The Great Recession has brought to light how important emerging market nations are for the global economy. Many analysts believe that it will be emerging market nations that pull developed nations out of the current financial morass. What makes emerging market countries so important are their growing middle classes. These new consumers provide the stimulus that will bolster most future global economic growth. Luis Alberto Moreno, who earlier this month was re-elected president of the Inter-American Development Bank, believes that Latin America is poised to rise in importance in world affairs [“Welcome to the Latin American Decade,” Financial Times, 7 July 2010]. He writes:
“Financial analysts point to a … set of indicators that should capture the world’s attention. Economic growth in Latin America and the Caribbean is forecast to average 4.5 per cent this year, twice the estimated US rate and four times faster than the eurozone. Fiscal deficits in Latin America are expected to average 2.3 per cent of gross domestic product in 2010, compared with 6.8 per cent in the euro area and 10.6 per cent in the US. The region’s total public debt is roughly only half the level of Europe and the US. This economic role-reversal is no accident.”
Moreno doesn’t deny that problems remain in the area (“such as drug-trafficking”). He’s correct. The drug war in Mexico, for example, produces new casualties every day. He also notes that another issue — emigration –“still dominate[s] and distort[s] public perceptions of Latin America.” Arizona’s controversial immigration law, which is being challenged by the Obama administration, will ensure that immigration remains in U.S. headlines in the months ahead. But where many people see challenges, Moreno sees hope. He continues:
“Over the past 20 years the region has undergone a quiet but profound transformation. Brazil is the most visible example: it has emerged as an industrial and agricultural powerhouse while lifting some 30m of its citizens out of poverty, and is on track to grow more than 7 per cent this year. But Brazil’s progress is echoed, to varying degrees, by most of its neighbours. The foundations for sustained development – particularly in the area of political stability and fiscal reform – have been laid in much of the region. Having weathered the financial crisis, Latin America now has the opportunity to join Asia in leading a global economic recovery.”
Despite his obvious optimism, Moreno encourages leaders of Latin American countries to continue transforming their economies and to address persistent problems. “[Latin American] governments,” he writes, “will have to tackle several long-neglected problems. One is education.” He continues:
“Latin America can take pride in having achieved near-universal primary school enrolment. Illiteracy has been essentially eliminated, and a growing percentage of children complete high school and have a chance to attend university. However, the region still scores near the bottom of international standardized tests. To finish the job, Latin America must revolutionize teacher training, adopt world-class curricula and make school administrators accountable for student performance.”
Another challenge Moreno identifies as requiring attention is building the necessary infrastructure to provide clean water and sanitation facilities. As I noted in a post entitled, The Future of Building Materials, some $7.5 trillion worth of infrastructure is expected to be built in Latin America over the next couple of decades. I suspect that water and sanitation infrastructure is included in that amount. Moreno continues:
“Almost every Latin American and Caribbean country is on track to meet the Millennium Development Goals for improving access to safe drinking water. But millions of people with faucets in their homes only get water for a few hours a day, and some 80 per cent of all sewage is still dumped raw into rivers and lakes. Governments must ensure that 100 per cent of their populations have reliable water 24 hours a day and that all wastewater is properly treated.”
Communication and transportation infrastructure are certainly included in the infrastructure figure mentioned above. Moreno notes that such infrastructure is critical for ensuring that Latin American economies continue to grow.
“Mobile phone penetration is nearly 90 per cent across Latin America and the Caribbean, while internet access is among the highest in the developing world. Many large cities have state-of-the-art Bus Rapid Transit systems that provide safe, efficient mobility to millions of low-income commuters. But crumbling ports, railways and highways hobble exporters with needless costs and delays.”
Moreno next turns to two other subjects about which I’ve often written: foreign direct investment and energy. FDI is much more important than aid in pushing economies to the next level. An unreliable electricity supply not only creates hardships for citizens but it discourages companies from investing in the economy. Moreno notes that FDI is necessary if the infrastructure discussed above as well as reliable electrical grids are going to be built. “Clear incentives and legal safeguards are needed,” he writes, “if Latin America is to attract the private capital that could overhaul its infrastructure.” He notes that “Latin America’s energy system is among the world’s cleanest” since “more than 65 per cent of the region’s electricity comes from hydroelectric sources.” He also notes that Latin America “is a leading producer of sustainable biofuels.” That’s the good news. But not all of Latin America’s cards have come up aces. He continues:
“In recent years severe droughts have left key reservoirs without water, while fossil fuel production is flat or declining in Mexico and Venezuela. The region needs to develop new sources of energy and fully embrace the regional energy integration that would allow natural gas, for example, to flow freely from countries that have it abundantly to those that do not.”
Finally, Moreno discusses Latin America politics, crime, and poverty.
“Finally, regular and credible elections are one of Latin America’s greatest recent achievements, given its history of military coups. However, violence and organized crime have become so pervasive in some cities that they threaten hard-won political and economic progress. To address this, governments must reform law enforcement and judicial systems. More fundamentally, they need to confront the staggering inequality and lack of economic opportunity that drive so many into lives of crime. As in marathons or football championships, the final stretch is often the hardest.”
