Running head: HOW THE HEALTH OF LATIN AMERICAN ECONOMIES IMPACT

How the Health of Latin American Economies Impact the U.S. and the Rest of the World Jamie Jackson Texas Womans University Global Business 5923.51 Dr. Mahesh Raisinghani August 12, 2011

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HOW THE HEALTH OF LATIN ECONOMIES IMPACT

Abstract
This manuscript will help the reader understand how the health of the Latin American economies impact the United States and the rest of the world. The countries discussed in this paper will be Brazil, Peru, Mexico, and Chile. For each country, the current market will first be considered, and then the latest research on each countrys global and U.S. impact will then be expanded upon. Finally, suggestions for lasting growth for each Latin American country will be provided, with the reasons for each suggestion.

HOW THE HEALTH OF LATIN ECONOMIES IMPACT

Introduction
Latin American economies are shifting from third world status to strong emerging markets. These economies are proving to be key power players in the global market. The economies of Brazil, Mexico, Chile, and Peru are experiencing growth and demand. However, the challenge lies in sustaining this growth (Ahmad, 2011`). The economies of Brazil, Mexico, Chile, and Peru have significant impacts both on the United States and the world. These economies current conditions affect the global economy. These economies have witnessed dramatic increases in capital flows (Ahmad, 2011`). Now, these emerging markets are looking to becoming advanced economies in the global world. The citizens of these Latin American countries are calling for better healthcare, education, and an increase in infrastructure (Ahmad, 2011`). Brazil is receiving heavy investment due to the Olympics and the World Cup (Moore, 2011). Mexico is also reaping the benefits gained from a healthy U.S. industrial sector (Moore, 2011). Chile and Peru have both signed Federal Trade Agreements with the U.S. Chile is one of the leading Latin American countries due to demand for its high priced copper (Hornbeck, 2011). Peru has benefited from high prices for its precious metals, gold and copper (Hornbeck, 2011). The Latin American economies of Brazil, Mexico, Chile, and Peru are emerging as lucrative economies for investment and trade. These countries only challenge remains sustaining this growth and achieving economic stability.

HOW THE HEALTH OF LATIN ECONOMIES IMPACT

Brazil
Current Market Brazils business environment has steadily grown over the last ten years. In 2010, Brazil ranked fourth in the worlds market size with an index of 21, and eleventh in the world in market growth rate (globalEdge, 2010). The GDP for 2011 is predicted to be 4.3% (Economic Intelligence Unit, 2010). Brazils consumer class has experienced a rapid growth, which has helped attract foreign investors. In 2010, Brazil was ranked fourth in the world with a foreign direct confidence index score of 1.53 (Kearney, 2010). One of Brazils top commodities is Petrobas, a relatively new oil find that is speculated to contain between 5-8 billion barrels of light oil and gas at the Tupi field, which is 155 miles offshore from southern Brazil (Schneyer, 2007). Brazils industrial sector is one of the most advanced in all of the Latin American countries and accounts for approximately one-third of the countrys GDP. Automobiles, coffee, textiles, shoes, computers, aircraft, and machinery are just a few of Brazils major industries. Agriculture also plays a leading role in Brazils economy and is considered an important factor for economic growth and foreign exchange. In 2009, Brazil had an agricultural trade balance of $55 billion (globalEdge, 2010). The countrys top agricultural products are coffee, sugarcane, tropical juice, and frozen concentrated orange juice. Brazil also owns the worlds largest commercial cattle herd, which consists of 170 million head.

