China’s wage hikes could benefit Latin America

March 4th, 2012


The Miami Herald

By Andres Oppenheimer

Good news for Latin America: wages in China, Vietnam and other Asian countries are rising faster than expected, leading growing numbers of multinational firms to move their manufacturing plants to Mexico and other countries closer to the U.S. market.The Feb. 19 announcement by Foxconn Technology Group, which assembles iPads and other products for Apple, Dell, Nokia, Motorola and other firms in China, that it has raised pay for its workers by 16 to 25 percent was just the latest example of how fast Chinese salaries are rising. It was Foxconn’s third wage hike since 2010.

“More and more companies are telling us that wages are rising faster than they expected,” says Harold Sirkin, managing partner of the Boston Consulting Group, which recently published a study on China’s wages.

“The quality of the workforce in China is highly competitive,” Sirkin added. “People have options to go to other factories, and they do, which is why companies are forced to raise wages.”

According to BCG projections, China’s wages in the Yangtze river delta technology belt have risen from 72 cents an hour in 2000, to $2.79 cents in 2010, and are expected to reach $6.31 in 2015.

And the trend is likely to continue beyond 2015. A growing appreciation of the Chinese currency, higher education standards and a declining workforce will drive Chinese salaries up for decades to come, economists say.

A new joint report by the World Bank and China’s government-run Development Research Center, entitled “China 2030,” says China’s labor force “will start to shrink from around 2015, initially slowly but faster from the 2020s, and is projected to be 15 percent smaller than at its peak by 2050.”

That is because, among other reasons, the population is getting older, Chinese workers tend to work fewer years than their counterparts in other countries, and the supply of rural workers moving to the cities is drying up, the report says.

Even if China were to further relax its one-child policy, things would not change much, because Chinese women are not likely to have more babies, it says. Fertility rates in countries such as Japan, South Korea and Vietnam are not significantly higher than China’s, and suggest that China’s average rate of children per couple — now at 1.5 — will remain stable “even if the (one-child) policy were eliminated,” it says.

In Vietnam and India, wages are rising at an even faster pace. That will present a fantastic opportunity for Latin American countries to attract technology companies and service industries that help produce long-term growth, economists say.

Most multinational companies will maintain plants in China to serve the local market and neighboring countries in Asia, but will move their export-oriented plants to other parts of the world, they add.

While in 2002 China’s average wage was 237 percent lower than Mexico’s, by 2010 it was only 14 percent lower, a recent study by the J.P. Morgan investment bank said. Because of Mexico’s proximity to the U.S. market, many U.S. car companies and other manufacturing industries are moving from China to Mexico, the study said.

Augusto de la Torre, the World Bank’s chief analyst for Latin America, told me that many Latin American countries’ labor forces may already be too expensive and not skilled enough to draw manufacturing plants away from China, but added that Latin America can benefit in other ways from China’s rising wages.

As China’s population becomes wealthier, it will import more consumer goods, entertainment, health and education services. “Latin American countries need to find a niche in supplying that demand on the basis of higher productivity, rather than on the basis of cheap labor,” he said.

My opinion: Either way, Asia’s rising wages present a fabulous opportunity for Latin America.

But to lure foreign manufacturing plants and to export increasingly sophisticated goods and services to China, Mexico and Central America will have to reduce their violence rates, and all Latin American countries will have to dramatically improve their education systems, which nowadays lag far behind those of their Asian competitors.

Granted, these are major challenges. But Latin American countries that realize the golden opportunity they have thanks to Asia’s rising wages and take advantage of it will do great in coming decades.

Read more here:

Which emerging economies are at greatest risk of overheating?

July 7th, 2011

Economics focus

Some like it hot

Jun 30th 2011 | from the print edition

WHEN the term “emerging markets” was coined 30 years ago by Antoine van Agtmael, then at the World Bank, these economies accounted for one-third of global GDP (measured at purchasing-power parity). Now they make up more than half. More dramatic still, emerging markets produced more than four-fifths of global real GDP growth over the past five years.

Important though these countries are, many commentators still tend to lump them together in a way they never would with developed economies. Headlines about rising inflation, rampant bank lending and a flood of capital inflows might appear to suggest that virtually all emerging economies are overheating. In reality, some are red-hot and others are only lukewarm. An analysis by The Economist tries to identify the hottest spots.

