Greg Mills & Michael Spicer
The full text of an article on the relevance of the Latin American growth and development experience, which appeared in The Sunday Times, 12 April 2009.
Is there a formula for growth common among emerging markets? Is it possible to enjoy high growth and at the same time reduce social inequality? Are there common approaches to dealing with the global financial crisis?
These questions were in the foreground of the minds of a recent visit by a group of African opinion-formers to Costa Rica, Salvador, Panama and Colombia, which found the following typology of these high-growth economies:
Security is a Critical First Step: It is axiomatic that growth begets security and vice versa, but it is impossible to make progress without improving the basics. Indeed, a crisis – economic or security – was in each case the spur for widespread reforms, just as the current global financial crisis is focusing attention in this way. Achieving security means rooting out corruption: in Colombia’s case this has involved military and intelligence leadership taking regular lie-detector tests, and has resulted in the expulsion of 10,000 security force members, with 700 in jail too for human rights abuses. According to Colombia’s Vice-President Francisco Santos, ‘The basis of everything is security.’ Such arrests are, he says, ‘a cost you have to pay, otherwise it will only lead to wider corruption.’ In Colombia, even after seven years of improving stability measured by a radical drop in violent crime, guerrilla attacks and kidnappings, politicians from national to municipal level win and lose their posts on their delivery of security.
Accept Differentiation: There are different formulas for growth and development, depending on circumstance – in Latin America as in Africa and Asia. For example, Costa Rica is a 120 year old democracy which has not had an army since 1948. Colombia has doubled its defence spending to four percent of GDP over the past seven years in a (largely successful) effort to defeat the guerrillas and problems of criminality. Panama and Salvador have both dollarised economies, the former for over 100 years. But all have experienced, until the current crisis, high rates of growth this decade – in Panama’s case over nine percent in 2007, Costa Rica 7.3%, Salvador 5% and Colombia 7.5%. Whereas Panama’s growth has been built on a unique combination of its location and canal and its tax-free privileges, the Costa Rican and Salvadorean stories are about attracting manufacturing and services industries, creating over 50,000 direct jobs in each of these countries in the last decade through export-led growth.
Invest for the Long-Term: In each case, investment in education and health care was cited as a priority in countries which price themselves on their work ethic. ‘Colombians are smart, educated and work like hell’ says Karl Lippert of SAB Miller, the largest investor in the country. The Vice-President of Salvador, Ana Vilma de Escobar, puts it slightly differently. ‘We do not have oil or minerals, but we have people: they are our greatest resource.’ Or as Bill Merrigan, head of Proctor & Gamble’s Americas’ back-office 1300-employee operation based in Costa Rica says, ‘If you ask for a miracle, the joke goes here, the Costa Ricans say ‘when do you want it delivered’. They work so hard and are so driven.’
Social Cohesion is Important: While widening wealth inequality is problematic across the region, to an extent this has been dissipated by policies which have led to marked declines in poverty: since the current generation of reforms began from 55% to 18% in Costa Rica, 65% to 40% in El Salvador, and 57% to 44% in Colombia. This has been achieved partly through social grants made on condition of school and clinic attendance by family members. The rise of Hugo Chavez in Venezuela, the high priest of regional radicalism, and his disciples from Bolivia and Ecuador to Nicaragua, illustrates the cost of not addressing issues of inequality and social cohesion, though this alternative is bound to be even more costly. As Salvador’s Vice-President observes in this regard, ‘We went into a civil conflict because we had people who did not have their basic needs met.’
Politics Matters: Many of the economic problems are primarily political. Not only does this require building respect for and capacity in institutions (which at its root requires dealing with political patronage and professionalizing the civil service), but devolving power. More funding is devolved to mayoral and municipal levels, and there is consequently great interest in local level elections.
Economic Solutions Require Better Policy – Incentives and Institutions: The experience of these Latin American states in attracting investment suggests that incentives work. There is widespread use of consistently-applied tax holidays ranging from eight (Costa Rica) to 30 years (Colombia), along with other measures including exceptions on raw materials and equipment and components, and the expediting of work permits. Intel’s signal 1997 investment in Costa Rica had, however, generated $6 in personal income tax for every $1 of tax relief. Of course, policy is not enough without the protection offered to investors by sound domestic, democratic institutions. Specialist institutions have also been created to promote investment and exports. From CINDE in Costa Rica to Colombia’s Proexport, the professionalism and energy of their staffers is impressive – usually young, foreign educated, multilingual, and equally as comfortable with the private sector as government, responsive and proactive, according to their business clients, n matters from visas to after-care.