HOW THE HEALTH OF LATIN ECONOMIES IMPACT

Global/US Impact In 2010, Forbes ranked Brazil in 62nd place out of the top 500 best countries for doing business (Forbes, p.3, 2010). In 2010, globalEdge ranked it number 58 out of 139 in global competitiveness. Brazils strengths in the global market include its large variety of natural resources, large proportion of manufactured products and exports, ability to cope with international market instability, and competitive labor costs. Although Brazil is best known for soccer and supermodels, its now also becoming known as destination for investment capital, according to Bloomberg Businessweek (Bloomberg Businessweek, 2009). At the end of 2008, foreign investors had committed $28 billion in venture and private equity capital companies in Brazil. Among its weaknesses are its high complex tax rates and lack of infrastructure, corruption, and bribery. Brazilian has high payroll taxes, which can account at times for up to 40% of an employers payroll taxes. Brazil also has very extensive labor laws in which workers are entitled long paid vacations, large bonuses, food, and health insurance. Suggestions for Lasting Growth Brazils taxes are among the highest and most complex in the world. In order to attract more foreign investment their government needs to not only lower the tax rate but also simplify the tax code. Brazil won the bids to host the World Cup in 2014 and the Olympics in 2014. In order to prepare to host these events they will have to make large improvements in their infrastructure, particularly in its roads, airports, and railways. In doing so, this will also help attract foreign businesses to locate there. Brazils workforce is made up of largely unskilled

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labor. Their government needs to make improvements in the education system so that more of its citizens can attend college or trade schools.

Mexico
Viva Mexico!, or as it is translated in English, long live Mexico. That is precisely the attitude that Mexico has taken in regard to its economy. After a recent slump in the global economy and a near collapse of the economy in 1995, Mexico is showing the world that it can persevere against difficult odds. Within the last 5 years, Mexicos economy has been dealt blows by the Global Recession of 2009, a weakening of the U.S. economy, and a decline in tourism due to the H1N1 virus, and rampant violence by the drug cartels (Mexico, 2011). Nevertheless, the Mexican economy is on the upswing and showing economic growth. Economic Blows Mexico has weathered through a recent series of economic hits. Perhaps the hardest of these blows was the global recession of 2009. According to M. Angeles Villarreal, Mexicos economy was hit harder than most Latin American countries during the global recession of 2009. Mexicos economy contracted by 6.5% in 2009 (Mexico, 2010). Because the Mexican economy is closely tied to the U.S. economy, it felt the impact of fewer exports to its largest trade partner, the U.S. Moreover, the country faced a downturn in tourism due to the H1N1 virus in 2009. The H1N1 virus caused severe respiratory illness in infected people. Because Mexico had 84 confirmed deaths of swine flu, many countries halted trade while many airlines canceled flights to Mexico. This put a damper on Mexicos economy because tourism accounts for a

HOW THE HEALTH OF LATIN ECONOMIES IMPACT significant amount of GDP. Moreover, a slowdown in trade has caused the amount of remittances from Mexicans in the U.S. to decline (Villarreal, 2011). Current Market Mexico is the most populated of the Spanish speaking countries with a 131 million inhabitants (Mexico, 2010). Given its close proximity to the U.S., trade between Mexico and the U.S. becomes a necessity. The Mexican economy is characterized as a market economy. In 2010, it is estimated that Mexico had a GDP of $1 trillion. It is expected to realize a GDP growth of 4.5%. It adopted macroeconomic approach by entering in on various trade agreements with other nations (Mexico, 2010). The World Bank has classified Mexico as an upper-middleincome country because of its per capita GDP in purchasing power parity (PPP) of $15, 720 in 2010 (Villarreal, 2011). Mexicos economy is a mixture of agricultural products, manufacturing, and various services. Mexico has a multitude of natural resources such as petroleum, natural gas, and copper. Mexicos agriculture or 4% of GDP is comprised of products such as corn, rice, and fruit (Mexico, 2010). Industry based companies contribute to 31% of GDP. The bulk of Mexicos economy, 64% of GDP, relies on commerce and other services such as tourism (Mexico, 2010). In addition, Mexicans living in the United States send many remittances back to Mexico. It is the source of an average $21 billion a year (Villarreal, 2011). Mexicos economy relies heavily on the various trade agreements it has with many countries (Villarreal, 2011). Mexico is a member of the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA), the G-20, and the Organization for Economic Cooperation and Development (Mexico, 2011). Mexicos largest trading partner is the U.S. while China is its second largest trading partner (Villarreal, 2011). The U.S. receives 80% of
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HOW THE HEALTH OF LATIN ECONOMIES IMPACT Mexicos exports. Consequently, any economic downtown in the U.S. is bound to have a significant impact on Mexico (Villarreal, 2011). U.S./Mexico Relations Perhaps no other country is more closely tied to the U.S. than Mexico. Mexicos economic reliance on the U.S. is the result of its close proximity to the U.S. and the fact that 80% of Mexican exports are shipped to the U.S (Villarreal, 2011). Consequently, the Mexican economy is significantly affected by any change in the U.S. economy. Mexico is the United States third largest trading partner after China and Canada (Villarreal, 2011). Mexicos main export to the United States is oil. Mexico is the United States second-largest supplier of oil, and over one-third of Mexicos revenues come from oil (Mexico, 2010). The next largest export to the U.S. comes from the automotive sector. In 2010, the United States imported almost $51 billion in motor vehicles and motor vehicle parts (Villarreal, 2011). It is this manufacturing industry in Mexico that has attracted investment from U.S. companies. These maquiladoras, or assembly plants, have attracted industries such as auto parts and electronic goods. U.S. companies are able to situate plants in Mexico where they realize lower labor costs. According to M. Angeles Villarreal (Villarreal, 2011), Many economists believe that maquiladoras are an important part of the U.S. corporate strategy in achieving competitively priced goods in the marketplace. The 2,000 mile border region with the U.S. contains most of the assembly plants and workers. In Tijuana there are 590 plants while 339 plants are located in Cd. Juarez (Villarreal, 2011). Although some analysts cite loss of U.S. jobs because of the assembly plants, the close proximity to the U.S. actually allows for greater U.S. content in the final product. This actually helps sustain jobs. Moreover, a higher degree of U.S. content allows for greater quality products (Villarreal, 2011).
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HOW THE HEALTH OF LATIN ECONOMIES IMPACT

