Latin America in the Global Economy

THEODORE MORAN: So ladies and gentlemen, welcome to today's presentation on Latin America in the world economy. We all know that just three days ago the IMF lowered its growth rate estimates while noting the wide diversity among the different countries. I think we're not going to be trying to make specific predictions or discussion of microdata but to be talking about a little bit broader structural issues.

But before we can speak about anything, we have to have introductory remarks, which says welcome, and please completely turn off, not just put on vibrate, your electronic devices. That's to avoid interference with the sound system, so you really have to turn them completely --

MR. : Except pacemakers -- (inaudible) -- (laughs) --

MORAN: Thank you. Thank you for reminding me. If you would like to use an electronic device today, please do so outside of the meeting room. An overflow room with a live feed is available. So if you are in charge of ongoing operations that you have to monitor on a real-time basis, you can go out and still watch us.

And the final reminder is that our meeting is on the record.

Claudio, I'm going to lead off with you. There are many ways of saying the same thing. When the United States catches a cold, Latin -- sneezes, Latin America catches a cold. When the international financial system shows some weakness, Latin America shows huge banking crises. But we didn't really have that coming out of the last financial crisis. We actually had a fairly resilient reaction in Latin America. Would you give us some perspective on that, please?

CLAUDIO LOSER: Yes. I -- first of all, thank you very much for inviting me and for having me participate in this presentation. I'm sorry for the bad remark about my pacemaker, which is a true event in my case.

Now, in terms of a perspective, I want to start with a warning, and that is that complacency is one of the great dangers that Latin America has. And during my previous jobs, I had the moments where I also -- as a member of the IMF -- I also practiced complacency regarding Latin America during the Asian crisis. So in this sense, whatever I say that is very positive -- and I will be very positive -- we should be aware that Latin America has this great capacity to go back to having a great time without really worrying too much. I don't think this will happen.

Having said this, I would say Latin America has changed enormously. And although Latin America was growing before the big recession at a lower rate than the world and it was staying behind, the last few years have been years where Latin America has shown that it has learned the lesson. Latin America is not growing at the fantastic rate. Brazil, the largest economy there, is not helping, in the sense that it has been growing at a rate of less than 2 percent. And Latin America may grow at 3.2 percent this year and a little bit more next year.

But what has happened is that over the last 10 years, there has been a change in the mindset. People don't want inflation. People want stability. And this is very much in Latin America the macroeconomic element. There has been something that is fantastic for many of the countries; that is, that we produce in Latin America a lot of primary commodities and they have been doing very well, thanks to the miracle of Asia. And this is also something that one has to have in mind, that the commodity prices in terms of trade have improved by 30 or 40 percent in recent years, and this is one important thing, but also, Latin Americans have learned the lesson.

I say complacency is the danger because we may fall into it, but at this moment, with a few exceptions that we can go into at a later stage, the main countries of Latin America have been doing very well in terms of macroeconomics, something that the Asians have been doing for a while.

MORAN: Before I go to Antoine, let me follow up on a specific question. When we had the subprime mortgage crisis here that affected us so much, but we saw villages and municipalities in Sweden and, I mean, you know, far-flung places had bought a lot of this toxic material, and based on past evidence, we would have thought, uh-oh, let's watch out for the Latin American banking system; there's going to be a lot of bad assets on -- but that wasn't the case.

LOSER: We in Latin America had our bad banking events, if I can call it that way, from the 1980s -- not to speak of the '70s, when we were doing all sorts of crazy things. We had the crisis in Chile in the early 1980s. We had it in Venezuela in the mid-'80s to the early '90s. We had it in Argentina. I can say many things about my own country there. But in terms of the banking crisis, we had it --

MORAN: (Inaudible.)

LOSER: -- the Mexicans had it in the 1990s. And the Latin Americans, one way or another, put a system of supervision that was very strong. It resulted in a system that is small. By all standards of any other region, Latin America has the smallest banking system, proportion of GDP. That is a bad thing in principle, but it is good in this case, with a lot of the type of supervision that the Europeans and the United States should have had before the great -- the big recession now. So I think this is the main element that explains it.

