A generation ago, Latin America and the Caribbean (LAC) was known for debt crises, military dictatorships, hyperinflation, and grinding poverty. Today, the region is characterized by regional political and economic integration, increased global market share for its exports, sound financial management, and declining unemployment. Most importantly, it is a region that has internalized its role in the world. Imbued with new choices and an independent voice, the region is emerging as the center of the South-South-East exchange of goods and financial capital between LAC, Africa, and China. It is time for the world to look at Latin America and the Caribbean in a new way.
Though results vary between nations, LAC’s accomplishments as a region include 5 percent annual growth that propelled at least 60 million people out of poverty during the five years that led up to the global financial crisis in 2009, and the remarkable economic recovery in 2010 due to countercyclical programs, targeted government spending, and lower interest rates that prompted the region to grow 6 percent. This resilience can be explained by improved fiscal positions, increasing levels of international reserves, lower public debt, greater exchange rate flexibility, and the proliferation of independent central banks.
These are the institutional outcomes of democratic maturity, the result of decades of focus on greater freedoms and transparency. Though major challenges remain, such as inequality and inadequate infrastructure, the trend toward greater choices and opportunities for the poor through pro-innovation policies like export-led growth, firm-level competition policies, and conditional cash transfers that support education and health outcomes cannot be denied.
Perhaps the most important change that is happening is the mindset change from viewing the poor as hapless victims and passive recipients of aid who may never escape the poverty trap, to seeing them as self-determined, potentially successful actors in the economy.
At the Opportunities for the Majority Sector of the IDB, we believe that the key is to view people in low-income communities neither as problems to be addressed nor merely as consumers of established products, but as respected partners in national economic development. This is a particularly deeply entrenched perspective when it is viewed in light of the region’s recent history.
The 1980s: The Lost Decade
Today, young people in Latin America and the Caribbean are surprised to hear that the price of certain items such as bread, milk, and clothing once changed daily. People raced to currency exchange offices to purchase dollars with their paychecks to guard against fluctuations. This was considered the best way to fight inflation.
At the start of the 1980s, LAC gross domestic product (GDP) began at 7.8 percent of world GDP. Rising oil prices allowed the accumulation of debt that led to the Mexican debt crisis in 1982, which in turn curtailed credit to the entire region. Regional inflation went from 159 percent in 1985 to 1,189 percent in 1990. New currencies were frequently introduced. Government budgets and payrolls were cut against the backdrop of limited democratic freedoms. Regional growth stagnated, and the poor were hit hardest of all. LAC GDP ended the decade down at 6.4 percent of world GDP, and 64 million people had joined the ranks of the poor.
Overnight, terms such as “adjustment program” and “austerity measure” became part of people’s everyday vocabulary. Children could recite macroeconomic indicators as easily as football scores. This led to a new generation of more technocratic leaders. Often trained in the United States and inspired by the potential in the Asian tigers, they formed trusted networks with a shared, pro-innovation vision, promoted open trade policies and privatizations, and brought the import substitution model to an abrupt end.
The 1990s: The Decade of Apertura
In the 1990s, the LAC region embarked on a long and sometimes bumpy journey that has not always been fruitful or uniform across the countries. The macroeconomic adjustment programs were key for economic recovery: the region grew at an annual rate of 3.2 percent and the inflation rate declined substantially, reaching single digit levels by the end of the decade. Nevertheless, global financial turbulence in the 1990s again exposed the region’s economic frailty. Both the constraints of public budgets and the external shocks that affected the capacity of the economies in the region to generate good jobs made it difficult to achieve significant progress.
By the end of the decade, it was evident that the strategy for economic development and creating prosperity for all citizens of any nation had to go beyond macroeconomics to include the microeconomic foundations of development. We also had to develop a competitive strategy at the level of the firm. Export competitiveness and “enterprise solutions to poverty” were a paradigm shift. Up until then, most decision makers in Latin America believed that government officials should set competitive strategy. Unfortunately, it was ineffective.
We knew that nations had to stabilize their economies to create a predictable investment climate, to liberalize trade, to introduce competition that spurred innovation and initiative, to privatize firms to create more demanding shareholders, and ultimately to democratize and decentralize decision making to increase legitimacy.
Harvard Professor Michael Porter, a proponent of export competitiveness, wrote just after the fall of the Berlin Wall, “firms compete, not nations.” This became a rallying cry for those of us who fought to open and integrate our economies, upgrade our private sectors, and invest in the skills and abilities of, and compensation for, the average worker.