The chart shows our ranking of 27 emerging economies according to their risk of overheating. We take each economy’s temperature using six different indicators. The scores from these indicators are then summed to produce an overall index; 100 means that an economy is red-hot on all six measures. (The rankings for all of the individual indicators can be found here)

Start with inflation. This has jumped more sharply in emerging economies than in the developed world, to an estimated average rate of 6.7% in May. But it ranges from a modest 1.7% in Taiwan to 20% or more in Vietnam, Venezuela and Argentina (using private-sector estimates for the latter rather than the government’s lower but dubious figure). Most of the pickup in inflation over the past year was due to higher food prices, which have a bigger share of the consumer-price basket than in rich countries. So if food prices stabilise, headline inflation will fall later this year. In China core inflation (excluding food and energy) is only 2.4%, but it is a more worrying 5.5% in Brazil and over 8% in India. Where growth is bumping up against capacity constraints and labour markets are tight, food inflation may spill over into wages and other prices.

Spare room

Our second indicator tries to gauge spare capacity by comparing a country’s average GDP growth rate since 2007 with its growth rate in the previous ten years. Growth has exceeded its long-term trend in Argentina, Brazil, India and Indonesia, but is well below trend (suggesting ample spare capacity) in Hungary, the Czech Republic, Russia and South Africa. China’s growth has also been slightly below trend. An economy’s potential growth rate may have increased over time, thanks to reforms. However, tight labour markets (our third indicator) confirm that several economies have been growing unsustainably fast. In Argentina, Brazil, Indonesia and Hong Kong unemployment is well below its ten-year average. Brazil’s jobless rate is at a record low and wages are accelerating.

 Our interactive index ranks these 27 emerging economies across all six individual indicators

The fourth symptom of overheating, and one of the most important, is excessive credit expansion, which can lead to asset bubbles as well as inflation. The best measure of excess credit is the difference between the growth rate in bank credit and nominal GDP. It is normal for bank lending to grow a bit faster than GDP in an emerging economy as the financial sector develops, but credit is outpacing GDP by an alarming margin in Argentina, Brazil, Hong Kong and Turkey. Lending to the private sector has increased by around 20% more than nominal GDP over the past year in both Turkey and Hong Kong. But not all emerging economies are awash with liquidity. In ten of the 27 countries, including Russia, South Africa, Egypt and Chile, credit is growing more slowly than GDP. The growth rate in China’s bank lending has halved over the past year or so, and is now broadly in line with GDP growth.

Our fifth indicator is the real rate of interest, which is negative in over half of the economies. That may be appropriate where demand is weak but in rapidly growing economies, such as Argentina, India, Vietnam and Hong Kong, negative real rates are fuelling faster credit growth and inflation. At the other extreme, Brazil’s real interest rate of almost 6% is among the highest in the world. China’s benchmark lending rate is slightly positive but this understates the extent of its recent monetary tightening: the central bank has also sharply raised banks’ reserve requirements and capped credit growth.

Mercury rising

Our final temperature gauge is the external balance. A widening current-account deficit can be a classic sign of overheating, as domestic demand outpaces supply. Turkey looks particularly worrying, with its deficit expected to jump to 8% of GDP this year, up from 2% in 2009. Rising current-account deficits in Brazil and India also suggest domestic demand is growing too fast.

Adding up the six scores reveals seven hotspots where most of the indicators are flashing red: Argentina, Brazil, Hong Kong, India, Indonesia, Turkey and Vietnam. Argentina is the only economy where all six indicators are on red, but Brazil and India are not far behind. China, often the focus of concerns about overheating, is well down the rankings in the amber zone, partly thanks to more aggressive monetary tightening. Russia, Mexico and South Africa are in the green zone, suggesting little risk of overheating.

Red-hot economies with negative real interest rates need to raise them. Fiscal policy is also too loose in many places. Budget deficits have been reduced slightly since 2009 but this is largely because strong growth has boosted tax revenues. On a general-government definition, six of the seven are still running quite large deficits (8% of GDP in India, for example); only Hong Kong’s government is in surplus. Given that their economies are booming, all of them should arguably be running a surplus. Drivers who ignore red warning lights on the dashboard risk a serious breakdown.

