LATAM COMPILATION 2015 New times for Latin America BARCELONA BOGOTA BUENOS AIRES LIMA LISBON MADRID MEXICO MIAMI PANAMA QUITO RIO J SAO PAULO SANTIAGO STO DOMINGO Contents Prologue by José Antonio Llorente 3 Latin America: structural reforms in 5 the face of a business change of cycle Justice in Latin America as an 39 essential factor for development The Latin American population in the 59 United States: a “sleeping giant?” Towards where should the strategic 75 relation between the EU and Latin America and the Caribbean move? Latin family businesses: more 115 governance, better enterprises by Manuel Bermejo, Director of Executive Education and Professor at IE Business School The multilatinas by Ramón Casilda, 153 Professor and Iberoamerican businesses consultant The role of multilateral organizations 191 in the economic and social development of Latin America LLORENTE & CUENCA 211 Prologue Currently, Latin America operates in a changing international context in which the Chinese economic slowdown and the negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the European Union (EU) and the United States and the Transpacific Partnership (TPP) between the EU and the Pacific Rim countries have increased its complexity. Each region needs to take its corresponding position in the world and play its role in order to achieve a comprehensive development. In order to be competitive in this environment, Latin America must address a plan of structural reforms to put forward solutions and alternatives to the development slowdown affecting the whole region and thus avoid getting stuck in the “middle income trap”. All the reforms must be comprehensive and multidisciplinary, and governments should avoid implementing partial reforms to solve the problem to a degree, instead of completely removing it. This is the case of the various legal reforms that most Latin American countries have addressed. Considering the efforts that these nations made to carry out these reforms, the results have been disappointing. However, their implementation shows that both the population and the institutions are aware of the need to complete these reforms, which is in itself a first important step towards the development of the region. The reforms that the region requires should cover all areas of action to foster development in the countries which make up the region. Justice is an important development tool, but not the only one and, thus, a reform in that area would not automatically entail the economic growth of the region and would not cover all the needs of Latin America. Latin America is ready to identify all the development and seize progress opportunities to stop being the region of the missed chances. It is the time to put on the table the necessary strength and efforts to become competitive and take build on the momentum provided by the Multi-Latin corporations and SMEs that are starting to grow, turning them into regional representatives and relationship facilitators. Innovation shall be the main objective that all countries need to promote. The truth is, the environment will require the region to adapt to a market in which commodities will neither be the only, nor the main source of growth. Moreover, Latin America must take advantage of the presence of its fellow citizens in the U.S. a country which offers various opportunities for development. Hispanic population is the largest minority in the country and, therefore, the relation between Latin America and the U.S. is crucial. In the deepening of relations, Europe plays a key role thanks to the existence of cultural ties, a common language and shared values that have enhanced a relation that goes beyond the economic dimension. The relationship between the EU and the Community of Latin American and Caribbean States (CELAC) has to move in a new direction, seeking to generate a greater trust among both regions and thus turn the EU-CELAC relations into a strategic alliance which promotes the development and growth of both regions. Therefore, Latin America must face this dynamic cycle and advocate for change and innovation, reforms and the deepening of relations as the foundations on which its development and prominence in the international arena should be built. We need to make the efforts and have the willingness to continue fostering the development and growth of the region. It is every- body’s work. José Antonio Llorente Founding partner and chairman Latin America: structural reforms in the face of a business change of cycle Madrid , April 2015 LATIN AMERICA: STRUCTURAL REFORMS IN THE FACE OF A BUSINESS CHANGE OF CYCLE 1. INTRODUCTION “The party of high oil prices and low interest rates is over. We are 1. INTRODUCTION entering a storm from an economic point of view… Besides the fall in 2. SIGNS OF A CHANGE OF CYCLE oil prices, the United States will soon increase their interest rates. In 3. A NEW REFORMING CYCLE this context, all currencies, included those of the developed countries, 4. CONCLUSIONS are depreciating against the US dollar... There is no doubt: hard times are coming, times of great volatility and tough adjustments where emerging economies will have to make a difference from one another in order to get out as soon as possible and dented as little as possible from the international turbulence”. This text, written by Leo Zuckermann, analyst of the Mexican newspaper Excelsior, only confirms a feeling that is being gradually extended through Latin America. We are witnessing a cycle change, an end of an era in front of which the Latin American countries must react in order to adapt their economies to the new global and regional scenario. The slowdown and downturn signs are very obvious, caused by lower commodities prices, mainly set off by the economic downturn in China, the increase in external financing costs and prospects of fewer capital inflows. This, added to the own structural problems of the Latin American economies and to the global change that is taking place regarding the transfer of wealth from the Atlantic to the Pacific Ocean, forces the countries of this region to undertake far-reaching reforms in order not to fall behind in relation to the emergence of other regions such as sub-Saharan Africa and many Asian countries, nor lose ground in the reduction of poverty and inequality. In fact, Latin America is not going through an unknown phase but through an experience which, with its nuances and specific features, had already occurred. Historically, the rise in international prices of commodities the region exports used to create a “virtuous circle” where income increased and trade deficit decreased becoming surpluses. This way, states received greater financial means thanks to those new revenues and expanded the public spending. Along this line, the Argentine economist, Ricardo Arriazu, points out that this initiates “a second stage in which demand (and production) increase in other sectors than automotive and agricultural machinery producers in Argentina’s case), and since production rises, employment and wages grow; at this stage the public sector benefits from a new increase in tax collection and imports start to grow. At the third stage, the process is accentuated due to the capital inflow, attracted by the greater economic growth and the improvement in the fiscal and external accounts. At this stage, public spending expands rapidly because governments feel confident due to the improvements in tax collection and some countries let their currencies appreciate due to the great increase in their reserves”. The boom ends when international prices start to fall and the increase in public and private spending results in 6 LATIN AMERICA: STRUCTURAL REFORMS IN THE FACE OF A BUSINESS CHANGE OF CYCLE a deterioration of the internal America had to reinvent itself fiscal accounts and the external again. The commitment to neo- balances and all added to a fall in liberal reforms (the Washington the foreign investment. Consensus), to external openness, the reduction of tariffs, the Latin America’s history is indeed stimulus to trade, the reduction of a succession of serious crises, inflation and deficits (by reducing followed by major adjustments the size of the State through that precede booms linked to privatization) allowed the region the high prices in commodities, to be ready (with its “homework accompanied by speculative done”) to be able to benefit from “bubbles” that end up exploding and strengthen during the in the midst of scandals of boom of the “Golden Decade” corruption and delegitimization (2003-2013). First of all, during a of the State. After the traumatic virtuous six-year period (2003- beginning of the 19th century 2008) followed by, after the fall in (1810-1850) Latin American 2009, a new growth period despite States gradually settled in and the international turbulences the economy developed based (2010-2013). As Rebeca Grynspan, on the growth of international current Ibero-American Secretary trade and on the links with a General, states, “in the last 10 Western Europe that demanded years more than 50 million Latin American export people escaped from poverty. The products for their increasing majority benefited from the labor industrial production and market dynamism –in particular the population growth. The men’s remunerations, from 25 to 1929 crash forced the region 49 years old, in urban areas, in to reinvent itself for the first the region’s services sector– and time and to promote import to a lesser extent through social substitution industrialization, transfers and the demographic which was accompanied by a dividend”. In these years, a whole academic production series of solid economic and giving it intellectual support financial policies, together with (Raúl Prebisch’s ECLAC school the tailwind of the commodities of thought). “super cycle”, enabled Latin America to grow at an average The new system was supported rate of 4,2% since 2003.