensive networks of productiveinfrastructure like roads, electricity andtelecommunications than the countries of East Asia.Since then the Asian “tigers” scampered ahead andnow lead by a factor of three to two, according to aWorld Bank report. A child entering school today inArgentina or Brazil can expect to complete 16 yearsof study, according to a UNESCO study, but thequality of education leaves much to be desired; a32-country study by the OECD measuring 15-year-olds’ abilities in math, science and their nativelanguage ranked Brazil and Mexico well behind theglobal average.

Rather than lament lost opportunities, many LatinAmerican policy-makers are looking on the brightside. “There is good news on two fronts,” said LuizFernando Furlan, Minister of Development, Industryand Trade of Brazil. “First, Brazil’s competitiveness isgrowing. There are signs of that in foreign trade,which is up by 20% a year over the last three years.And second, there is room to improve ourcompetitiveness in terms of improving logistics,reducing bureaucracy and eliminating domesticbarriers.”

Many countries are banking on public-privatepartnerships (PPPs) to boost infrastructuredevelopment. In Brazil the new legislation for PPPsincludes a guarantee fund to calm the skittishnerves of private investors who might otherwise bewary of joining forces with the government. “Withoutinvestment in infrastructure, we’ll remain spectatorsfor the next 100 years,” said Luiz Inácio Lula daSilva, President of Brazil.

Education has become a mantra for many LatinAmerican reformers, but guaranteeing high qualityinstruction for the poor majority is proving moredifficult than building classrooms and tracking downtruants. Training for teachers and higher salaries torecruit better candidates into the profession

represent two elements of the solution to theequality equation. “We don’t need one greatbusiness executive; we need hundreds of greatexecutives. We don’t need a few goodengineers; we need thousands of goodengineers,” said President Lula.

One road to success is to further specialize inareas where the region already enjoys acompetitive advantage. Latin America andespecially Brazil are well positioned to becomeglobal leaders in biofuels and renewable energy,and the United States and other countries arekeen to explore partnerships in the region todevelop them.

Furlan has met with officials from California,Japan, South Africa and elsewhere to discussinitiatives in the biofuel realm. New investmentsin the cultivation and refining of sugarcane,Brazil’s raw material for ethanol production, arebooming. Meanwhile Argentina is offeringincentives for biofuel development fromsoybeans, said Martín P. Redrado, President ofthe Central Bank of Argentina.

“There is a very serious energy agenda that wecan work on together,” observed E. AnthonyWayne, US Assistant Secretary of State forEconomic and Business Affairs. “We areembarking on a programme to diversify ourenergy sources and change the mix, and Brazilis a leader in ethanol production.”

A potential outgrowth of efforts in biofuel couldbe a broader expansion in biotechnology. “Thereare only three countries in the world that havedecoded the genome of a living organism, andBrazil is one of them,” said Furlan. “And we arerich in biodiversity.”

10 11World Economic Forum on Latin America World Economic Forum on Latin America

Improving Latin America’sCompetitiveness

Improving Latin America’sCompetitiveness

Figure 1: Regional comparators for goods market efficiency

Source: World Economic Forum, Global Competitiveness Report 2005-2006

A. Good markets: distorsions,competition and size

Figure 2: Regional comparators for labor market efficiency

Source: World Economic Forum, Global Competitiveness Report 2005-2006

B. Labor markets: flexibility andefficiency

South African Minister of Trade and Industry Mandisi Mpahlwa and Brazilian Minister of Development, Industry and Trade Luiz Fernando Furlan indiscussion during the session “Competing in the Global Economy”

“Over the years, the price paid to producers for ethanolhas dropped from US$ 100 a barrel to US$ 30 a barrelwithout subsidies. It has become competitive withgasoline.”

Jose GoldembergSecretary for the Environment,

Government of the State of São Paulo, Brazil

Deeper integration of Latin America is essential forglobal competitiveness, particularly in the face ofgreater cooperation among countries in otherregions and the rise of China and India. Yet theimmediate outlook for closer relations among LatinAmerican economies is poor. While intra-regionalcommerce has mushroomed, the Free Trade Area ofthe Americas (FTAA) and a Mercosur-EUarrangement have stalled at a time when progress isimperative, given the World Trade Organization’sflagging Doha Round. And while recently across theregion, democracy has spread, macroeconomicstability has increased, the investment climate hasimproved and confidence has palpably risen, thiscelebrated convergence of favourable factors hasnot translated into significant practical integration.