Rethinking the Scorecard: Brazil vs Mexico

June 9th, 2011
The conventional U.S. wisdom today is that Mexico is a problem, and Brazil is an opportunity. The reality is that while Mexico faces serious challenges, the United States shouldn’t count it out. And, while Brazil does present real promise, there are serious issues it has yet to take on.Economically, these two countries are not as drastically different as current analyses suggest. Yes, Brazil has had six years of consistent high growth. In large part, these were the dividends from macroeconomic reforms begun in the mid-1990s under President Cardoso and reinforced and deepened by President Lula (in fact, the pick up in growth coincided with the start of Lula’s second term, when domestic money finally believed  his centrist promises).

By comparison, Mexico embarked on a similar reform process ten years earlier and earned its macroeconomic dividend in the 1990s, when Brazil was still struggling to rein in hyperinflation. Looking at per capita growth rates over the last twenty years (not just the last 7 or 8), Mexico and Brazil actually look fairly similar (with annual average per capita growth of 2.25% and 2.5% respectively).
While both countries have now solidified a range of necessary macro reforms, they face somewhat similar long term  challenges. Both desperately need to invest in  infrastructure, in education, and to find ways to reduce stark inequalities. Both too are now thriving democracies – a plus on so many levels, but not for pushing through big comprehensive reforms.

There are of course big differences – but those don’t necessarily cut just in Brazil’s favor. Brazil is a bigger market, has ever increasing oil finds, and is a complement to China’s rise – all positive. But it is also a more bloated state, stands in a much worse place vis-à-vis inequality and infrastructure, and faces worrisome inflationary and exchange rate pressures that threaten to undermine its recent gains.

Mexico is already a more export and manufacturing-led economy. And while Obama (and others) made much of  the potential of US-Brazil trade during his March visit, the reality is that the United States already depends on Mexico as its second largest export market – earning some $163 bn last year compared to $35 bn with Brazil.

Mexico is also a much more friendly business environment. According the World Bank’s Doing Business index, Mexico ranks 35th globally – and the highest in Latin America — while Brazil is a woeful 127th (out of a total of 183 countries). On the downside, Mexico lacks widespread credit (which is much more available in Brazil), suffers from too many monopolies and oligopolies, and so far competes with (rather than complements) China’s rise.

The upshot is that there is no clear “winner” in terms of future potential or peril. So what drives the misguided conventional wisdom? A recent paper by Roberto Newell, founder of the Mexican Institute for Competitiveness (IMCO), provides a partial answer.  Analyzing the Mexico coverage in the New York Times and Wall Street Journal since the late 1980s, he shows the increasingly negative tone and focus of the main U.S. papers of record. While political and economic news dominated both papers in the 1990s (in large part due to NAFTA), in recent years crime and the border have taken over the new cycle. Economic and political news – much of it good – rarely merit a mention, much less a sustained focus.

Without doing a similar in depth study, anecdotal readings of Brazil in the U.S. media shows the reverse – an almost ebullient focus  on economics and politics, with relatively few stories on crime (even though Brazil’s 25 per 100,000 inhabitants murder rate far exceeds Mexico’s 14).

This negative shift isn’t because that is the only news coming out of Mexico. Yes Mexico’s security situation is grave, but it isn’t Mexico’s only story. As the brief comparison above shows, there are many economic and political strengths (and weaknesses) in both countries. Newell lays out many more of Mexico’s advantages and advances vis-à-vis the much touted BRICs, which include Brazil.

This skewed coverage hits both countries – though Mexico the hardest. For Brazil, it encourages the “hot money” flowing in, further aggravating the underlying economic weaknesses. For Mexico, the resoundingly negative take may, somewhat paradoxically, make it harder to address the security challenge. To see through necessary changes, Mexicans need some sense of optimism and can-do spirit, as well as a sense of what can be lost – and that is so much of what Mexico has gained.

Posted on June 8th, 2011 in Brazil, Mexico

Article printed from LatIntelligence:

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The next eleven

April 5th, 2011

Financial Post

A new block of emerging powerhouses is poised to shatter existing global trade patterns. Is your business ready for the next wave?

Illustration by Gary Neill

A new block of emerging powerhouses is poised to shatter existing global trade patterns. Is your business ready for the next wave?

Tim Shufelt, Financial Post Magazine · Apr. 5, 2011 | Last Updated: Apr. 5, 2011 11:59 AM ET

A new bloc of emerging economic powerhouses is poised to shatter existing global trade patterns. Is your business ready for the next wave?