Legislative and logistical impediments to trade, as well as communication costs, were declining. Integration had gradually become a global phenomenon. In 1994, Chile joined the Asia-Pacific Economic Cooperation (APEC), and the United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA). In 1995, Brazil, Argentina, Paraguay, and Uruguay formed the Southern Cone Common Market (Mercosur), and in 1998, Peru joined the APEC.
Strategist Michael Fairbanks, who advised many leaders in the region as they opened their economies and began to compete, argued we needed “to enable companies to make competitive strategy: focus on new, attractive market segments, refurbish distributions systems, cut costs without hampering performance, and invest and compensate their employees as the only true source of innovation.”
As the world around us continued to change, we began to envision a region that focused on social equity through economic growth and private sector innovation.
The 2000s: the Decade of Global Competition
Between 2003 and 2008, LAC’s economy showed remarkable improvement. The average annual GDP growth reached 5 percent, while the per capita income grew at an annual average rate of 4 percent; unemployment decreased from 9.3 percent to 6.9 percent; foreign direct investment increased by 150 percent, while remittances grew from US$37 billion to US$69 billion; and exports of goods and services from LAC to the rest of the world increased by 145 percent, while intra-regional exports increased steadily.
In this more competitive environment, governments needed to focus on investments in higher forms of capital, such as specialized infrastructure, human capital, and knowledge, which were becoming more critical to the competitive advantage of the countries. This allowed firms to spend more time investing in workers, upgrading their products, finding new distribution channels, and segmenting and understanding their customers’ needs. There were already initial signs that a new, emerging middle class that was severely underserved would require firms to rethink business models to meet its needs.
In 2009, the global financial crisis hit Latin America. GDP contracted by 2 percent due to lower exports, fewer remittances, less tourism, and declining business confidence. Governments employed countercyclical measures: spending on public works, job creation, and improving social safety nets with conditional cash transfers. Some taxes were temporarily suspended to support key productive activities. In the past, an external shock of such magnitude would have typically spelled disaster for LAC, but the region weathered the crisis without major damage. Moreover, its rapid economic recovery since 2009 is definitive evidence that Latin America is no longer the region many still think it is. In fact, at the time, many other nations around the world looked toward LAC for ways to tackle the challenges that the financial crisis posed for them.
Economic growth, combined with the reduction in poverty and improved distribution of income, has produced an expansion of the middle class. Estimates suggest that between 2003 and 2008 over 40 million people entered this sector of the population. This development is very significant, given the role of the middle class as an engine of growth and its implications for strengthening social cohesion and mobility.
As part of a unique process, the President of the IDB, Luis Alberto Moreno, launched the Opportunities for the Majority Initiative to find ways to instill a private sector perspective into fighting poverty by tapping the potential of the base of the pyramid markets.
We reasoned that if development meant meeting the needs of the poor, and if the needs of the poor in the aggregate were as large a market as C.K. Prahalad had described in his ground-breaking work, The Fortune at the Bottom of the Pyramid, then we could play a role in stimulating companies to meet these needs by making strategic investments, creating model projects, and improving information surrounding these markets. Furthermore, this could be accomplished in the realm of housing, energy, health care, education, and even climate change.
2010: The Latin American Decade
In April 2012, leaders from throughout the hemisphere gathered in Cartagena, Colombia to discuss an ambitious agenda that included regional issues such as climate change, drug trade, and women’s rights, among others. The event set out to improve the trusted network of business and government leaders, to make priorities, and to seek commitment to change. Mostly, it will be remembered for signaling to the rest of the world that the LAC region was speaking with an increasingly strong, unified, and independent voice.
This independence is fueled by the resilience its maturing democratic institutions demonstrated during the global financial crisis; by its ability to pivot into networks of trade, industry, and investment either to the north (the United States and Europe) or to the south and east (Africa and China); by its sustained commitment to private sector innovation; and by its ability to provide the average citizen with a high and rising standard of living.
Over the last twenty years key metrics have changed significantly in LAC, bolstered by global trade and consumption. Inflation fell from a regional average in the triple digits to about 7 percent; foreign debt dropped from 28 percent to 10 percent of regional GDP; per capita income more than doubled, from US$5,200 of purchasing power to US$11,200; and poverty rates fell from 50 percent of the population to about one-third of the population. Our region has improved on a scale that few would have believed possible.
The rapid evolution of LAC’s international trade profile has played a key role in these accomplishments. The South-South-East dialogue has increased and China now represents 7 percent of regional exports. The “Deep Integration Area” between Chile, Colombia, Mexico, and Peru formed to focus on Asia.
Social advances have benefited from the “growth effect” and are apparent in the advances in education, health, and gender equality. Primary school enrollment rose from 77 percent in 1970 to 94 percent in 2008. Secondary enrollment over the same period rose from 21 percent to 71 percent, and enrollment has almost doubled to 38 percent at the tertiary level.