Global Impacts As a member of NAFTA (North American Free Trade Agreement), Mexico has realized significant economic benefits by trading with the United States (Villarreal, 2011). Recently NAFTA approved a pilot program for Mexican trucks, which allows for greater economic integration for North America. It will require numerous safety inspection requirements (Villarreal, 2011). The pilot program for Mexican trucks represents a great victory for North American integration (Everything's Bigger in Texas. Even the Income Gap. Nafta's Rolling Thunder, 2011). The North American economy has been affected by low cost suppliers such as India and China which has displaced many North American companies (Villarreal, 2011). A greater North American integration might decrease the amount of imports by the United States from China. This could attract more companies to Mexico that would be able to take advantage of low wages and openness of trade with the United States. Suggestions for Lasting Growth In order for the Mexican economy to continue to prosper, I propose the following suggestions. First, Mexico should privatize PEMEX, the state owned oil monopoly of Mexico. PEMEX retains control over oil and natural gas exploration. Moreover, Mexico imports oil and gas because of a serious lack of refinery capacity (Mexico, 2011). Privatization of PEMEX would allow for private investment in other oil reserves as Mexicos known reserves are in decline (Mexico, 2011). Secondly, Mexico should invest in education. According to M. Angeles Villarreal (Villarreal, 2011), Mexico needs to invest more in education; innovation and infrastructure; and in the quality of national institutions. A highly skilled workforce attracts
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HOW THE HEALTH OF LATIN ECONOMIES IMPACT foreign investment. Mexico should also invest heavily in its infrastructure. It has the most extensive network of transportation in Latin America with 366, 341 kilometers of paved roads (Mexico, 2011). Another suggestion for Mexico is to improve its agricultural sector. Exports of fruits and vegetables have increased dramatically to $4.7 billion worth of agricultural exports to the United States in 2009 (Mexico, 2010). Agriculture in Mexico has suffered because of smallscale producers and lack of infrastructure. In the United States, we see huge plots of land devoted solely for agriculture. Mexico should employ the United States method of growing products on huge parcels of land (Mexico, 2010). Lastly, Mexico should look to decrease poverty. Poverty may be decreased by increasing education standards, funding infrastructure projects, allowing farmers to cultivate products on more acreage. Mexicos poverty continues to plague rural areas (Villarreal, 2011). Mexico has a program called Oportunidades that has sought to alleviate poverty in Mexico by providing nutrition and health services to the poor (Villarreal, 2011). Furthermore, Mexico can achieve stability in its economy by privatizing state-owned monopolies, improving infrastructure and education, increasing agriculture, and by improving the living standards of the poor.