Alfred Hanna was in Panama in December 1989 when the standoff between Gen. Manuel Noriega’s soldiers and the United States military boiled over. At the time, Hanna was overseeing a feasibility study for SNC-Lavalin Group Inc. on the construction of a pair of hydroelectric plants. Just before Christmas, U.S. President George Bush unleashed thousands of troops on the Central American nation to depose Noriega’s military dictatorship. Hanna’s bosses at the Montreal headquarters of the engineering giant asked if he wanted to abandon the work and the country. But the team decided to see the project through to its end. “The Panamanians have never forgotten that we persisted,” Hanna said. “Twenty years after, I go there and everybody remembers and wants to give us work.”

Then, as now, countries most Canadian business leaders consider “non-traditional” — the places they forgo in favour of the comfort and familiarity offered by established economies, especially the U.S. — are right in SNC-Lavalin’s wheelhouse. The company has built a sprawling international presence and knows what it takes to make money in parts of the world where the prospects for growth and the potential for instability are both high and interwoven. SNC-Lavalin’s global approach has since taken it to, among many other corners of the world, the Indonesian island of Sulawesi to construct the US$410-million Karebbe hydroelectric generating facility. “The potential in Indonesia is vast,” Hanna says. Indeed, Indonesia’s economic prospects are so buoyant that the world’s largest archipelago state is part of a basket of countries being hailed as the next axis of global growth. These countries, which have the potential capacity to rival the G7, have been dubbed The Next 11, or simply the N-11.

It’s common knowledge that the balance of global economic power is shifting, as is the need for Canadian industry to reduce its dependence on the U.S. So far, the focus of diversification has largely been on the existing champions of the emerging world: Brazil, Russia, India and, most of all, China — the BRIC nations. But as the world’s second-largest economy, China has officially emerged, says Katie Koch, senior portfolio strategist at Goldman Sachs, which came up with both the BRIC and N-11 monikers. “We don’t think the BRICs should be called emerging markets.”

Even some of the N-11 countries– specifically, Indonesia, Turkey, South Korea and Mexico — have graduated to “growth market” status, Koch says. She explains that any non-developed country is considered a growth market if it has at least a 1% share of global GDP. The remaining N-11 nations– Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines and Vietnam — currently fall short, and also suffer from a large variance in terms of income levels, political and social stability, and investing environments. But despite potentially grave risks, all 11 countries are projected to post blistering rates of growth in the coming years. “Many of these countries have the scale, the growth trajectory and the aspirations to one day become at least 1% of global GDP,” Koch says.

The result could be a profound recalibration of the world economic order, according to long-term projections by Goldman Sachs. Collective GDP for the N-11 could reach two-thirds the size of the G7 by 2050, with twice the growth rate in consumer demand. Mexico is projected to become the world’s fifth-largest economy. Indonesia could overtake Japan. And six of the N-11, including Nigeria and Vietnam, could surpass Canada in economic size. “It can be humbling to see some of these changes in the world’s largest economies. Surprising and humbling,” Koch says. However, she adds: “This could play out to be a huge wealth-creation opportunity.”

Driving these changes are demographic forces. In the industrialized world, falling birth rates will constrain growth because countries will struggle to bolster their workforces. Meanwhile, increased longevity is contributing to aging populations that will increasingly sap economies of their financial resources. “It’s a weird kaleidoscope,” says George Friedman, the founder and CEO of Stratfor, a Texas-based political intelligence and forecasting consultant. “You’re seeing one trend that’s been going on for 300 years — the population explosion — ending. It’s transforming the way societies work. But some will be losers and some will be winners by the same phenomenon.”

Koch says the 15 countries that make up the BRIC and N-11 blocs will be the beneficiaries of shifting population tides. A shared trait among all of them is large populations. Indeed, total N-11 population already accounts for almost 20% of the world’s total, ranging from South Korea’s 50 million people to the 230 million who call Indonesia home. In addition, many of these populations are heavily skewed towards a younger demographic. For example, the median age in Nigeria is 19 years old. Combine that people power with the preconditions for growth, and the economic prospects quickly become explosive, Koch says.