Big Ticket Investors are Symbolic – and Important: Growth has been in every case led by foreign direct investment. In this, a large first investor has been symbolically important: such as Intel in Costa Rica (which now makes one-quarter of the world’s Pentium chips), and more recently the $7 billion investment by SAB Miller in Colombia. Merrigan: ‘The first group did Costa Rica a great service by succeeding. And the presence of companies coming in an succeeding has helped to create the right business environment for others.’
Populism is No Solution: As Nobel Laureate President Oscar Arias observed with regard to the rise of Chavez and the other regional Bolivaranistas, ‘No-one knows what it is about, not even Chavez. It is a mix of empty rhetoric, populism, xenophobia, anti-Americanism and demagoguery. It lives in an anti-American and not a post-American world.’ A more cynical if less political view is offered by the head of SAB Miller’s head in Bogota: ‘The price controls in Venezuela have caused lots of shortages which offers us a market opportunity, especially with his threat of nationalising the major brewer. But it is difficult to do business with a country where the currency is volatile and decisions are taken so arbitrarily.’ In effect, Venezuela is exporting growth that should be benefiting its citizens to the profit more of its neighbours.
Infrastructure is Not the First Step: While infrastructure spending is recognised as necessary for long-term growth, each of these countries has found that investors demand physical and rule of law security. In most (Salvador is the exception, having taken soft loans a decade ago to build a top-class international airport and port at La Union) basic (notably road) infrastructure has lagged some way behind demand, an aspect cited by most policy-makers as a failure, but one that they are turning their attention to now especially as a stimulus in the current environment. Panama’s $5 billion widening project of the canal, due to be completed in 2014, is something of a regional ‘one-off’ in this regard.
The Devil is in the Detail – Leadership is Key: The common features between good leadership are the focus on identifying priorities and hands-on management. This includes identifying and admitting one’s mistakes in developing solutions. Colombia’s Vice-President Santos willingly lists more than ten policy failures, from judicial accountability to youth unemployment – but he can also point to what government is doing about each of these areas. Arias has sage advice in this regard: ‘To be a leader you need to have clear objectives, and you need to be honest in telling people what you are going to do no matter how unpopular this might be. Because you need to tell people what they need to know, not what they want to hear.’ Colombia’s President Uribe spends every Saturday staging all-day televised consultations across the country, where the audience has a chance to directly pose questions. This way he has covered most of the 1000 municipalities and 32 regions in seven years. Though it portrays the president in a positive light, reflected in his high ratings, it aims at more than just PR and the evidence is of a genuine feed-back loop. While President Mbeki’s sporadic imbizos were principally about spinning an otherwise introverted president, Uribe has been willing to make return visits to report-back on his promises.
Success has an International Dimension: Improving competitiveness, expediting global integration, delivering security, attracting investors and carving a more positive international image go together. This goes beyond trade liberalisation to include use of free trade zones and incentives. It requires attracting – through direct presidential intervention – multinational companies to set up operations in their countries. At its heart, though, it means accepting globalisation as an opportunity to be exploited not a challenge to be avoided, in contrast to influential South African voices arguing for a move to a more closed, protectionist economy.
The Common Theme of Competitiveness: Central American leaders have competitiveness benchmarks, from the World Bank’s Doing Business Indicators to those of the World Economic Forum at their fingertips, always aware of their regional rankings. And they know, too, that wealth creation is not just about increasing production through increased investment and exports, but about capturing the margins available in the system – adding value and jobs by seeking new opportunities in manufacturing to back-officing and tourism.
For Africa the relevance of these lessons is two-fold: First, an acceptance that a more prosperous future depends on the three pillars of economic growth – exports, investments and productivity. Second, little can be accomplished without providing security of property and people, and building responsive and competent institutions.
Dr Mills and Mr Spicer respectively head the Brenthurst Foundation and Business Leadership SA, organisers of the Central American study-tour.

 

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