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The reindustrialization of Latin America: Are we going to lose this opportunity again?

Ingo Ploger | 
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By Ingo Ploger, entrepreneur and President of CEAL, Brasil

After major depressions comes strong economic growth. After the pandemic, it seems that in 2022 we will have global and regional growth above average.

The surprise is that global production chains remain unbalanced and highly fragile due to large regional concentrations, a lack of flexible options, and constant shortages. Electronic components -such as chips – show a total lack of capacity to balance demand. The automotive sector so far has not recovered precisely due to the lack of these components.

At the beginning of the pandemic, car production lines were turned off, along with production of processing iron, aluminum, copper, plastics and packaging. But the 2020 crisis did not happen as generally expected: demand rose sharply in various sectors. Industrial products, for example, received much higher-than-expected orders from the consumer, pharmaceutical, civil construction and agribusiness industries.

This imbalance in the production chains led the global industry to manage a crisis that did not come from the sales side, but from the supply side. Prices rose and now reducing the shortage of productive elements has become an urgent priority.

Initially it was thought that the shortage would be fleeting, and that with the normalization after the pandemic, everything would go back to normal. But in most global companies, this is no longer the forecast.

This imbalance was caused by an unusual reason: suppliers concentrated in a few countries, early withdrawal from production, and a lack of supply options.

That is why the ones who adapted best this time were neither the biggest nor the fastest.

As we may be less global and more digital in the future, the global production chain needs to be completely overhauled. You must decentralize your suppliers and develop more creative, sustainable and diversified options in different regions.

In fact, many took new investments out of the drawer and others already planned are becoming a reality. However, the question remains: Everything in Asia? In Europe, Japan and the United States?

Some investments are being taken “back home” even though they have higher costs and are less competitive. Others are looking for new locations to increase diversity and safety.

The attention of strategic investors suddenly turned to Latin America. Despite all the news and the reputation of the region, suddenly the results are not so bad, and the indicators of productivity and rapid adaptability show its resilience. Stock exchanges, IPOs, startups, and reported mergers and acquisitions show this trend.

Countries like Peru, Chile, Paraguay and Uruguay despite the insecurity that the news may transmit. Argentina appears well referenced in agribusiness and energy. Brazil and Mexico, two engines in the region, are receiving several of these investments.

On the international stage, Chinese companies, followed by American and then European ones, continue to have a great appetite for multilatinas to complete their long production chains.

It is important to differentiate the news from the facts. We have seen the news of the companies that leave Latin America (as in the case of Ford, Walmart, among others), but if we look carefully, we see that the investment volume of the companies that enter is much greater than the investment of the ones leaving.

Large companies will anchor regional development, but in terms of innovation, employability and sustainability, medium-sized companies will be the ones that will make the difference. In this aspect the policies of industrialization and recovery of growth come into play. We have already seen this scene in several Latin American development scenarios, which have no happy ending.

Will we lose this opportunity again?

During the last 30 years, Latin American nations deindustrialized the continent early. In the name of globalization, currency stability, and modernity, the central banks abandoned the floating of their currencies to face inflation, and established interest rate policies much higher than international ones. In addition, on account of these actions, they postponed relevant reforms.

These policies stabilized currencies and brought the region’s indebtedness below that of developed countries, making economic indicators more favorable for investors.

However, the permanent appreciation of currencies and higher interest rates do not benefit the international competitiveness of commodities.

For this reason, there was an early deindustrialization, which increased the area of ​​services in GDP, without generating the increase in per capita income that occurred in most industrialized countries. At the same time, democratic pressures for social issues made the State have a greater presence with worse services.

Today we have an industrial underrepresentation and the added value of the entire economy is still small. Thus was a population of almost 450 million inhabitants with a per capita far below what is possible.

But it seems that we would have a more favorable scenario in the future, due to the breaking of the chains. They generate higher prices for raw materials, and they produce a generalized devaluation of the currencies of the region that puts us at competitive levels. Exporting today makes sense. We improve competitiveness and with more employment in industry we can expect a significant improvement in the quality of life.

The question is: Until when is it sustainable?

When they come out of the crisis, the U.S. and Europe will have higher interest rates and will continue their monetary easing plans, devaluing their currencies in relation to others, which will put pressure on the appreciation of our currencies. However, raw materials will not lower their prices as quickly and the trend towards diversification of supply will benefit investments in Latin America.

If we do not want to lose this opportunity again, public reindustrialization policies must focus on global production chains, local synergies and the vocation of the region.

Sustainability is here to stay and is part of regional vocations, being an indisputable preference of global consumers. Regional integration has enormous potential for synergy in logistics, energy, services and sustainability. Employability, together with quality of life, is in the direct promotion of small and medium-sized enterprises, where new agendas are expected, such as cooperativism (not only in products, but mainly in services) and in the stimulation of innovation and entrepreneurship.

This time, central banks will have the Herculean task of ensuring that there is more competition to improve competitiveness in the supply of credit. Raising interest rates and raising the exchange rate are poisonous for reindustrialization!

Central banks will have to balance emergency social loans with supply for small and medium-sized enterprises using real competition between banks. The private financial sector moved away from its social function during the pandemic, leaving the most difficult and important part to public banks.

Financial sector performance was the best among many sectors. The increase in liquidity is shown in their balance sheets and in the emergency, the central banks were more concerned with keeping liquidity and inflation under control. Now they must support the positive investment environment and secure competitive short- and long-term credit. The new fintech technologies help in this trend, to facilitate the intermediation of financial services at more competitive prices. But central banks will have a more relevant mission for reindustrialization.

Reindustrialization will have new characteristics: greater innovation, digitization and insertion in the production chains, including small and medium-sized companies in the best sustainability practices.

The “new industry” in Latin America will be digitized, with high international competence, flexible, sustainable and adapted to the new governance model.

Am I the only one who sees this?

If not, who do we need to convince?

 

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