But Friedman argues that it’s not enough to have the numbers, particularly if the growth in productive assets — everything from machinery and equipment to new buildings — is insufficient to predicate economic progress. China has tried to mask its lack of this capital formation and, in doing so, set itself up for an impending collapse, Friedman predicts. By slashing its profit margins, China has realized an extreme, prolonged pace of growth that lacks healthy returns on capital. And while the export market has taken off, the domestic economy has trailed behind. As a result, more than one billion Chinese live on less than US$6 a day, Friedman says. “The vast majority of China has a standard of living of sub-Saharan Africa.” To quell social unrest, Friedman predicts China will use its banking system to keep insolvent companies afloat and maintain employment, as Japan did in the 1990s. He suggests a range of possible outcomes for China, none of them good, and none of them leading to the country claiming global economic supremacy.

Turkey, by contrast, stands to make great economic strides by combining its growing workforce with substantial capital formation. And the spoils will go not just to the Turks, but also their neighbours, Friedman says. “Where Germany was an engine for European recovery in the 1950s and ’60s, Turkey becomes an engine for recovery and development in the Baltics, in the Caucasus, in the Arab world.”

One Canadian company that has already capitalized on the Turkish engine is Alliance Grain Traders Inc. Founded 10 years ago by Murad Al-Katib, a Turkish descendent born and raised in rural Saskatchewan, the one-time basement enterprise is now the world’s largest processor and exporter of lentils, controlling about one-third of the global trade. It has a $660-million market cap and grosses about $700 million annually. The company made its big transformative move in 2009, when it made a $100-million bet on Turkey by acquiring a Turkish counterpart. At the time, the deal was bigger than the size of Alliance itself.

“Think about the location of Istanbul,” Al-Katib says. He points out that a four-hour flight heading east or west out of Toronto might not breach Canada’s borders. But four hours in the air from the Turkish capital can land one in North Africa, Dubai, Moscow or London. Turkey is a strategic geographic play, but it has also established a vast trading network in the region that transcends political tensions. “Imagine a country with ties to the Islamic world, yet still has free trade with Israel,” Al-Katib says. “It also reaches into a customs union in the EU, and let’s not forget that all of the Central Asian republics are Turkic republics.”

Unlike some of its neighbours, Turkey has recovered well from the global recession, realizing robust economic growth with relatively low levels of unemployment and inflation, two forces central to the region’s recent uprisings. “Turkey is a diamond in the rough,” Al-Katib says. “It’s a country of stability in a region of instability. It’s within a different class.” A strong majority — and secular — government maintains political stability. And Turkey’s banking and lending community has reached a level of sophistication. “We have a big working capital requirement and we carry $150 million of Turkish bank credits in our Turkish operations,” he says.

Turkey’s already a regional leader, but its ascent in the decade ahead could transform the region’s economy and its influence could moderate the extremist elements that threaten to destabilize the Middle East, according to Stratfor’s forecast. “Of course, Turkey will feel tremendous internal tensions during this process, as is the case for any emerging power,” the report states, and the tension between Islamic and secular forces still represents a “deep fault line. It could falsify this forecast by plunging the country into chaos.”

But Turkey is not alone in this regard. All N-11 members share the potential for disaster, much more so than developed economies. From the chance of bombs dropping on Iran, to hostilities erupting in Pakistan, to the threat of soaring food prices and rampant inflation leading to more Egypt-style revolts, geopolitical risks loom over emerging markets. “The probability of any one of these countries being in a real crisis at any point in time is high,” Koch says.

Nowhere are these risks more glaring than in sub-Saharan Africa, a region that has come to epitomize failed development models and economic vulnerability due to political instability. Still, on a continental level, GDP growth has averaged 5% over the last 10 years, and growth rates of most African countries exceed those in the developed world. South of the Sahara, Nigeria is the region’s oil powerhouse and demographic giant, two assets qualifying it for inclusion in the N-11. In many ways, Nigeria is the great hope of sub-Saharan Africa, and Goldman Sachs projects it will surpass the Canadian economy within about 35 years. “It’s a great example of what other African nations can aspire to,” Koch says.

Nigeria is Africa’s biggest oil producer and ranks 10th in the world by proven reserves with about 2.7% of the global total. It has undergone substantial economic reform and has a credible central bank governor who is seemingly empowered to clean up the banking sector, says Philippe de Pontet, a sub-Saharan Africa analyst at the Eurasia Group, a political risk analysis firm based in New York. The country’s progress, however, has been made from a very low starting point. “From independence up until 1999, it was a terribly mismanaged country. Now I would say it’s just a very mismanaged country,” de Pontet says. Nigeria has much to overcome to realize its economic potential. Like most African states, it is composed of hostile factions thinly held together under a common flag. As a comparison, Friedman cites the tensions between the French and English throughout Canada’s history. “Multiply that a thousand times, and you’ve got Nigeria,” he says.