Peru
Current Market Peru is a country in western South America with an estimated population of 29.5 million, and it is bordered by Ecuador, Colombia, Brazil, Bolivia, Chile, and the Pacific Ocean on the west (ECEO, 2011). Peru has undergone periods of political unrest and fiscal crisis as well as periods of stability and economic upswing. It is a representative democratic republic divided into 25 regions. Its main economic activities include agriculture, fishing, mining, and manufacturing of products such as textiles (ECEO, 2011). Peru is a developing country with a market-oriented
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HOW THE HEALTH OF LATIN ECONOMIES IMPACT economy; the IMF at US$5, (ECEO, 2011). Historically, the country's economic performance has been tied to exports, which provide hard currency to finance imports and external debt payments. Peru has peculiar income inequalities and hence it has 20 percent of the population controls over 54 percent of the national income. Estimation on income reveals about 50 percent of the population stay in poverty whereas 20 percent are below the poverty line (Ana Peruana, 2011). Although they have provided substantial revenue, self-sustained growth and a more egalitarian distribution of income have proven elusive. According to 2010 data, 31.3% of its total population is poor, including 9.8% that is extremely poor (Ana Peruana, 2011). All the above factors have lead to the launch of Peru Healthcare Policy by the government and utmost care is taken regarding the Peru health. The Healthcare System is designed very specifically for the Peruvians so that they can avail the Peru health care policy under any circumstances. Peru health care system is working effectively with a vision to improve the health conditions of all the Peruvians and gain a level in Peru health. Peru Global/US Impact When it comes to healthcare in Peru, the country faces a daunting task. There are a number of challenges for the country in healthcare. Besides fighting against a range of diseases, the healthcare system in Peru also has to fight against the lower infrastructure as well as centralization of wealth. As the country sees contrasting inequalities of wealth among its citizens, only a selected few can avail good quality medical services. Though the U.S. Agency for International Development (USAID) is currently supporting the efforts of the Peru government to decentralize the healthcare system of the nation, yet healthcare in Peru has way to go (Ana Peruana, 2011).
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HOW THE HEALTH OF LATIN ECONOMIES IMPACT With the help of US government, Peru is working towards improving their medical infrastructure as well as enhancing their reach to cover more number of poor people. The government is trying to expand the primary care services as much as possible. In order to improve the Peru healthcare system, Seguro Integral de Salud (SIS) was established in 2002 to offer free healthcare to all the citizens (Futurey Years, 2011). However, a few hidden costs like travel and prescription drug costs also came as barrier for the poor. Peru will have little effect on the United States because of the relatively small size of Perus economy in relation to the U.S. economy. In 2006, Peru had U.S. imports from Peru account for 0.3% and U.S. exports to Peru account goes for 0.3% of total U.S. exports (Villarreal, 2007). U.S. exporters have substantially larger tariff barriers on their exports to Peru than do Peruvian exporters on their exports to the United States. In April 2005, Perus Health Ministry released an evaluation of potential effects of a free trade agreement on access to medicines in Peru (Villarreal, 2007). The study stated that an agreement would affect generic brands of medicine in that many of these medicines would no longer be eligible to be branded as generic. The poor populations of Peru also concern a number of non-government organizations based in the United States and Latin America that a PTPA would reduce access to essential medicines. Suggestion for Lasting Growth Peru is a country with many climates and geographical zones that make it a very important agricultural nation. Peru agricultural exports are highly appreciated and include artichokes, grapes, avocados, mangoes, peppers, sugarcane, organic coffee and premium-quality cotton. The Government of Peru's economic stabilization and liberalization program lowered trade barriers, eliminated restrictions on capital flows, and opened the economy to foreign
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HOW THE HEALTH OF LATIN ECONOMIES IMPACT investment, with the result that Peru now has one of the most open investment regimes in the world. Peru is an international leader in fishing, producing nearly 10 percent of the world's fish catch. A Peru rank fifth worldwide in gold production (first in Latin America), second in copper, and is among the top 5 producers of lead and zinc. Manufacturing: Because of its long dependence on raw material exports, Peru has developed a minor manufacturing sector. The sector now represents 23 percent of GDP and is tied heavily to mining, fishing, agriculture, construction and textiles (Avameg,2011). Manufacturing is mainly devoted to processing to gain a value-added advantage. The most promising sector is textiles, metal mechanics, food industry and agricultural industry (Avameg, 2011). Tourism has represented a new growth industry in Peru since the early 1990s, with the government and private sector dedicating considerable energies to boosting the country's tourist destinations both to Peruvians and foreigners (Avameg, 2011). Between 1992 and 2001, Peru attracted almost $17 billion in foreign direct investment in Peru, after negligible investment until 1991, mainly from Spain, the United States, Switzerland, Chile, and Mexico.

