Latin America Steps Up as the U.S. Takes a Break
By Gene Huang, Senior Economist of FedEx Express, Latin America and Caribbean Division
MIAMI, DECEMBER 2007 – The global economy is doing remarkably well. However, it’s not the U.S. doing the driving anymore. After spurring economic growth for the rest of the world from 2002 to 2005, the U.S. is taking a break and it’s now Latin America, Asia, Japan and Europe which are currently grabbing the reigns to propel the global economy forward.
Latin America is performing well; Asia is experiencing strong growth; China is likely to expand by a double-digit percentage once again this year; India is currently increasing its gross domestic product by slightly more than nine percent; Europe is performing slightly above its potential output; and Japan has finally returned to its underlying rate of two percent. The weakest link in the chain is the U.S., as it is affected by the lull in the residential real estate market which directly and indirectly corresponds to nine percent of the country’s GDP.
The Latin American region consists of important emerging markets where economies are releasing energy, resulting in opportunity. Presently, growth rates in Latin America are higher than the forecasts, and the export of raw materials has led to a trade balance excess. Although there has been a swing to the left in the governments of many Latin American countries in the past few years, economic needs should align the political processes and prevent any negative influence on the freedom of trade and logistics.
For the Latin American economies to truly excel, the key is greater access to the global economy. This leads to enhanced supply chain management through improved logistics, strengthened infrastructure and better access to capital through public/private partnerships. SRI International, one of the world’s leading independent research and technology development organizations, conducted a study in 2006 entitled “The Power of Access.” The study found that access is directly related to commerce, growth, economic stability, reduction in poverty and businesses’ operational capacity.
Greater access is possible through improved logistics operations. The significance of logistics has steadily increased over the past few years as globalization and world trade have continued to grow. This is evidenced by four economic macro trends: faster delivery cycles for urgent just-in-time production, the linking of supply chain management, the strengthening of e-commerce through global delivery chains and the integration of global production.
It is clear that improved logistics due to greater access to the global economy is leading to stronger economies in Latin America. Take, for instance, Brazil and Argentina—two of the largest economies in the region.
The Brazilian economy is on the right track as the government is undertaking difficult but necessary economic measures. One example is the implementation of a government initiative which seeks to grow the Brazilian economy through investments in infrastructure. A strengthened infrastructure leads to a more robust economy.
Further, Brazil is extremely well-positioned for sustained economic growth. The abundance of natural resources, the mild climate, the young population and the diversity of Brazilian industries are the country’s assets which will keep its economy competitive in the world arena. Brazil is one of the most blessed countries on the planet as far as geographic conditions are concerned since it has one of the largest surfaces with arable land, as opposed to Russia, China, Canada and even the U.S.
Brazil is achieving a reputation of reliability, but there are several areas which the country should focus on in order to achieve increased economic growth. These areas include improving the country’s infrastructure, strengthening fiscal discipline, reducing bureaucracy, increasing investments in higher education, reducing the size of the informal sector and maintaining the independence of the Brazilian Central Bank.
Another country in Latin America on the right economic track is Argentina which also has huge potential for growth. Similar to Brazil, the country’s economy benefits from rich natural resources, a highly literate young population, a temperate climate, an export-oriented agricultural sector and the recent introduction of a variety of new industries.
Yet there is still considerable room for growth in the Argentine economy. The areas the government should concentrate on include improving the country’s infrastructure and productivity, implementing increased financial discipline, fighting corruption, reducing bureaucracy and establishing greater macroeconomic stability which will attract more investors.
As the world economy marches forward, it is Latin America that is playing a major role in its success and development. In turn, Brazil and Argentina are principal players in the continued progress of the Latin American economy. The key for continued growth for these two countries, as well as for the whole region, is greater access to the global economy through enhanced logistics. With globalization sustaining its torrid pace, barriers to access will be further broken down and the worldwide economic future will remain bright.
About Gene Huang
Gene Huang is Chief Economist for FedEx where he monitors all industries served by the company and is responsible for forecasting global economic and financial conditions. He is also managing director of the company’s Economic and Industry Analysis Group and is a member of the board of directors of the National Association for Business Economics, the Wall Street Journal Economic Panel, Business Week Magazine’s Business Outlook Panel and the Blue Chip Consensus Panel.