MORAN: Interesting.

Antoine, you actually coined the phrase "emerging markets," and that gives me a segue to say, how do you place Latin America -- again, with all its diversity, so we can't generalize too much -- within the context of other emerging markets? And could you give us a little perspective on this?

ANTOINE VAN AGTMAEL: You want me to give you scorecard? (Laughter.)

Well, let me start by saying, I agree with Claudio that that's -- you can certainly say that really through 2008, in -- really since the change of the century, Latin America in many ways, you know, hit the sweet spot. (Chuckles.) And that was a combination of, as you already said, getting their macroeconomic house in order.

I mean, basically, they rhetorically often resented the Washington Consensus and then embraced it with a vengeance. (Chuckles.) And that made a real difference. That was one factor.

But there was also tail -- a tail wind. And the tail wind, as you said, was China. Huge difference.

Now, what that means is, in terms of scorecards, in terms of macroeconomic policies, in terms of resiliency, I would give them very high marks.

But there's another side to that. And that may show up in the coming years because now -- at least I believe -- growth in China is going to go from a range of 10 (percent), 12 percent to a range of 6 or so percent. That makes a huge difference for what Latin America was so strong at, whether it's copper, whether it's iron ore, whether it's soy beans, whether it's -- (inaudible) -- you can -- commodities was their strength. But because it was their strength -- and I hate to say this as a -- as a Dutchman by origin -- they also suffered from a kind of Dutch disease, as it is -- I find that word horrible -- (laughter) -- but, you know, what happened was that they didn't focus on other sectors of the economy.

So in terms of the scorecard, to go back to that, if I look at competitiveness, if I look at productivity, if I look at equality of educational opportunity, if I look at innovation, if I look at diversification of the industrial base, they had a scorecard -- if you go -- if the first ones were an eight out of a scale of 10, here I would put them at a four to five. So that's less good.

MORAN: Let me follow up. Could you focus a little bit on Brazil because you -- we talk about emerging markets, BRICS. The first one, B, is Brazil. And how do you see that comparing with some of the other BRICS or some of the other more successful developing countries?

VAN AGTMAEL: Well, let me take them one by one. First of fall, China is many times bigger, both in terms of population, in terms of GDP. Also, they have done far more in infrastructure than Brazil has done. And so in -- they opened up in a way that was far greater than Brazil. Brazil opened up, but not as much as China did. So -- and their growth rate was never, except for a year or two, in the range of the growth rate of China.

Russia: Russia is more dependent on commodities than India. India, you could make the argument that -- and by the way, as a result, coming back to China, China really became -- and I -- there are some qualifications to that because I don't -- I think actually China is losing competitiveness at the moment, but they certainly became the manufacturing center of the world in a way that Brazil never did. India became the (back office ?) center of the world in a way that Brazil never do, although they do some good things there. And that is a level of innovation that you don't find in Brazil.

So I think I've hit the other three.

MORAN: Claudio, do you want to focus on Brazil for a moment?

LOSER: Yes. I want to talk about Brazil within the context of Latin America. There's another country we have not mentioned, which is Mexico, which is exceedingly important there, which is -- I think it has more prospects -- better prospects than Brazil, in my view, at the moment. But we can --

MORAN: I'll come back to that.

LOSER: Yes, we'll come back to that. (Chuckles.) But Brazil has grown enormously. If we read today's Washington Post, there's a long article about the fact that they will become the largest producer of soybeans in the world in a few years. And of course this is great. This is a gift of nature. There's also oil -- there is oil, "pre-sal," which is this oil at great depths, that they have been very happy thinking of how to spend and -- how to spend the proceeds without investing the money to get the oil out. That is a continental problem that we have.

But fundamentally, Brazil has the problem of technology and the problem of education, although it's improving. It's in -- fantastic in terms of the fight against poverty. All these things are exceedingly important.