Among the N-11, South Korea is perhaps the most stable, which is telling given the potential for war in the Korean Peninsula. But South Korea is also among the most developed emerging economies and, like China, its rapidly rising income levels are leaving more and more consumers with money to burn and a demand for the trappings of Western consumer culture such as big-screen and 3-D movies. “There’s a very broad build-out of the entertainment sector in a lot of these markets,” says Richard Gelfond, CEO of Imax Corp.

In China, the number of multiplex screens has tripled to 6,000 over a three-year period, and that total is expected to rise to 25,000 within five years. “There’s also a tremendous demand for luxury-type products,” Gelfond says, calling the Imax offering an “affordable luxury.” Imax has already opened 10 theatres in South Korea, with seven more to come, the result of a deal signed late last year. “They have an appetite for the newest and the greatest,” Gelfond says. “Once our footprint gets to a certain critical mass there, we’ll start doing Korean movies in Imax.”

South Korea hardly seems like a country that belongs in a conversation about emerging markets. It is already “developed” in many senses. It is a member of the Organisation for Economic Co-operation and Development (OECD). Its GDP per capita of about US$20,000 is double that of Turkey or Mexico, about 10 times higher than the Philippines or Egypt, 20 times higher than Pakistan, and 30 times higher than Bangladesh.

However, North Korea’s shelling of a South Korean island late last year renewed fears of a broader military conflict that could potentially engage Western forces. “A big reason that country is still considered a non-developed market is because of geopolitical tensions,” Koch says. But even absent an unlikely resolution to the historic stalemate, South Korean growth prospects could soon vault the country ahead of some G7 economies, including Canada. Only one other N-11 member could do the same: Mexico.

Drug-related violence in Mexico garners plenty of headlines in Canada and the U.S., souring opinions on the state of the country and sullying its reputation as a premier tourist destination. But the drug trade has a huge upside, one on which Mexican expansion is largely based. After factoring in profit margins, drug exports to the U.S. net more than legal exports, Friedman says. “That’s the secret of Mexico. It’s a huge transfer of wealth from the United States to Mexico.”

What begins as a very low-cost agricultural crop ends up as an illicit form of capital formation, adds Friedman. Eventually, as drug money fuels expansion, cartel wars will settle and legitimate enterprises will become more profitable. “I regard Mexico as a real challenger to the United States later in the century,” Friedman says. “It’s going to have a very capable workforce.”

Montreal-based Bombardier Inc. saw a chance to take advantage of that workforce after the Mexican government about five years ago set out to establish an aerospace manufacturing cluster in central Queretaro state. With 90% of Bombardier’s revenues coming from outside of Canada, the transportation giant has an interest in diversifying its manufacturing base, and lower-cost labour in Mexico helps offset its domestic manufacturing costs.

Bombardier’s $200-million commitment began with relatively simple labour-intensive electrical assembly work. But the quality of the labour has advanced substantially, says Bombardier spokesman John Paul Macdonald. “In a very short time, they’re doing subcomponents, they’re doing Learjet 85 wings, they’re getting into more complex work.” The Mexican government has also partnered with the company to establish a specialized training facility. “It’s kind of like an aerospace trade school,” Macdonald says.

If Goldman Sachs’ predictions hold true, Mexico in 40 years will be the world’s fifth-largest economy, bigger than either Russia, Japan or Germany. But the rise of the N-11 will not just be based on attracting money from Western companies such as Bombardier, but on sowing a new crop of corporate champions, Koch says. “What is that going to do to the strategies of Canadian companies and U.S. companies still in the early stages of tapping into that pool of growth?” she asks. “That’s what the world’s going to be all about over the next decade. And for Western multinationals, the name of the game is getting into the middle of that.”


