The document analyzes the political, economic, social, and technological (PEST) factors affecting Latin America in 2012. It finds that while the region faces challenges like weak institutions and infrastructure, overall economic growth is relatively positive at 4.1% due to stability and emerging markets. The largest economies like Brazil, Mexico, Chile, and Colombia are leading growth, while countries such as Venezuela and Argentina face greater economic and political instability. Innovation and addressing weaknesses will be important for the region to sustain its progress.

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LATIN AMERICA STRATEGIC P.E.S.T ANALYSIS - 2012 -
LATIN AMERICA
STRATEGIC P.E.S.T ANALYSIS
2012
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I. INTRODUCTION
Latin America has come of age as a region of relative political and social stability that is
attracting ever-greater attention in a global context of financial and economic crises in
the more developed world. This is despite the many challenges that the region
continues to face in its efforts to attain development while consolidating and expanding
social achievements.
It is in this scenario that former Brazilian President Luiz Inácio Lula da Silva has been
fond of repeating that “this is Latin America´s decade”, and international economic
indicators would seem to bear this out. According to preliminary World Bank statistics,
overall economic growth in Latin America and the Caribbean will be 4.1% in 2012,
above the world average of 3.6% respectively.
The region’s relative stability, maturing markets and more dynamic growth compared to
developed nations has also made it an attractive place for investments from those parts
of the world. Thus, the dynamic in the region has gradually shifted toward investments
with a more long-term vision and involving greater transfer of technology and
knowledge.
This growth in all areas, both commercial as well as in terms of public services, is
naturally reflected in the rising use of new technologies of all types, which are reaching
the region at ever-faster paces, practically eliminating the delays in uptake that used to
characterize such progress. This is especially so with Information and Communication
Technologies (ICTs), as they allow countries and enterprises to “leapfrog” into the new
world economy without the tremendous capital expenses that would have been required
in the past.
However, it should also be noted that this development is not happening at an even
pace throughout the region and that, in fact, the larger and relatively more sophisticated
markets of South America and Mexico have clearly broken away from the pack.
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II. REGIONAL OUTLOOK
The economic outlook for Latin America shows a relatively positive picture for the
coming years, there is anyway some uncertainty linked to the actual slowdown in
Europe and the United States, both important trading partners.
However, in some commodity-exporting countries such as Chile and Brazil, where
economic growth is forecasted to reach 5.1% and 2.4%, respectively, in 2012 some
signals of overheating with inflationary pressures have already started to accrue and are
becoming increasingly worrisome in the region.
In terms of competitiveness, many countries have experienced significant
improvements. Mexico, Peru, Bolivia, and Brazil register the largest improvements,
while Panama, Ecuador, Argentina, Barbados, and Uruguay have seen more moderate
progress. The rest of the countries in the region have either remained stable like
Colombia, or have slightly declined. In order to keep the positive momentum going,
Latin America will need to address some of the persistent challenges that constrain its
competitiveness. While the region is vast and heterogeneous as a whole, four main key
challenges that affect each country differently can be highlighted:
 Weak institutions with high costs associated and lack of physical security
 Poor development of infrastructure
 Inefficient allocation of production and human resources; and, increasingly
 Lack in innovation vis-à-vis more developed, but also emerging, economies
Addressing these challenges in the next decade will be crucial to ensure the economic
and social progress of the following countries that lead the region:
i. Mexico has one of the highest improvements in the region. The country’s efforts
to boost competition and its regulatory improvements that facilitate
entrepreneurial dynamism are contributing to an improvement of the business
environment. This development, coupled with the country’s traditional competitive
strengths such as its large internal market size, fairly good transport
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infrastructure, macroeconomic policies, and strong levels of technological
adoption have led Mexico to improve its competitive edge. However, the country
still suffers from organized crime; security concerns. Adopting and implementing
policies to boost ICT, energy, and retailing, along with additional reforms to
render the labour market more efficient are still needed to increase the efficiency
of the Mexican economy. The current overall poor quality of the educational
system, insufficient company spending in R&D, and limited innovation capacity
can jeopardize the future ability of the country to compete internationally in higher
value-added sectors.
ii. Panama, has remained relatively stable in most competitiveness drivers. Overall,
it benefits from important strengths in its efficient financial market, solid transport
infrastructures, and very good technological adoption, especially through FDI.