Moreno believes “each of the objectives [he] described is within reach”; which is why he asserts that the world stands “poised to see the 2010s become the decade of Latin America.” Even some Asian leaders agree that, along with Asia, Latin America is a good place to invest [“China invests heavily in Brazil, elsewhere in pursuit of political heft,” by John Pomfret, Washington Post, 26 Jul 2010]. Pomfret reports from Porto Do Acu, Brazil:
“Here along the golden sands that grace the Atlantic coastline 175 miles north of Rio de Janeiro, China is forging a new economic reality. Just past a port where workers are building a two-mile-long pier to accommodate huge vessels known as Chinamaxes that will transport iron ore for China’s ravenous steel industry, past berths for tankers to lug oil to Beijing, a city of factories is sprouting on an island almost twice the size of Manhattan. Many of the structures will be built with Chinese investment: a steel mill, a shipyard, an automobile plant, a factory to manufacture oil and gas equipment. The port project recalls the China of the past decade: a worldwide effort to extract resources for use in the country’s vast manufacturing sector. But the factory city represents something new: an aggressive push to invest in industries overseas to bolster the country’s image and political influence. Call it ‘dollar diplomacy,’ Chinese-style. The investments in Brazil reflect China’s ‘going out’ strategy, which seeks to guarantee natural resources for development purposes and to shield the country’s state-owned enterprises from slower growth at home. Flush with more than $2 trillion in foreign exchange reserves, China has directed its state firms to scour the globe for opportunities.”
Japanese leaders are also keen to invest in emerging markets [“Japan’s Exporters Eye Every Rupee,” by Eric Bellman, Wall Street Journal, 7 July 2010]. Bellman reports:
“Japanese companies from Toyota Motor Corp. to Canon Inc. are looking at poor people in emerging markets as potential consumers for the first time in a bid to find new, high-growth markets to offset the slump at home and in traditional markets in the U.S. and Europe. ‘This represents a new frontier for the Japanese economy and industries,’ Japan’s powerful Ministry of Economy, Trade and Industry said in a February report which puts the market at 4 billion people and $5 trillion in sales last year. ‘Innovations for conquering the frontier are expected to revitalize the Japanese economy as a whole.’ An 81-page report from the ministry and many of Japan’s leading exporters about the opportunities in countries like China, Brazil, India and Vietnam is being passed around board rooms across Tokyo. It says Japanese companies can’t just focus on rich countries and rich consumers. They have to start making more products that a consumer who makes less than $3,000 a year can afford.”
Bellman reports that “Yoshinori Noritake, chief engineer at Toyota shuttled between India and Japan more than 30 times over the last three years to figure out how to build a Toyota aimed squarely at the emerging market driver.” It’s no surprise that Japanese officials are looking to emerging markets since “emerging markets make up a growing share of Japanese exports.” Bellman continues:
“The U.S.’s share of Japan’s global exports slid to around 16% from 20% over the last three years while the percentage of Japan’s exports that went to emerging markets including China, Brazil and India each rose by more than a quarter. The big effort by the government and industry is aimed at helping Japan play catch-up. Unilever PLC has been pushing its products into rural India for years while General Electric Co. of the U.S. has developed new medical equipment specifically for emerging market conditions and budgets.”
Japanese leaders are encouraging their multinational companies to look at emerging markets because they “are often beaten by brands from Korea and China, which have been more aggressive at wooing less affluent consumers.” Bellman explains:
“In India, … Korean brands now dominate the consumer appliance and electronics markets. The LG Corp. and Samsung Electronics Co. have grabbed as much as half of the television, refrigerator and air conditioner markets while Japanese brands such as Hitachi and Sony rarely get more than a 5% market share, according to data from researcher Euromonitor International.”
Bellman reports that “some Japanese companies have stumbled on the opportunity” because they didn’t understand the local market.
“Canon didn’t understand why it was getting a surge in orders for its $50 home photo-printers in India. It discovered many were going to rural India. Village entrepreneurs were using the printers to start photo businesses, serving farmers who were willing to pay 50 cents to print the photos they had taken from their cell phones. Canon is now reaching out to its potential new customers with a truck fleet that goes from town to town setting up mobile show rooms for Canon products. It gives wedding photography workshops to small town photographers. Canon’s sales and staff in India have doubled in the last three years and it expects sales to hit $1 billion by 2015.”
Bellman concludes that it has been difficult for Japanese companies to change mindsets and envision customers at the bottom of the pyramid. That, however, seems to be changing:
“Sumitomo Chemical Co., for instance, designed mosquito-repellant infused screens to protect factories when it realized there was a mass market using the technology for inexpensive mosquito nets. It now sells more than 40 million a year in Africa, Vietnam and elsewhere. Sanyo Electric Co. has launched its solar-charged LED lights in Uganda. Sony Corp. is working on an affordable power generator for the developing world. Nissin Corp. doubled its noodle-making capacity in India last year and cut the size of its packages of noodles so more Indians can afford its Top Raman brand for less than 10 cents apiece. It tripled the size of its staff over the last three years and created a flavor for eastern India. The company is developing more regional flavors and expects overall sales to climb 50% this year, said Yuji Tabeta, president of Indo Nissin Foods Ltd., which is based in Bangalore.”
Despite these positive signs, Bellman reports that “many Japanese companies have a long way to go.” He writes that “Indian consumers are familiar with Nokia or Samsung,” but they seem to know little about Japanese products or companies.
Although I’m not sure that next decade will be the decade of emerging market countries, it will surely see emerging market countries brought to the doorstep of prosperity. As I noted in the post on infrastructure, trillions of dollars worth of infrastructure needs to be built before real prosperity can be discussed. That will take some time and effort and the current recession will delay some of those efforts. My advice to multinational companies is to get in early (or at least as quickly as they can) or risk being shut out of emerging markets. That’s what the Japanese fear and are hoping to avoid.