A Snapshot Of 11 Countries Set To Become Some Of The World’s Biggest Economies

MEXICO: Will be the world’s fifth-largest economy by 2050, predicts Goldman Sachs

NIGERIA: Economy could grow 12% this year if new government can resolve the Niger Delta conflict, fix the power sector and boost infrastructure

TURKEY: OECD expects its 6.7% growth rate from 2011-2017 to be the fastest in the N-11

IRAN: World Bank forecasts foreign investment of $2.9B despite international sanctions

PAKISTAN: Expected to strengthen ties with neighbouring China, which should help its economy

EGYPT: Unrest will probably cut economic growth in half to as low as 3%, says Central Bank

BANGLADESH: The N-11’s best-performing stock market grew 43.2% last year on the MSCI frontier markets index

INDONESIA: Fourth-most populous country is one of the most promising, say Citigroup economists

VIETNAM: The poorest N-11 country is expected to have the fastest-rising GDP per capita at 9.7% from 2009 to 2020

SOUTH KOREA: Its GDP per capita of $22,631 in 2009 was the highest in the N-11

PHILIPPINES: The president has asked investors to help build $16B worth of roads, bridges and schools

As a group of potentially large, fast-growing markets, with rising incomes and activity, the N-11 could be an important source of growth and opportunity both for companies and investors alike during the next two decades, according to a Goldman Sachs report in 2007.

The four BRIC nations -Brazil, Russia, India and China -have or will soon surpass Canada in terms of GDP, but Goldman Sachs predicts Mexico, Indonesia, Nigeria, South Korea, Turkey and Vietnam will do likewise by 2050.

Five of the N-11 countries-Turkey, Korea, Indonesia, Philippines and Mexico -are commonly found in emerging market investment indices, but the ability to access N-11 markets varies widely.

A special report on Latin America: So near and yet so far

March 28th, 2011

A richer, fairer Latin America is within reach, but a lot of things have to be put right first, says Michael Reid

Sep 9th 2010 | from the print edition

AT DAWN on September 16th 1810 Miguel Hidalgo, the parish priest of Dolores, a small town in central Mexico, rang the bells of his church to raise the cry of rebellion against the Spanish crown. Mexico, Spain’s richest American colony, thus joined a struggle for independence which had already seen the colonial authorities ousted and rebel juntas installed in Caracas, Buenos Aires and other South American cities. Two years earlier, following Napoleon Bonaparte’s invasion of the Iberian peninsula, King João VI of Portugal and his court had been installed in Rio de Janeiro by a British fleet. Brazil would never again be governed from Lisbon.

As Latin America marks the bicentenary of the start of its struggle for political independence, many of its constituent countries have more recent cause for celebration too. The five years to 2008 were Latin America’s best since the 1960s, with economic growth averaging 5.5% a year and inflation generally in single digits. Even more impressively, a region which had become a byword for financial instability mostly sailed through the recent recession. After a brief downturn in late 2008 and early 2009, a strong recovery is now under way, with most forecasts suggesting economic growth of over 5% this year for the region as a whole.

Along with growth came a better life. Between 2002 and 2008 some 40m Latin Americans, out of a total population of 580m, were lifted out of poverty, and income distribution became a bit less unequal almost everywhere. Poverty increased in 2009 because of the recession, but will start declining again this year. Average unemployment went up slightly to 8.2%, but should come down again this year to 7.8%, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).

Latin America weathered the recession partly thanks to good fortune but also to sound policies. After the cataclysmic debt crisis of 1982 the region’s policymakers abandoned the protectionism and fiscal profligacy that had brought hyperinflation and bankruptcy. In their place they adopted the market reforms of the Washington Consensus (opening up their economies to trade and foreign investment, privatisation and deregulation).

But they found the road to stability and faster growth a long and bumpy one. During a second bout of instability, from 1998 to 2002, the region introduced more pragmatic policies. The formula has generally included flexible exchange rates, inflation-targeting by more or less independent central banks, more responsible fiscal policies and tighter regulation of banks, as well as social policies aimed at the poor. The recession was an important test. Last year “may have been the final exam and the graduation party” after Latin America’s lengthy education in getting macroeconomic policy right, says Santiago Levy, the chief economist at the Inter-American Development Bank (IDB).

The region’s newfound economic stability and social progress also owes much to the fact that over the past 30 years democracy has become established almost everywhere. Nearly all elections are now free and fair. The big exception remains the gerontocratic dictatorship of the Castro brothers in Cuba. There are threats to democracy in some other places: last year a coup toppled an elected government in Honduras, and opponents of the governments in Venezuela and Nicaragua face growing harassment and intimidation. But broadly speaking Latin America today is more democratic than ever before.