But Brazil has one characteristic that none of the Asians have, and that is that among the major emerging economies, it has one of the lowest levels of savings and investment. It is -- actually, within Latin America, it is one of -- among the large countries, it's number one. Then comes Mexico. The distant third is Argentina, Colombia, Venezuela. They have a very low level of saving and investment. It's either that the numbers are wrong or they have been very productive and they've been helped by a lot of things.

But I think that Brazil, although it's tremendously important, it's actually -- at current prices, it's the second-largest economy among emerging economies today, not according to PPP, but it is -- it has a serious problem in terms of its future, in terms of productivity and in terms of the capacity to increase savings and investment.

VAN AGTMAEL: Yeah. I actually agree with Claudio that basically Brazil, you could say, benefited from the tail wind of the fumes of China, and Mexico suffered --

MR. : Yes.

VAN AGTMAEL: -- a headwind from the fumes of China because it made China less -- (inaudible).

Now what is happening now? What is happening now is, as China is slowing, basically the tail wind won't be as strong for Brazil. They will have to focus on ways to become more competitive. And Mexico, which in terms of wage levels, was way above China for a while, despite the fact that they had this advantage of being close to the U.S., now is regaining that advantage, as -- as I believe, U.S. manufacturing will undergo a renaissance over the coming 10 years. That will be disproportionately good for Mexico, in addition to the fact that they are more competitive relative to China. So I agree.

MORAN: Let me bring --

VAN AGTMAEL: But of course Brazil is -- we have to start with the fact that Brazil is very big, and Brazil should have had a leading role before that, but they screwed it up before.

LOSER: I agree.

MORAN: Well, let's come back to that, because I want to -- want us to go back to what policies we should favor in the post-Washington consensus environment or whatever we want to call -- I have done some research looking at the impact of foreign direct investment on the transformation of the Chinese economy, and then I did a comparison with Latin America. And what I -- what we found -- I use "we" because a lot of it was looking at -- other research had been done -- is that almost the entire high-tech export sector in China is, as we know, dominated -- dominated -- I mean, like 98 percent dominated by foreign multinationals. Very few -- I mean, we can name Huawei, Lenovo, HI AIR, I mean, just really a handful --

VAN AGTMAEL: Huawei's not foreign.

MORAN: What?

VAN AGTMAEL: Huawei is not foreign.

MORAN: No, no, no, we can name some indigenous Chinese companies that actually are exporters, but 96, 97, 98 percent of the high-tech end of Chinese exports are done by American, Japanese, Korean --

VAN AGTMAEL: Taiwanese.

MORAN: -- or Taiwanese or European multinationals. The value added is very small, so when you read the studies of how much of Apple is actually -- of the value added or of the profit is actually located in China as opposed to just assembling foreign components, that's not just Apple; that really extends across microscopes, across chemicals, across a whole range of electronics, et cetera. Point A.

Point B is, very few spillovers to local Chinese firms, and a lot of it can be explained by the fact that most Chinese firms are still state-owned enterprises that really aren't able to pick this up. So then we looked -- and this is drawing on the research of others as well as my own -- at both Mexico and Brazil, and you have much more value added in automobiles, in electronics, in chemicals, petrochemicals, in, you know, a range of industrial products, more value added by indigenous Mexican or Brazilian companies, and many more spillovers. I mean, spillovers is an econometrics thing. We don't -- we see the measurements, we see rises in productivity -- we don't exactly know where they are showing up.

But so you really have Latin American companies taking advantage of foreign investment in a way that China has not yet learned how to do. Does that strike you by surprise?

VAN AGTMAEL: I don't quite buy the thesis.

MORAN: Ah! This is going to be fun.

VAN AGTMAEL: (Laughs.)

MORAN: I'm sorry, I interrupted you, Claudio.

LOSER: Let me second Antoine's -- (laughter) -- I don't quite buy --

MORAN: We're ganging up on -- (laughter).

LOSER: First of all --

MORAN: We're on the record, so be nice. (Laughter.) You can't be too critical.

