CNBC Davos 2011: Latin America Flexes Its Economic Muscle

Christ the Redeemer statue, Rio de Janeiro, Brazil
Christ the Redeemer statue, Rio de Janeiro, Brazil

After decades of boom to bust behavior, economies from Mexico to Brazil are looking dynamic, diverse and durable, helped by a wealth of natural resources and a good measure of fiscal discipline.

"Latin America is among the regions leading the economic recovery," says Mona Pearl, founder and COO of BeyondAStrategy, a global business development firm. "Latin America's economic performance is certain to improve even more."

"Latin America has been notorious for centuries as having a poor track record for sustaining economic growth," says Larry Harding, founder and president of High Street Partners, an international business service firm. "But things are different now. The area is blessed with commodities and natural resources that are in demand and a lot of the political instability of the past is gone. It's really an economic engine."

It's a big engine at that—some 600 million people and 36 countries—from Mexico to the Caribbean islands to the bottom of the continent and Chile.

Once thought of as under-developed and ignored, Latin America boasts huge reserves of raw materials like oil and minerals, growing industries as well as population, while attracting billions in investment money from China, Europe and the U.S.

And despite 2010 being a recovery year because of the global economic downturn, Latin America still ranks second among emerging markets behind Asian countries in terms of gross domestic product growth, GDP, and represents nearly 18 percent of the total GDP from all emerging markets.

"The interesting thing is that before the Great Recession, during and now after, emerging markets have been growing fast than mature markets," says Bob Gitter, department of economics chair at Ohio Wesleyan University. "That is true of Latin America."

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Analysts like Gitter, point to several factors for Latin America's economic boom. The area is experiencing a huge increase in purchase power due to growing income among lower wage workers. It also has a relatively young and educated labor pool, say experts. And the region is experiencing high demand for its natural resources from China that's turning into jobs and consumer spending.

"People in Latin America are doing well for the most part and that shows up in the world economy," says Jorge Pinto, a professor at Pace University's Lubin School of Business. "People are consuming goods and becoming wealthier. They are interested in the latest electronics and technology. As a whole, Latin America is doing well."

Taken as a whole, Latin America appears monolithic. But experts say that appearance is deceiving.

"It's impossible to discuss Latin America as an economic or cultural bloc," says Phillip Guarino, president of Elementi Consulting, a global business management consulting firm in Boston, Massachusetts.

Davos 2011 - See Complete Coverage
Davos 2011 - See Complete Coverage

"There are big ethnic differences in areas like language with various dialects of Spanish and even food," Guarino goes on to say. "The northern countries, like Mexico and Central America feel more aligned with the U.S., while Argentina and the other southern countries considers themselves more European in culture and business."

"Latin America is really four areas," says Hernando Diaz-Candia, the managing partner in the Caracas, Venezuela office of Squire Sanders & Dempsey, a business and corporate law firm.

"You have Venezuela, Ecuador, Bolivia, Nicaragua, Cuba and Argentina having left wing politics," Diaz-Candia says. "Then it's Colombia, Chile, Peru, Panama and most of Central America that embrace neo-liberal economic policies of capitalism. Mexico stands alone as one bloc with its special relationship with the U.S. And the final piece is Brazil which because of its size and different language (Portuguese) and pragmatic approach to politics and economics, is unique among them all."

Those differences can be hard on businesses, says Mark Barnes, principal in charge of the U.S. High Growth Markets practice at KPMG, a tax and advisory firm.

"Conditions really vary from country to country as there are different challenges including corporate tax structures, compliance rules and regulations," Barnes adds. "A recent study from our firm showed that 52 percent of respondents cite complex and high taxation as a potential barrier to investment in Brazil."

Which countries best for investing?

Not all of Latin America should be equal in the eyes of investors, says Antonio Morales-Pita, assistant professor of international political economy at DePaul University.

"Economic soundness and political stability are the main conditions for a country to attract foreign investment," Morales-Pita explains. "As far as Latin America, it's Chile, Argentina, Costa Rica and Brazil as the best candidates for investment in the region. Those countries are showing good economic growth for the most part."

Morales-Pita adds Mexico, which has the second largest economy in Latin America, to the list of investment opportunities even in the midst of a drug war.

Mexico's economic funadmentals aren't as string as some of the others, but they're good enough, says Morales-Pita. "And it's unstable in terms of the increase in crime due to the drug cartels and doesn't look attractive to foreign investors, but I'd put in on the list of best candidates in the region."

"Clearly there are areas in Mexico where violence is a problem and you need to avoid those areas" says Ohio Wesleyan's Gitter." "But most of the country is safe and you see a lot of American companies doing business there like Starbucks, Ford and Wal-Mart, which is the largest retailer in Mexico. A recovery has taken place there even if the growth rate is below the rest of Latin America."

Still drawing major headlines of its own is Venezuela, as President Hugo Chavez continues to exert what some call a "hostility to private enterprise."

"The socialist movement in Venezuela, Bolivia and Ecuador provides great risk for investors," says Raul Vega, president and CEO of Auxis Inc, a management consulting firm based in south Florida.

Davos 2011 - See Complete Coverage
Davos 2011 - See Complete Coverage

"While there are opportunities to generate profits in these countries, they are offset by great economic and political uncertainty," Vega argues. "Many multi-national companies operating in Venezuela have seen their earnings negatively impacted by unexpected devaluations of the Bolivar and they've struggled to find methods to expatriate those earnings."

There are threats beyond Chavez that could sweep through the whole region, says Maria Pia Olivero, assistant professor at the LeBow College of Business at Drexel University.

"A drop in commodity prices would prove a major downside risk for all the region's economies," Olivero goes on to say. "Inflation is also a concern and if you look at it, capital inflows are increasingly speculative and fueling as asset prices and real estate bubble in many areas."

Olivero echoes words similar to former U.S. Fed Chairman Alan Greenspan about a past economic blow up.

"The current growth seems to be driven only by exuberance in consumption goods, not productivity," says Olivero. "Tighter fiscal policy to prevent overheating the Latin American economies may lie ahead."

While no one predicts endless growth for Latin America, for now at least, analysts see continued improvement in the region and the global economy.

"Latin America had a robust year in 2010 and while growth may be slower in 2011, regional performance will be positive," says KPMG's Barnes. "This makes the market attractive for investors and business in general."

"I always like to look at events, trends and then connect the dots," says Mona Pearl. "Since Brazil will host the World Cup in 2014 and the Olympics in 2016, this will have a huge economic impact on the whole region. The opportunities for benefiting from doing business in Latin America are endless."