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South America: A Powerhouse, Not a Circus

By Benjamin Shepherd on January 3, 2013

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It’s no surprise that all eyes are on China, given its integral role in the global economy. With most economic indicators from the country showing marked improvement, most of us are breathing a sigh of relief because an improvement there is a good indication that the global economy is picking up speed.

But with all of the emphasis on Asia, many folks might have missed that fact that we’re seeing a serious improvement in Latin America as well, particularly since there have been some notable distractions.

With Venezuela one of the last radical socialist holdouts in the region, many analysts have been focusing on the health of President Huge Chavez. As Chavez reportedly seeks treatment for cancer in Cuba, opposition parties in Venezuela have become emboldened. The president of the country’s National Assembly is seeking to take control of the government at least until Chavez returns.

The situation in Argentina is also getting interesting, as President Christina Fernandez reopens the issue of the Falkland Islands, which lie off Argentina’s coast. Ownership of the Falklands, known as the Malvinas Islands to the Argentines, has been in dispute for decades. Held by the British, Argentina has long laid claim to the islands and a brief war was fought there in 1982, with Britain as the victor.

In today’s edition of the British newspaper The Guardian, President Fernandez ran an open letter urging UK Prime Minister David Cameron to respect a 1965 United Nation’s resolution to negotiate over the islands.

While both Argentina and Venezuela are excellent examples of the potential political instability still lurking in the southern hemisphere, these stories have been drowning out positive economic news coming out of the region.

Earlier this week, the Purchasing Manufacturers’ Index (PMI), a gauge of business conditions in the manufacturing industry, was released for both Mexico and Brazil. In December, Mexico’s PMI reading hit 57.1, its highest level since the index data began to be kept in the country. Both new orders and production from Mexican manufacturers hit an all-time high, as global demand for goods has improved dramatically in recent months.

Business at Mexican manufacturers has also been helped along by wages, which are currently lower than the global average and fairly high fuel costs, both of which have given Mexican goods a competitive edge in the global market place.

The Mexican economy is also being helped by the sweeping reform program proposed by newly sworn-in President Enrique Pena Nieto. The president has shepherded legislation liberalizing Mexican labor laws and gained greater control over the country’s educational system, which has long been dominated by its teachers union.

With only about 36 percent of Mexicans currently holding education certificates at the high school level or better, reforms which breathe life into Mexico’s sclerotic schools will only make the country more competitive.

But the spirit of reform doesn’t end there. Nieto intends to push for legislation which would encourage greater competition in Mexico’s energy patch.

Mexico’s state oil company Pemex has long held exclusive control of the country’s energy assets and as a result of inadequate investment Mexican oil production has fallen off a cliff in recent years. With no competition and constitutional prohibitions on private sector involvement, Pemex has had no incentive to rethink the way it does business. Opening the country’s energy sector to private players would essentially create a whole new industry in the country.

In Brazil, the focus for much of the past year has been on the country’s slowing gross domestic product (GDP) growth. Brazil has fallen from grace as South America’s economic powerhouse; the country’s GDP expanded by less than 1 percent last year, although final data isn’t yet available.

In an attempt to restart growth, the Brazilian government recently announced drastic cuts in the country’s electricity tariffs, lowering rates for manufacturers by as much as 28 percent and for households by about 16 percent.

Those cuts won’t take effect until February, but Brazilian manufacturers reported another month of positive growth with the PMI index coming in at 51.1. While lower than the November reading, the fact that the sector continues to grow underscores the positive contribution the sector is making to the nation’s economy.

Considering that much of Brazil’s GDP growth is tied to commodity exports, I look for the country to enjoy growing fortunes in 2013. As China comes out of its slump and developed world economies continue to improve, demand for raw materials will help push Brazilian growth further into the black and drive more business for its manufacturers.

That’s especially true since the government announced a BRL54 billion infrastructure investment plan geared primarily towards improving the country’s ports. Brazil is long infamous for supply bottlenecks due to the huge volume of soybeans, copper and other commodities which flow through its port system. The country’s port modernization will encourage more foreign buyers to enter its markets.

The improvements are expected to shave days off transport times. Brazil also reduced financial transaction taxes in December in a move geared to stimulate more foreign investment in both its infrastructure and commodities markets.

So while colorful sideshows continue to roil Latin America, we shouldn’t lose sight of the fact that business barriers are being torn down in the region, as governments become more liberalized. Improving economic conditions around the world will also kick start commodities demand and Latin America has long been a key supplier of industrial metals and agricultural products.

Last year might not have been the best for the region, but it ended on a high note and 2013 could shape up to be one of its best in decades.

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