LOSER: We cannot be too critical of Latin America, of you. (Laughter.) Ah! No. You have described very nicely and very well a reality of Latin America incorporating foreign investment. Also there is an issue that there is Latin America investment going into developed countries, a very significant one.

Now, what I would say -- Latin America -- I've been working with other people in Centennial, a company I'm in, and together with the Inter-American Dialogue we've been working on that, on analyzing Latin America in terms not only of the macro but other things. We in Latin America have had a very poor performance in total factor productivity, not output per unit of labor, because capital has been growing, but we have not innovated, by far, in any way comparable to the NICs, to Korea and to Taiwan and the others, and actually with regard to China and others. So in this sense I think that Latin America, which is incorporating these things very well in terms of output, has not contributed in terms of basic research, in terms of total improvement. There may be issues of measurement.

So I think that Latin America is sort of integrating, well, Mexico, for sure, within the North America Free Trade Agreement, and here we have one of the authors here, with Carla Hills, certainly. We -- I would say Mexico did very well, then did very poorly, and now it's doing well again. And in this sense you have this effect. But I think there is a lot of work that has to be done.

VAN AGTMAEL: Well, a couple of comments. I think we cannot forget that while what you call the value added has been limited, it still has given rise to extremely profitable companies and to what we complain about here, which is that all those jobs moved over, an enormous creation in China. Now, that job creation has pulled a significant segment of the population out of really boring jobs into slightly less boring jobs, but jobs where you actually can learn.

MORAN: Yeah.

VAN AGTMAEL: And I would not agree when it comes to there not being connections. I mean, you go to Shenzhen or you go to -- you know, all these places, you go around these factories of Hon Hai, Foxconn --

MR. : Right.

VAN AGTMAEL: -- and you see that there is a vast network of local companies that wouldn't be there without that. These are local companies. And by the way, most of the foreign investment is not from the U.S., as Carla knows. It's more from Taiwan, and to some extent Korea, but Taiwan is by far the biggest exporter from China.

So -- and then, you know, in terms of innovation, I agree with Claudio, if you look at the number of patents coming from Brazil, you know, Mexican companies, and compared to Taiwanese or Chinese companies or Korean companies, we are -- I mean, in Latin America they are way, way behind. So something is happening there as a result of this.

And then process engineering. I mean, all of these people working in these factories learn a hell of a lot about process engineering that we are not learning anymore and they're not learning in Latin America. So I think actually the spillover effects I would say are pretty dramatic.

MORAN: Good, because I disagree. (Laughter.) Now, if -- if -- if we were to look at where both value-added and spillovers are the largest, we would find them in Singapore, in Malaysia, in Thailand -- Taiwan I'm including as kind of a developed country now -- and then Costa Rica, Chile, Mexico, less so in Brazil, and maybe we can come back to that. So I -- actually what I'm saying is I think our data can be reconciled.

But I don't find it that much in China. That may change if -- OK, here we just had the Chinese party congress and everybody's debating are they going to become more reformers, or a lot of pessimism -- no, they're actually -- we are -- some experts who are afraid they're going to get even more status.

I think that the recipe for China becoming a genuine, innovative, expansive superpower is to head in the direction of Singapore, not in the direction of, you know, Mao or -- (chuckles) -- yeah, heavy-handed industrial policy. I don't think that's going to -- going to get them, because what you find is the state-owned companies still are -- they don't do much R&D, they're -- they don't have good management systems, they don't have merit promotion. So they're a long way from the Malaysian, Thai, Singapore model.

But when you go to Guadalajara and you look at the little Silicon Valley or you go -- you and I were discussing over lunch -- you go to the avionics section between Sao Paulo and Rio, you see an awful lot of activity that's very promising.

Well, I'm supposed to be the moderator and ask you questions. (Laughter.) So tell me I'm wrong. No?