Chile
Current Market Chile has one of Latin Americas fastest growing and strongest economies. Chile's economy is based on the export of minerals, which account for about half of the total value of exports. Copper is the nation's most valuable resource, and Chile is the world's largest producer. Agriculture is the main occupation of about 15% of the population; it accounts for about 6% of the national wealth, and produces less than half of the domestic needs. The Vale of Chile is the country's primary agricultural area; its vineyards are the basis of Chile's wine industry. Grapes,

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HOW THE HEALTH OF LATIN ECONOMIES IMPACT apples, pears, onions, wheat, corn, oats, peaches, garlic, asparagus, onions, potatoes, sugar beets, and beans are the chief crops. Livestock production includes beef and poultry. Sheep raising is the chief pastoral occupation, providing wool and meat for domestic use and for export. Fishing and lumbering are also important economic activities. Chile's industries largely process its raw materials and manufacture various consumer goods. The major products are copper and other minerals, processed food, fish meal, iron and steel, wood and wood products, transportation equipment, and textiles. Chile's overall trade profile has traditionally been dependent upon copper exports. The state-owned firm CODELCO is the world's largest copper-producing company, with recorded copper reserves of 200 years. Chile has made an effort to expand nontraditional exports. The most important non-mineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and wine. The dependence of the economy on copper prices and the production of an adequate food supply are two of Chile's major economic problems. Chile's main imports are petroleum and petroleum products, chemicals, electrical and telecommunications equipment, industrial machinery, vehicles, and natural gas. In addition to minerals, it also exports fruit, fish and fish products, paper and pulp, chemicals, and wine. The chief trading partners are the United States, China, Brazil, Japan, Mexico, Argentina, and South Korea. Chiles GDP was $231, 925 billion with 6.2% growth. Their exports were $71, 029 billion in 2010. Their imports were $55, 174 billion in 2010 and consisted of petroleum and petroleum products, chemicals, electrical and telecommunications equipment, industrial machinery, vehicles, and natural gas. Their main import partners are United States, China, Argentina, Brazil, and South Korea.

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HOW THE HEALTH OF LATIN ECONOMIES IMPACT Global/US Impact Chile has a market-oriented economy characterized by a high level of foreign trade and a reputation for strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America. Chile deepened its longstanding commitment to trade liberalization with the signing of a free trade agreement with the US, which took effect on 1 January 2004. The United States-Chile Free Trade Agreement is a free trade agreement between the United States and Chile signed on June 6, 2003. The pact came into force on January 1, 2004 after nearly a decade of negotiations with the US being Chiles main trading partner. On that date, tariffs on 90% of U.S. exports to Chile and 95% of Chilean exports to the United States were eliminated. The agreement also established that Chile and the U.S. will establish duty free trade in all products within a maximum of 12 years (2016). In 2009, bilateral trade between the United States and Chile reached US$ 15.4 billion, a 141% increase over bilateral trade levels before the U.S.-Chile FTA took effect. In particular, U.S. exports to Chile in 2009 showed a 248% increase over pre-FTA levels. Chile claims to have more bilateral or regional trade agreements than any other country. It has 57 such agreements (not all of them full free trade agreements), including with the European Union, Mercosur, China, India, South Korea, and Mexico. Canadian-Chilean relations reached an important milestone in 2007, with the 10th anniversary of the Canada-Chile Free Trade Agreement (CCFTA). Signed on December 5, 1996, and implemented on July 5, 1997, the CCFTA is a comprehensive agreement that covers trade in goods and services, as well as the bilateral investment relationship. The CCFTA was Canadas first Free Trade Agreement (FTA) with a South American country, while

