For decades, many countries of Latin America were 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.
- Mexico is the second-largest economy in Latin America, with a 2020 GDP of over $1 trillion.
- Despite rapidly growing economies, many of these countries suffered from the impact of the COVID-19 pandemic.
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 local 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 at a modest 6% for just about every marketable product, with immediate results. Imports increased 30% in 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 $11.6 billion to the U.S. in 2021, accounting for 29% of the country's export market.
Colombia may not have what’s commonly regarded as an advanced manufacturing economy, but a nation can succeed in spite of that. The country has plenty of agricultural and mineral resources, and the means to develop them. It is one of the top 20 exporters of petroleum around the world. in 2021, Colombia exported $19.2 billion of mineral fuels and oils.
The country has continued a program of trade liberalization that includes lowering corporate income taxes. New tax laws offer certain tax incentives to promote investment, economic growth, and employment. In addition, it is also possible to pay taxes in kind, allowing taxpayers to perform useful projects for the country in lieu of financial payments.
The growth of foreign direct investment in Latin America in the year 2021, following a sharp drop the previous year.
Peru's economy has risen rapidly since the 1990s, and its GDP has more than quadrupled since the start of the century. The results are already tangible: prior to the coronavirus pandemic, Peru was on its way to eradicating poverty at a rate much faster than previously expected.
Between 2009 and 2019, the percentage of Peruvians living on less than $5.50 per day fell from 35.6% to 20.6%, meaning that over a third of the country's poorest people successfully escaped poverty, according to the World Bank. As of 2022, the World Bank is financing 16 investment projects in Peru, with a total investment of $1 billion as well as $2.8 billion in development loans.
Unlike Colombia and Chile, Peru’s major trading partner is not the United States. Instead, the U.S. is a close second behind China. Socialist president Pedro Castillo, who took office in 2021, has pledged to increase the minimum wage and raise taxes on the mining industry in order to fund health and education reforms.
However, the country's economy has been hard-hit by the economic impacts of the global COVID-19 pandemic. Existing inequality, overcrowding, and limited public health resources contributed to an 11% drop in the country's GDP in 2020, along with a 20% drop in employment. Although GDP rebounded in 2021, formal employment in urban areas remains below pre-pandemic levels.
Mexico is the second-largest economy in Latin America, with a 2020 GDP of over $1 trillion. Brazil's economy is larger, with a GDP of $1.4 trillion.
Mexico was a signatory to the most famous trade deal of the past decades, the North American Free Trade Agreement (NAFTA) with Canada and the United States. NAFTA has since been subsumed by the US-Mexico-Canada Agreement, which took effect in 2020.
It should come as no surprise that Mexico’s largest trade partner is the United States, which supplied 45% of Mexico's imports and bought 83% of the country's exports in 2021. The new agreement increased labor protections for workers in Mexico and introduced new enforcement mechanisms, while also reducing tariffs.
Although Mexico's foreign trade suffered a brief plunge in 2020, exports have since returned to an all-time high, suggesting that the country may be on its way to recovery from the coronavirus pandemic.
Which Countries Invest the Most in Latin America?
According to the U.N.'s Economic Commission for Latin America and the Caribbean, Europe is the largest source of foreign investment in the region, accounting for about 38% of all FDI to the region in 2020. However, this analysis groups all of Europe together. The United States accounted for 37% of Latin American FDI in 2020.
How Much Is the U.S. Investing in Latin America?
The U.S. is the largest source of foreign investment to Latin America, contributing about 37% of all FDI inflows to the region in 2020. The U.S. is also the largest source of new projects and mergers and acquisitions in the region. Over the years 2010-2019, U.S. companies announced a yearly average of nearly $20 billion in new investment projects and $14 billion in the year 2020.
How Much Is China Investing in Latin America?
It is difficult to assess the volume of China's Foreign Direct Investment (FDI) in Latin America since these investments often flow through a third country. But as the world's third-largest source of FDI, there is little doubt that China is making significant investments in Latin America and the Caribbean region. Chinese companies announced an average of over $7 billion in Latin American mergers and acquisitions each year between 2010 and 2019, although the figure fell to just below $6 billion in 2020. In the same decade, they announced an average of nearly $5 billion in new investment projects every year.
Why Is China Investing in Latin America?
China is investing heavily in Latin American infrastructure and industry as part of the One Belt and One Road initiative. This multi-trillion-dollar project seeks to provide developing countries with an alternative to Western-led globalization, while also providing Chinese companies with new markets, manufacturers, and sources of raw materials.
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 developed countries of the world and those aspiring to that level continues to shrink.