Take infrastructure. Last year, the World Bankreported that the rate of infrastructure spending inLatin America had been halved since the 1980s,falling to 2% of GDP, compared with 4%-6% in EastAsian middle-income countries and inadequateregional supply chains raised export costs by 15%to 34%. The Bank called on countries in the regionto triple spending on infrastructure to make up foryears of under-investment and poor maintenance.“If we don’t have the bridges, highways, railroadand energy facilities, we will just keep talking foranother century about the need for integration and itwon’t happen,” said Brazilian President Luiz InacioLula da Silva.

The priority therefore is to accelerate efforts toimprove infrastructure quality and links, boost intra-regional trade and promote cooperation in suchareas as energy, tourism and investment.

On the trade front, countries are discovering eachother. “We were manic about the US buying fromus,” President Lula explained. “But we forgot thatour neighbours could also buy from us.” Withregional efforts stymied and the Doha Round introuble, Latin American countries are focusing onbilateral accords, which can go further and be

negotiated faster than multilateral deals but canresult in a messy jumble of inconsistentcommitments. The best agreements are typicallyforged among the bigger economies, leaving smallones disadvantaged. “In an ideal world, we wouldgo multilateral, but that world does not exist,”Manuel A. González Sanz, Minister of Foreign Tradeof Costa Rica, conceded. “Bilaterals, however,should be WTO plus.”

With infrastructure, the main impediment is the lackof private sector participation due to risk. Fundingrequirements are so high that governments alonecannot provide the necessary capital to remedyLatin America’s infrastructure deficit. But accordingto the World Bank, the value of infrastructureprojects with private investment fell from a recordUS$ 71 billion in 1998 to US$ 16 billion in 2003.

As in other developing regions, besides traditionalconcession schemes such as the build-operate-andtransfer (BOT) arrangement, an increasingly popular

solution is the public-private partnership (PPP)which allows for risk to be shared betweengovernment and private actors. Brazil has beenat the forefront of PPP deployment in LatinAmerica, with legal frameworks for suchpartnerships in place in some dozen states andat the federal level. Risk management becomeseven more difficult with cross-borderinfrastructure investment. For this reason, LatinAmerican countries have to negotiate regionalagreements along the lines of Europe’s EnergyCharter Treaty in which over 50 nationsparticipate.

The energy sector may play a leading role inenhancing regional integration. Brazil this yearjoins the ranks of the half dozen Latin Americancountries that are net exporters of petroleum,allowing the region to cooperate more indeveloping energy markets and alternative fuels.A planned US$ 25 billion gas pipeline networkwill link natural gas reserves in Venezuela withBrazil, Argentina, Bolivia, Paraguay and Uruguay.

This “project of the century,” as Lula dubbed it,could be a major catalyst for cross-bordercooperation and regional cohesion.

Politics, however, could get in the way. Manyparticipants warned of a growing political divide.“The hemisphere has split between countriesthat want greater participation in the globaleconomy and those that reject the globalenvironment,” warned Eric Farnsworth, Vice-President, Council of the Americas, USA. Othersobserved that the wave of populism emerging insome countries threatens regional harmony. “Weare in a dangerous situation,” cautioned BorisFausto, Historian and Professor, PoliticalScience, University of São Paulo, Brazil.

Despite such risks, the logic of deeper regionalintegration remains compelling and the pressuresto pursue it are building rapidly, the stakes risingevery day. Indeed, Latin America cannot afford totalk for another century. It must act now.


Continuing with the IntegrationAgenda

Continuing with the IntegrationAgenda

Plenary Session on “Competing in the Global Economy”: E. Anthony Wayne, US Assistant Secretary of State for Economic and Business Affairs; Henrique deCampos Meirelles, Governor of the Central Bank of Brazil; Martín P. Redrado, President of the Central Bank of Argentina; Alan P. Larson, Senior Strategic Adviserand Director, World Economic Forum; Senior Adviser, Covington and Burling, USA; Mandisi Mpahlwa, Minister of Trade and Industry of South Africa; LuizFernando Furlan, Minister of Development, Industry and Trade of Brazil

“In an ideal world, we would go multilateral, but thatworld does not exist. Bilaterals, however, should beWTO plus.”

Manuel A. González SanzMinister of Foreign Trade of Costa Rica

In the area of investment, the priorities for LatinAmerica are clear. First, the region must find waysto boost foreign direct investment (FDI), which haslagged other regions. Second, the continent mustdiversify the business and investment opportunitiesit offers beyond natural resources and commodities,particularly in light of the emergence of China asboth a market opportunity and a formidablecompetitor. Third, Latin America should tacklebottlenecks that hinder its ability to raise and sustainhigh growth with equitable income distribution.These include: a skills deficit, the lack ofinfrastructure, the immaturity of the region’s capitalmarkets, regulatory unpredictability, the tax burden,high interest rates, and lingering perceptions thatLatin America is politically unstable.

