It is imperative that Latin America improve its infrastructure to lower transaction and transportation costs.
BY JUAN N CENTO
Even though Latin America has recently enjoyed its highest economic growth rates since the late 1970s, economic strength and momentum in other regions—Asia and Europe—overshadow its progress. Latin America is not advancing as rapidly and will continue to fall behind if businesses and governments do not prioritize spending on infrastructure or address regulatory barriers.
Two global trends indicate that Latin America’s exporters—who helped to drive the region’s rate of real GDP growth to over 5 percent again in 2007—are surrounded by a plethora of opportunities in the global marketplace. First, a more liberal regulatory environment in other markets around the world, including Asian and European countries, is helping to promote cross-border flows through free trade agreements, Open Skies pacts, and policies geared toward the reduction of transactional costs associated with trade. Second, Latin America’s growth rates are in part due to strong fiscal positions and macroeconomic policies, according to the World Bank.
GAP WITH ASIA
However, the region’s progress compared to that of Asia and Europe illustrates that there is still a great deal of work to be done to overcome gaps and shortcomings in order for Latin America to more fully participate in global trade.
In Latin America, poor transportation infrastructure and regulatory barriers undermine the region’s competitive strengths. Across most Latin American countries, less than one-third of the national road network is in good condition. The Organization for Economic Co-operation and Development suggests that although proximity to the United States is a competitive advantage to Latin America, this edge is quickly eroded by an insufficient network of roads, ports, railways, and airports. Insufficient infrastructure drives up transaction and transportation costs, and this impairs Latin American countries’ competitiveness with hot markets like China. To grow and compete aggressively with other markets, it is imperative that Latin America improve its infrastructure to lower transaction and transportation costs.
A look at China’s growth dramatically demonstrates the importance of a liberal trade structure and robust infrastructure for economic progress. Just over a dozen years ago, China had no highway system to link its provinces. Today, however, China accounts for over half of the world’s investment in new infrastructure, including ports, power generation plants, railroads, highways and elevators—its highway network has grown 65 percent.
CONTRAST WITH CHINA
The stark differences of Chinese market conditions in comparison to those of Latin America shed light on how regulatory trade barriers and an inadequate transportation infrastructure slow the region’s progress. According to a 2005 World Bank report, Latin American countries spend less than two percent of GDP on infrastructure, needlessly driving up logistics costs to between 15 percent and 34 percent of a product’s value. In industrialized countries, this figure is approximately 10 percent. Latin America’s spending would need to increase to 4 percent to 6 percent per year in order for its infrastructure to catch up or keep up with countries that once trailed them, such as Korea and China.
Even though the means by which to import and export goods are keys to progress, they alone are not sufficient. For free trade to flourish, Latin America must implement policies and procedures that aid the efficient flow of goods. This would include lowering tariffs and increasing the efficiency of customs clearance procedures to allow businesses to get their products in and out of the market more easily and cost-effectively. Liberal trade policies attract foreign investment and business expansion—and when foreign companies find it easy and cost-effective to do business in a given market, they will expand there and bring jobs with them.
To compete successfully with rapidly growing economies in the global marketplace, key stakeholders from both the public and private sectors need to foster and develop partnerships to build stronger physical transportation networks. Businesses large and small must collaborate with government and non-profit organizations in new and innovative ways. Of the top 100 economies in the world, 51 are corporations and 49 are countries. Without a doubt, corporations, and governments play comparable roles in shaping the global economy.
While Latin American governments have recently increased investments in infrastructure development, we cannot rely solely on their efforts. In addition, businesses must forge partnerships with governments to establish procedures that facilitate trade and eliminate any unlawful practices. Efficiency in cross-border trade flows would significantly increase. Improved and increased transportation infrastructure across Latin American countries would create better cohesion and economic strength, allowing governments and organizations to work more closely together and give businesses the economic framework to grow and expand their market reach with more speed and frequency.
With so much promise for potential growth and progress, it would be a disappointment if Latin American businesses and governments can’t build the partnerships necessary for our commerce and citizens to thrive in the global marketplace.
Juan N. Cento is President of the FedEx Express Latin America and Caribbean Division, headquartered in Miami, Florida. He maintains overall responsibility for the division, which includes more than 3,400 employees in more than 50 countries and territories. Cento’s primary focus is on magnifying the FedEx Express presence throughout Latin America and the Caribbean and integrating the region into the FedEx global network serving more than 220 countries and territories worldwide. This column is based on the Viewpoint Americas series from the Council of the Americas.