Except these advantages, the country still faces important weaknesses in terms
of education. Panama also struggles with rigidities in its labour market, low levels
of public trust of politicians, insufficient judicial independence, and favouritism in
the decisions of government officials a situation that has deteriorated in the past
years.
iii. Venezuela continues to fall because of quality of the country’s public institutions.
This dismal showing, coupled with severe weaknesses in its markets efficiency
and deterioration in the macroeconomic stability have led the country to feature
at the bottom of the region and among the least competitive countries in the
world. Despite being at the forefront in its tertiary education enrolment rate, the
overall quality of the educational system is weak. This, added to a lack of
sophisticated businesses and poor innovation potential, critically constrain the
competitiveness performance of the country.
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iv. Costa Rica, is suffering of the macroeconomic imbalances seen in its high
budget deficit and inflation and a scarcity of financial resources for the private
sector. With fairly nice forecasts of around 4.5% GDP growth rates for the
coming years, the country still depicts a strong overall position in the region
thanks to its friendly trade policies, with low tariffs, few constraints on FDI, and its
strong educational system. Costa Rica presents strong levels of technological
adoption with many companies in high-tech industries, as well as solid business
sophistication and innovation. All these factors can generate significant benefits.
v. Colombia experiences an improvement based on its competitive strengths
clustered around a stable macroeconomic environment; an improving
educational system with a high level of enrolment and a large domestic market.
On the other hand, despite the sustained efforts of the government to improve
social pacification and eradicate organized crime, security concerns remain very
high on the list of factors dragging down its competitive potential. In addition,
improved regulation to foster domestic competition and facilitate a more efficient
allocation of resources, as well as further investments to improve the transport
infrastructure, are needed.
vi. Peru improved its macroeconomic stability and strengthened its competitive
edge thanks to a better control of inflation, a reduction of the government deficit,
coupled with a friendlier environment for entrepreneurship. The country still faces
a number of important challenges to solve as a weak public institutional
environment, an educational system in need of higher quality, and the very low
level of innovation. The impressive economic outlook for the next years, with
GDP growth rates forecast of 6% in 2012 thanks to high mineral prices, provides
a good opportunity to undertake the necessary investments and reforms to
address its pending competitive limitations.
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vii. Chile: remains the most competitive economy in the region. Early measures to
open and liberalize its markets by introducing high levels of domestic and foreign
competition, a relatively flexible labour market, and one of the most sophisticated
and efficient financial markets have also helped the country to maintain its long-
term growth prospects in the past decades. As Chile moves quickly toward
higher levels of rent and the next stage of development, companies with low
investment in R&D and a weak capacity for innovation act in an innovation
environment characterized by relatively low-quality scientific research institutions
and weak university-industry collaboration in R&D. Making sufficient progress on
this front is the major challenge that Chile will face in the next decade.
viii. Brazil benefits from several competitive strengths, including one of the world’s
largest internal markets and a sophisticated business environment. Moreover,
the country has one of the most efficient financial markets and one of the highest
rates of technological adoption and innovation in the region. On a less positive
note, Brazil still suffers from weaknesses that hinder its capacity to fulfil its
tremendous competitive potential. The lagging qualities of its overall
infrastructure despite its Growth Acceleration Programme (PAC), its
macroeconomic imbalances, the poor overall quality of its educational system,
the rigidities in its labour market, and insufficient progress to boost competition
are areas of increasing concern.
ix. Uruguay leverages its traditional competitiveness strengths thanks to its
transparent and well-functioning public institutions, its high rates of education
enrolment and its stable policies that encourage FDI. However, despite this
progress, inflationary pressures and the reduction of the national savings could
bring significant macroeconomic distress if not properly tackled. Moreover, as
Uruguay keeps growing and moves steadily toward a higher stage of
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development, policies to increase domestic competition that would incentivize
higher business-sector investment in R&D and innovation capacity will become
increasingly important.
x. Argentina is getting more and more unstable. The extraordinary competitive
potential of the country that benefits from a large domestic market size and a
population that has a high level of education remains unfulfilled because of both
a lack of trust in its institutions and the large inefficiencies in its allocation of
goods, as well as labour and financial resources. Excessive red tape that
benefits the expansion of the informal economy and high barriers to trade bring a
lack of confidence in the financial system. The progressive deterioration of the
country’s macroeconomic stability and a two-digit inflation rate, casts additional
worrisome uncertainties about the sustainability of its economic growth. Unless
these weaknesses are addressed, this situation could lead the economy back
into the erratic fluctuations of the past, characterized by high expansionary
periods followed by deep recessions.
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