LOSER: (Laughs.) It's just that the measurement of productivity has shown over the last 20 to 30 years that Latin America has lagged behind. There has been enormous investment. Foreign investment has been huge in Brazil, in Mexico, in Chile, Colombia. What happens is that when you measure the contribution in terms of output, it doesn't appear -- with your eyes you see it, but with the measurement, it doesn't work. It is a conflict, in a way. But --

MORAN: We're going to go shortly to questions and answers from the audience, but let's -- Colombia, Peru, Chile and Argentina -- I mean, we don't want to just focus on Mexico and Brazil. What are your -- and these are different kinds of countries, but what are your perspectives on some of these other major Latin American countries?

LOSER: OK. Of course, if you look at the last 10 years, the country that has grown the most is Panama. But then there is some minor waterway that is being -- (laughter) -- widened there, and this may have some impact, so we'll leave that. The second one is Peru. Then comes Uruguay. Argentina is below that.

I would say that Chile, interestingly enough, over the last 10 years has not grown that much because it is sort of in a state of maturity, and in that sense, they've already -- they've already truly been accepted by the OECD -- (chuckles) -- in a way.

Now, I would say that Peru is a country that has been the most surprising in a positive way in terms of the transformation. Poverty is there. Inequality is there. Now, that's not just in the case of Colombia, but still you've had a transformation that is -- that is very, very significant. And I think that it is one of those cases that we can say is a success.

Colombia, with the -- hopefully, with the end of violence as -- I mean, the war that you had internally, is also doing -- I think, doing very well. They will have an excellent team of people working there at the government level and now (elects ?) coming up. It's doing better.

If I have to talk about Argentina, I can do it in a minute -- (laughter) -- or I can do it in several hours. (Laughter.) I become a little bit more emotional there. I only will speak positively about the --

MORAN: Give us -- give us the one-minute summary of several hours. (Laughter.)

LOSER: Yeah. I will not talk about the wonders of the Argentine wine, because I come from Mendoza, Argentina. (Laughter.) I will not do any advertising in this regard. (Chuckles.) However, I think that the -- Argentina is and has been consistently the country that has disappointed us one way -- one time after another. The capacity -- and I can say that for the record. The capacity to implement the wrong policies on a sustained basis -- (laughter) -- in the case of Argentina, as this also in the case of Venezuela, I would say, is enormous. And therefore, although it has grown -- it has grown nicely because of the tailwind, and it has grown nicely because the numbers that they have used are the wrong ones. I think that there is a lot to be said about how much better they could do.

VAN AGTMAEL: Yeah, I want to, before we go to the questions, add two points. One is, again, Mexico versus Brazil. I think there's one more factor that will fairly dramatically change things over the coming 10 years, and that's shale gas. Not only will it make the United States much more competitive, but there's a lot of shale gas in Argentina, a lot of shale gas in Mexico, and you can get it out at a relatively low price. And so the question then becomes what is going to happen to the relatively expensive pre-salt exploration that, basically, Brazil is spending unbelievable amounts on? There's a question now suddenly that arises from that. So that is a big question mark I want to just put out. Then second point is --

MORAN: I see people heading for the telephones to call their brokers. (Laughter.) They're going to short Brazil -- (inaudible) --

VAN AGTMAEL: Well, second point is -- and as along as we're here at the Council on Foreign Relations, I think we cannot ignore the political side. I believe that we have been, both from an economic and from a political point of view, become too transfixed with Asia, and China in particular, and that we have basically treated Latin America with benign neglect. I think that's dumb, actually.

Why? Well, China is making big inroads into Latin America. It's now the second-largest trading partner, right after the U.S. It's the biggest export market for places like Brazil, Peru and Chile. I think that's something to be concerned about, even business. Think of telecommunications. Who -- I mean, where is -- where is AT&T or any of these companies in telecommunication in Latin America? Nowhere.

So some of the big industries that have developed in the last 10 years in Latin America -- the U.S. was nowhere. They were somewhere in extraction, somewhere in food and retail a little bit, but they have not been leading the way -- they have been leaving huge opportunities on the table. So those two points, just to make it interesting. (Chuckles.)

MORAN: Well, we are not going to leave opportunities on the table, so now we're going to turn to discussion and Q-and-A from the audience. Please wait for the microphone to come and speak into it. And if you could state your name and your affiliation.

