For decades, much of Latin America was a morass of hyperinflation and political instability—hardly the most prudent region of the world in which to conduct business. While Western Europe, the United States, Canada, Japan, South Korea, Australia, New Zealand, and other developed realms continued to benefit from mutual trade, the Spanish- and Portuguese-speaking parts of the Western Hemisphere lagged.
Today, they’re catching up. While pockets of Latin America are still susceptible to dictatorship and corruption, those countries are now the exception. Four nations, in particular, are leading the charge toward market prosperity in this often overlooked part of the globe.
- For decades, much of Latin America was a morass of hyperinflation and political instability.
- While there are still pockets of Latin America that are susceptible to dictatorship and corruption, these countries are the exception.
- Four nations—Chile, Peru, Colombia, and Mexico—are leading the charge toward market prosperity in this often overlooked part of the globe.
Chile is one of the least publicized success stories in the Americas. The nation has actively courted foreign investment for decades, dating all the way back to the tyrannical regimes of the 1970s. Non-resident investors can take advantage of Decree-Law 600, which subjects them to the same regulations as native investors.
The advantages of this are numerous. For instance, Chile’s top corporate tax rate is 27%. (Prior to the Tax Cut and Jobs Act (TCJA) of 2017, the United States' highest tax rate was 35%, relatively high in comparison to Chile's highest corporate tax rate. However, now, as a result of the TCJA, the United States’ highest corporate tax rate sits at 21%.)
A 2004 trade agreement between the countries set Chilean tariffs of a modest 6% of just about every marketable product, with immediately realizable results. Imports increased 30% the first year, prompting Chile to sign subsequent trade agreements with Canada, Mexico, China, Japan, the European Union, South Korea, Brunei, New Zealand, and Singapore. Chile is now one of the Latin American countries most actively pursuing bilateral trade agreements.
Colombia’s 49 million citizens are, through fate, convenience or strategy, inexorably linked to the fortunes of their largest trading partner, the United States. Colombia exported $19.6 billion to the U.S. in 2017 (latest data available). The U.S. is also the nation that Colombia imports the most from, by a large margin. Thus, it’s imperative that Colombia keep a good thing going.
Colombia may not have what’s commonly regarded as a technologically advanced economy—its semiconductor fabrication plants are nonexistent—but a nation can succeed in spite of that. Last we checked, you still need raw commodities, and Colombia not only has plenty of those, but the means to capitalize on them. For one thing, the nation is in the top 20 exporters of petroleum around the world. in 2019, Colombia exported approximately 616 barrels of crude oil per day.
The country has continued a program of trade liberalization that includes lowering corporate income taxes. Colombia’s now stands at 30%. New tax laws—enacted in late December 2018 and effective 1 January 2019—offer certain tax incentives to promote investment, economic growth, and employment (in addition to lowering the corporate tax rate from 33% to 30%).
Foreign investment in Peru goes well beyond the obligatory guided tours of Machu Picchu at $300 a pop. And the results are tangible. By the World Bank’s calculations, Peru is well on the road to eradicating poverty faster than was previously thought possible. Barely a decade ago, three out of five Peruvians fit the definition of “poor.” Between 2005 and 2013, the poverty rate (the percentage of the population living on $5.50 a day) fell from 52.2% to 26.1%. This was the equivalent of 6.4 million people escaping poverty during that time period.
One of the quietest developments of the George W. Bush Administration was the frequency with which it signed trade agreements with partners throughout the Western Hemisphere. Case in point, the Peru Trade Promotion Agreement of 2006. The pact immediately eliminated tariffs on 80% of manufactured exports to Peru, with the remainder to be phased out by 2016. Farm exports enjoyed a similar relaxation of tariffs.
Unlike Colombia and Chile, Peru’s major trading partner is not the United States. Instead, the U.S. is a close second behind China. Peru's president, Martín Alberto Vizcarra Cornejo has notably remained independent from political parties, promoted reforms against corruption in the legislative and judicial branches, and vowed to not run for president when his term ends in 2021.
However, the country's economy has been hard-hit by the economic impacts of the global Covid-19 pandemic. Existing inequality, overcrowding, and a largely informal economy played a role in the 30% decline in the country's gross domestic product (GDP).
Mexico was a signatory to the most famous trade deal of recent years, the North American Free Trade Agreement (NAFTA) that also incorporated Canada and the United States. Now in its 25th year, NAFTA created the largest trade bloc in the world (although granted, a trade bloc incorporating the United States and almost any two countries chosen at random would be the largest in the world).
It should come as no surprise that Mexico’s largest trade partner is thus the United States, which would likely be the case even without the benefit of NAFTA. Approximately 46.59% of Mexico’s imports originate in the U.S., while 76.49% of Mexico’s exports end up there. Mexico-U.S. trade has more than quadrupled since the onset of the agreement; that being said, a disproportionate part of that is accounted for by remittances. Expats sending Western Union Co. (WU) transfers home isn’t the foundation of a lastingly strong economy. Still, the impact of the 2009 recession—which shrank the Mexican economy by 6%—seems to be behind us finally.
The Bottom Line
The notion of a “global economy” is more often a talking point than an actual construct. As the movement of capital among countries continues to run into fewer and fewer artificial barriers, the gap between the Luxembourgs and Monacos of the world and the countries aspiring to get to that level continues to shrink.