Latin America’s new resilience and faster growth is starting to attract increased interest from outsiders. That is especially true of Brazil, now often perceived to be in a league of its own. That is only partly because Jim O’Neill, an economist at Goldman Sachs, did it a huge favour when in 2001 he bracketed it together with Russia, India and China as one of the BRICs which would dominate world economic growth over the coming decades. Another reason is Brazil’s sheer size: with a population of 191m it accounts for a third of Latin America’s total and 40% of the region’s GDP. Since 2007 Brazil has begun to grow faster than the regional average—although by common consent its red-hot pace of 11% in the year to March 2010 will subside to less than half that rate next year.

As multinationals face mounting difficulties in China, some bankers and businessmen are looking at Latin America—and not just Brazil—as an alternative. The region has 15% of the world’s oil reserves, a large stock of its minerals, a quarter of its arable land (much of it unused) and 30% of its fresh water. Mexico, its other giant, with almost 25% of its GDP, suffered a deeper recession in 2009 and is struggling to deal with violent drug gangs, but it has maintained economic and political stability. Like the big two, Chile, Colombia, Panama and Peru have investment-grade credit ratings, and all four are growing fast. Governments, households and companies in all these countries are less indebted than those in many developed countries.

Already, Latin America takes a quarter of the total exports of the United States and around a fifth of its outward flow of portfolio investment. Total bank credit in the region will grow by about 12% a year over the next few years, faster than anywhere except China and India, reckons Manuel Medina Mora, who heads Citibank’s Latin American operations and its global consumer-banking business. Its share of the market capitalisation of publicly quoted companies and assets under management is only 3-5% of the world total but growing at 25% a year, faster than anywhere else, according to Paulo Oliveira of Brain Brasil, a body set up to promote the country as a business hub.

Marketing people are beginning to talk about a “Latin American decade”. If the region can keep up the growth of the past few years, it will double its income per person by 2025, to an average of $22,000 a year at purchasing-power parity. By then Brazil may be the world’s fifth-biggest economy, behind only China, the United States, India and Japan. Half a dozen countries may have achieved developed-country status, with an income equivalent to Spain’s today.

Causes for caution

Some Latin American countries may at last have found a path towards economic development. But getting there may be no quicker or easier than achieving independence. Latin America has often flattered to deceive (see article). Today there are at least three big worries. First, since 1960 it has seen the lowest growth in productivity of any region in the world, not least because around half of all economic activity takes place in the informal sector. Second, despite some recent improvement, its income distribution is still the most unequal anywhere. This has acted as a drag on growth and caused political conflict. Third, it suffers from widespread crime and violence, much of it perpetrated by organised drug gangs. The murder rate is hideously high in some countries.

A problem for any report such as this one is that Latin America is so diverse as to defy most generalisations. For some purposes it includes the small English-speaking island-states of the Caribbean. Haiti’s problems were more akin to Africa’s even before its devastating earthquake. On the other hand, some Brazilians argue that their country—differentiated by speaking Portuguese and, until recently, geographically isolated from its neighbours—is not really part of Latin America.

Income per person also varies widely, from $15,300 in Panama to $2,900 in Nicaragua (see map). And there is an ideological divide too. Venezuela’s Hugo Chávez and the Castro brothers in Cuba reject integration with the world economy in favour of state socialism and managed trade. Their economies have suffered for it: Venezuela’s economy has become a lasting casualty of the recession, despite the swift recovery in the oil price.

So there are differences. But there are clear trends, and an identifiable majority. Mr Chávez, for instance, has his allies but very few want to embrace fully his brand of economic mayhem. Rafael Correa in Ecuador is discreetly distancing himself. Evo Morales in Bolivia has pursued a prudent macroeconomic policy at the same time as launching a collectivist experiment under which people of indigenous descent are being granted special rights. Despite the efforts of its first family, the Kirchners, Argentina retains a vigorous private sector.

This report will concentrate mainly on the region’s larger countries that have embraced globalisation: Brazil, Mexico, Chile, Colombia and Peru, which between them represent three-quarters of Latin America’s GDP and more than 70% of its people. They have all recently enjoyed a huge bonus: the world commodity boom that began earlier this decade as China and India sucked up foodstuffs and raw materials.