Today, LAC has the highest longevity rates and lowest infant mortality rates in the developing world. This is due to public investments in prevention or immunization programs, advances in medicine, and the increased number of health care professionals. Now, 95 percent of pregnant women have prenatal care.
In spite of these remarkable results, major challenges to the region remain. They include low productivity, informality, violence and crime, climate change, and natural disasters. While unemployment in LAC has been decreasing, falling to about 7 percent in 2010, the level of informal employment in the region has not dropped and remains at about 55 percent. This is the number of people who do not have full access to social security services, including health care and pensions. Most wage earners prefer to become formal employees. They recognize that informality perpetuates the existence of different classes of citizens, translating into greater inequalities of income and higher poverty rates.
Violence now surpasses unemployment as the top concern of the average person in LAC. Though crime is measurably down in most regions, and the problems are largely concentrated in a handful of countries or even specific urban areas, it does reveal a climate of fear.
Three factors have actively shaped the Latin American and Caribbean decade: seeing our recent history clearly and learning from it; speaking independently due to our new relationships within the region and the east; and focusing still further on the microeconomic foundations of success, which improve incomes and strengthen societies.
Market Solutions to Poverty
Low productivity and slow productivity growth, more so than barriers to accumulation of factors of production, explain the LAC region’s low income. The productivity of LAC is not quite at half its potential. However, this can change if we are able to increase the number of indigenous companies that meet the needs of the poor, build true competitive advantages for themselves, and become role models for others.
There is a vast market opportunity at the base of the pyramid, which will require public and private sector collaboration to develop and serve an immense segment of society with unmet needs. Role models are just beginning to emerge.
Carolina Lopez founded Adenica in 2000, which manages the full spectrum of logistics and import and export paperwork for major national and international firms operating in Nicaragua. Lopez, who won the IDB’s Multilateral Investment Fund’s Pioneers of Prosperity Award, is not just distinguished as a young mother competing in a challenging business environment. She created new software and improved the transportation logistics so her clients can obtain sorely-needed inputs from border customs in 24 hours instead of 24 days and helped them to create their own competitive advantages based on time to market.
Olivier Barrau runs the Alternative Insurance Company in Haiti. He built it to serve the well-to-do, as well as the 80 percent of Haitians who live on less than US$2 a day. “We don’t have a prevention culture in Haiti; and when you react, you are not efficient,” he says. “People don’t think of insurance for the poor, as if they have nothing to protect. But the goal of insurance is to make sure people can survive hardships.” The challenge, Barrau says, “is to build a safety net for rural people whose certificate of deposit is their cow, whose demand deposit is their goat, whose cash is a chicken.”
Twenty-two percent of Mexico’s 115 million inhabitants live in rural areas, with over 60 percent falling below the poverty line. More than 800,000 small stores, mostly owned by women, serve this market and face major challenges, including inefficient supply chains and lack of access to credit. Mi Tienda was conceived by Jose Ignacio Avalos, one of the most innovative “serial” social entrepreneurs in the region, to supply basic grocery products and training to rural micro-entrepreneurs in the central-south region of Mexico. They are building 25 distribution cells with our help to support 25,000 small stores.
In Brazil, 80 percent of the food-related businesses are small, informal, and run by women—they are also economically vulnerable. Mundo Vox Tenda was launched by Marco Gorini with a US$10 million loan from the IDB. It provides financing options to cover working capital needs and training in basic business knowledge: financial literacy, marketing, food safety practices, and the process of business formalization. The program is transformative for women who are empowered to be business owners and operators. It was launched in 2011 and expects to reach up to 90,000 micro-entrepreneurs.
There are refreshing and strong signals of empowerment, an emerging middle class that will fundamentally change the way the region is governed and business operates. After decades of dependency, import substitution, and low productivity, Latin America and the Caribbean nations finally have a shared vision of what it takes to be independent and strong.
Governments must root out violence and invest in specialized infrastructure; create transparent, accountable mechanisms that decentralize decision-making; and direct resources to reinvigorating the private sector, short of protecting it from competition. They see prosperity as a choice where the private sector must invest in true competitive advantages such as product development, new distribution systems, and attractive domestic and export market segments. Both the government and the private sector recognize that the only investment with the possibility of infinite returns for society is the investment in people.
For instance, Kurt Jean-Charles is the founder of Solutions S.A., which creates mobile software applications for the over one million cell phone subscribers in Haiti. He is creating a new group of software programmers in his country, while his product improves the communications and security of his customers. He evoked the promise of the decade of Latin America and the Caribbean when he said, “Entrepreneurs put aside their comfort to create something new, and in the process, advance society.”