According to the United Nations, in 2004, US$ 67.5billion in FDI flowed into Latin America and theCaribbean – mainly to Brazil, Mexico and Chile. Thiswas a rise of 44% over the year before, but onlyaccounted for 29% of total investments going todeveloping economies, only slightly greater thanChina’s share (26%). This was significantly lowerthan the level at which the region used to enjoy inthe 1990s.

The fall in attractiveness mainly concerns factorsranging from poorer infrastructure quality andinvestment to problems with the management ofpublic finances. Additionally, unpredictable politics,arbitrary regulations and slow bureaucraciesaggravate the situation. “Investment in the region isinsufficient and very low because countries, with theexception of Chile, have poor regulation,” RosarioCordoba, Director, Revista Dinero, Colombia,explained. “Investment is a function of confidence.Investors have to be able to see what lies ahead.Our countries, however, are perceived as politicallyunstable.”

While Latin America has benefited from the spreadof democracy, perceptions of instability areexacerbated by anxieties about growing populistmovements in some countries. The large number ofpresidential elections this year has stoked worriesfurther. “The problem of political risk in LatinAmerica today is much more about stable politicalcoalitions and quality of governments,” said JoséMiguel Insulza, Secretary-General, Organization ofAmerican States (OAS), Washington DC

That is perhaps the biggest challenge that LatinAmerican countries hoping to boost FDI have toface. While Chile, Brazil and Mexico have managedto differentiate themselves from the pack, mostother countries have failed to avoid the tar brush ofpoor governance. The region must combatignorance about Latin America and the tendency ofmany investors to take a simplistic approach.Greater transparency and better governance are themost obvious ways to achieve this.

Each country individually, and the regioncollectively, should use competitivenessassessments to address specific shortcomings.There are many bottlenecks that have to betackled. In financial services, for example, smalland medium size enterprises need better accessto capital. This would require a range of reformsto bring down the cost of capital and enhanceliquidity including changes in the tax regime,adjustments to collateral and bankruptcy rules,better prudential regulation, the establishment ofcredit bureaus and the launching of innovativerisk mitigation instruments. The region shouldwork together to develop a capital markets hub.“If you are able to have one single financialcentre for Latin America, then liquidity will bemuch greater and companies won’t migrate toraise capital,” explained Guillermo de la Dehesa,Vice-Chairman, Goldman Sachs Europe, Spain.

Finally, businesses in the region have an activerole to play. They can enhance the investment

climate by investing more in R&D, partnering thegovernment in education and healthcareprogrammes aimed at boosting competitiveness,and developing new sectors that leverage LatinAmerica’s comparative advantages. For example,the region can take a leading role in Spanish-and Portuguese-language outsourcing and ITservices.

Businesses should also be encouraged toincorporate the social context in their investmentstrategies. This means combining the need togrow with social responsibility, according to IvanF. Zurita, Chief Executive Officer of Nestlé Brasil.Nearly three-quarters of their consumers in Brazilare in the lower middle class or low incomebrackets. To reach these customers, Nestlé setup sales and distribution networks in slum areas.This is the sort of business model innovation thatinvestors must adopt to make inroads in today’sLatin America.


Re-evaluating the InvestmentFramework

Re-evaluating the InvestmentFramework

“Investment is function of confidence. Investors have to beable to see what lies ahead. Our countries, however, areperceived as politically unstable.”

Rosario CordobaDirector, Revista Dinero, Colombia

Opening Plenary on “Risks and Opportunities for Regional Development”: Peter Torreele, Managing Director, World Economic Forum; Ricardo B. SalinasPliego, Chairman, Grupo Salinas, Mexico; Claudio Lembo, Governor of the State of São Paulo, Brazil; José Miguel Insulza, Secretary-General, Organizationof American States (OAS), Washington DC; Jorge Gerdau Johannpeter, President and Chief Executive Officer, Gerdau, Brazil; Gilberto Kassab, Mayor ofSão Paulo, Brazil; Guillermo Perry Rubio, Chief Economist, Latin American and Caribbean Region, World Bank, Washington DC

Priorities for Action in Latin America

World Economic Forum on Latin America16

Priorities for Action in Latin America

World Economic Forum on Latin America17

Economic Priorities for Action

1. Institutional Reform and Innovation: Setup a public-private agency to concentratenational efforts on attracting investors andpromoting innovation. Offer tax credits forR&D spending in the private sector.

2. Tax Reform: Increase the tax base, simplifythe fiscal system and reduce tax evasion byinvesting in information systems. Institutionsneed to be strengthened to ensure that thesefunds are invested efficiently and to minimizethe possibilities of corruption and politicalmanipulation.