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HOW THE HEALTH OF LATIN ECONOMIES IMPACT for Chile it was the first comprehensive FTA concluded with any country. Since the CCFTAs
entry into force a decade ago, bilateral trade in goods has increased by 226%, growing from $718 million when the CCFTA entered into force in 1997 to $2.34 billion in 2006. Bilateral trade in services reached $164 million in 2005 (the latest year for which statistics are available), and Canadian investments in Chile reached $5.17 billion in 2006.

The Australia-Chile Free Trade Agreement (FTA) is a significant market opening agreement which will result in the immediate reduction of tariffs on 97 per cent of goods currently traded. Tariffs on all existing merchandise trade between Australia and Chile will be eliminated by 2015. The Australia-Chile FTA was entered into on 6 March 2009. The AustraliaChile FTA eliminates immediately Chile's tariffs on almost 92 per cent of tariff lines covering 97 per cent of goods currently traded. This includes Australian coal, meat, wine and key dairy exports and all other industrial goods of interest to Australia. The FTA will strengthen commercial links between Australia and Chile. The FTA covers trade in goods, services, and investment and is liberalizing with commitments that go beyond both countries WTO commitments. The European Union and Chile also recently signed a comprehensive association agreement giving Chiles goods free access to the European market of 400 million people. The agreement covered all aspects of bilateral trade relations. Chile and South Korea also signed a free trade agreement in October 2002. This came after 2 years of negotiations and marked South Koreas first trade agreement with a foreign country. As part of the FTA, South Korea will eliminate tariffs on Chilean manufactured goods, with a few exceptions. In return Chile must end

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HOW THE HEALTH OF LATIN ECONOMIES IMPACT tariffs on 66 percent of South Koreas exports to the country. Chile is currently in negotiations with Singapore as well as part of its efforts to reach out to the countries in the Asian Pacific Economic Cooperative. Over the past seven years, foreign direct investment inflows have quadrupled to some $15 billion in 2010, but FDI had dropped to about $7 billion in 2009 in the face of diminished investment throughout the world. In December 2009, the OECD invited Chile to become a full member, after a two year period of compliance with organization mandates, and in May 2010 Chile signed the OECD Convention, becoming the first South American country to join the OECD.

Suggestions for Lasting Growth I feel that Chile is already on its way for lasting growth by establishing trade agreements with various countries as well as having very diversified imports/exports. My only suggestion is that they continue making agreements and eliminating tariffs to help increase their presence in the global trade market.

Conclusion
Over the past few years, Latin America has undergone dramatic political and economic change. Much of the Latin American regions were characterized by volatility and risk scandals, crises and hyperinflation dominated the news. Investor was mostly dedicated merging market funds. Global asset allocation models as a general rule did not reflect any consistent interest in Latin American exposure.

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HOW THE HEALTH OF LATIN ECONOMIES IMPACT Then the last few years, Latin America has seen a complete transformation in the investor sentiment. Stable growth, lower market volatility, low inflation, declining interest rates and lower unemployment now provide the foundation for long-term growth in countries like Brazil, Mexico, Chile and Peru. Latin America sustained economic strength has impacted the global economy greatly, which has increased political stability and nurtured the growth of the middle class demographic. This amazing turnaround has been tremendous for investors. There is a great demand for yield globally at the moment, so much so that Latin America are seeing more clients investing into Brazil, Mexico, Chile, and Peru. Latin America was where the economic and political history seemed to be spotty in the last ten years, now Latin America, as an investment destination seems assured for the foreseeable future.

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