3. Infrastructure and Investment: Public-private partnerships (PPPs) and similarconcessions should be set up to focus onbuilding necessary infrastructure over thelong term, particularly in rural areas, regionsthat are underdeveloped and urban slums.Governments should implement appropriateregulation and increase capital expenditure.

4. Financial Services: Improve access of smallenterprises and producers to financialservices (“bancarización”, credit, insurance).This would require better creditor rights,credit bureaus, prudential regulation andinnovation in financial products. Promote riskmitigation instruments to help SMEs accesslong-term financing in local currencies.

5. International Trade: Actively engage innegotiations to promote fair trade ofmanufactured and non-manufacturedproducts.

Each country should focus, through stablepolitical coalitions and quality of its government,on unblocking the constraints that are impedingit from achieving equitable income distributionand sustained growth.

*The Priorities for Action in Latin America werepresented to participants on 6 April 2006 in theClosing Plenary of the World Economic Forumfor Latin America in São Paulo. Co-Chairs andparticipants voted on the base of theirwillingness to engage in the implementation ofsuch priorities.

The aim of the Priorities for Action* is to consolidateoptions and propose solutions to the regionalchallenges.

Latin America’s leaders recognize the need to renewand reinforce their commitment to improve the stateof their region and the world. To compete globally,countries should pool their strengths to achieve thescale necessary to build better infrastructure,deepen regional agreements and strengthenregional institutions and governance.

During the World Economic Forum on LatinAmerica, participants were asked to address thefollowing question: How can we achieve equitabledistribution of income with economic growth?

Figures below refer to participants’ responses onsocial and economic priorities for action andrepresent percentages of the total audience at theClosing Plenary.

Together with the ideas collected prior to theroundtable the following priorities for action wereidentified:

Social Priorities for Action

1. Equal Access: Promote active social policies infavour of low income households, reconciledwith macroeconomic stability, sound fiscalpolicies and efficient tax collection. An importantrole should be to enhance access by low incomefamilies to basic healthcare, good qualityeducation from pre-school level and universalsocial security.

2. Safety Net: Increase demand actions throughvouchers and/or conditional cash transfers suchas the Oportunidades (Mexico), the Bolsa Familia(Brazil) or the Familias en Acción (Colombia).

3. Housing: Enhance access to housing throughschemes that support demand, whichcomplements the purchasing power of lowincome households. Banks and governmentsshould promote the use of mortgage insuranceand find ways to extend the tenure ofmortgages.

4. Education: More emphasis and resourcesshould be put on the training of teachers andquality education than in extending mandatoryperiods of education for children. Educatorsshould be appropriately compensated.Resources should be employed to improveschool system management at all levels.

5. Employment: Increase the supply of skilledlabour so that the high value-added sectors ofthe economy can grow and improve incomedistribution, while ensuring long-term growth.Enhance the efficiency of the labour market,while protecting the rights and well-being of theemployee.

The World Economic Forum would like to thank its Partners for their valuable support of the

World Economic Forum on Latin America, São Paulo, 5-6 April 2006:

Strategic PartnersAudi

HP

KPMG

Kudelski Group

Merck & Co.

Nestlé

New York Stock Exchange

PepsiCo

Zurich Financial Services

Regional PartnersBanco Hipotecario SA

Grupo Salinas

Official CarrierIberia

The World Economic Forum would also like to thank the Government of São Paulo and Apex-

Brasil for their support and TV Cultura as host broadcaster.

18

Acknowledgements


20World Economic Forum on Latin America

Peter Torreele is Managing Director of the World Economic Forum. Sylvie Naville is Associate Director, LatinAmerica. Emilio Lozoya is a Global Leadership Fellow and Manager, Latin America. Jacques Marcovitch isProfessor at the University of São Paulo and Senior Adviser to the World Economic Forum. Chantal Adamson isSenior Event Manager.

Vidhi Tambiah is Associate Director, Global Agenda, at the World Economic Forum. He worked with WilliamHinchberger and Alejandro Reyes to produce this report.

The World Economic Forum would like to express its appreciation to the summary writers for their work at theWorld Economic Forum on Latin America in São Paulo. Session summaries are available at: www.weforum.org/

Alicia Bartlett, Icon Design

Associate Director, Editing: Nancy Tranchet

Design and Layout: Kamal Kimaoui, Associate Director, Production and Design

Photographs: Julio Vilela

Contributors

The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders inpartnerships to shape global, regional andindustry agendas.

Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied tono political, partisan or national interests.(www.weforum.org)

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