QUESTIONER: Mario Jaramillo, ambassador of Panama. (Laughter.) Thank you for the invitation. I was invited by Mr. (name inaudible), good friend. I was the last American to (head ?) the canal, and all in Panama consider him the best reason why the transition was so smooth.

First of all, I was invited to a forum called Latin America. And it seemed like it was only Mexico and Brazil, OK? (Inaudible) -- the gentleman mentioned Panama in -- kind of in a bad way, because he said that the canal is -- (inaudible).

OK, let me -- I just want to make some comments and make an offer. Panama has grown because if I'm an investor here and they tell me that Latin America grows on 2 percent like you said -- you opened, Latin America grows at a 2 percent rate -- I'm not even look at Latin America to go invest at 2 percent, OK? So just remember, Latin America is not only Brazil and Mexico.

Just in the case of Panama -- and I could -- another ambassador could get up here for other country -- (laughter) -- Panama grew up an average of 8 percent the last seven years and the canal doesn't start till 2015, so you (make clear ?) about the canal. Panama grew 10 percent last year. We're going to grow 10 percent this year. When the canal starts, there's three more points that come right there.

What somebody said about the banks -- you talk about banks, you can mention Panama. The biggest banking sector in Latin America is Panama. The liquidity's -- 40 percent of the banks are liquid assets, which noplace in the world you find that. And the highest percentage of liquid assets to GDP in the world also. So they're very strong, and they give a big service. And we just gave a talk to the Wharton students of this -- big service to Latin America.

The fact on the competitives -- if you look at the reports not of Panama, World Bank, the doing business in countries, I look up there and you see how Panama and Chile are fifth or sixth in the world. And all this is without taking into account our mining. Talking about diversity, our mining, which is starting mostly by Canadian companies, is going to be even more than the canal. So I just wanted to make sure for the -- (inaudible) -- investors here, and you look at the newspapers today, obviously you will see all the articles, the canal, the big ships now are going to be 14,000 -- (inaudible) -- instead of 4,000, as it were, game changer in the world.

Well, beside the canal, I wanted to make sure this (prospector ?) investors -- remember when I took my first course in -- I studied marketing and then MBA. That professor at -- (inaudible) -- came with a -- (inaudible) -- they said, read this and come back. I said -- (inaudible) -- statistics. If I hear this, Latin American grows in 2 percent, I'm not even going to look at investing Latin America. So it's hard to make sure that people know that there's other countries than Brazil and Mexico in Latin America and that small is beautiful.

MORAN: Thank you very much.

QUESTIONER: I'm Howard Wiarda from CSIS. As a political scientist, let me ask the two economists on our panel. Moran is a kind of hybrid, as we all know. (Laughter.)

LOSER: He has improved with age. (Laughter.)

QUESTIONER: But towards political science rather than towards economics, no? (Laughter.) If the four tests are downed for the region in general, let me ask the economist what they think of as the political implications of that downward trend. Do you think that civil society or governance or bureaucratic infrastructure is sufficiently strong that in the various countries they will survive this downward economic trend?

VAN AGTMAEL: I personally believe that corporations and nations both become stronger through tests. They will be tested. I believe they will come out stronger, not weaker. It would be -- in very short, my answer to that, I don't believe that this will lead, nor has it led, in the last couple of years, to upheavals, revolts, things like that. I don't believe that at all. If I'm concerned about anything, it would be, what's going to happen to Venezuela? That's what I would be concerned about.

And Argentina, to some extent. (Chuckles.) But you know more about that than I do.

LOSER: Yes.

I would say the following, that there has been a strengthening of institutions, something that years ago, as an economist, as a sort of -- as a true believer in the Washington Consensus, I didn't pay as much attention to, but it is something that is extremely important. And this has occurred not in the way that we may want to see, but probably sometimes not any worse than we see in this country in terms of the conflicts of the institutions.

But the important thing is, Latin America has had the economic transformation. It has serious problems. When we talked about telecommunications, the fact is that you have the Carlos Slims and others that are the private monopolies, and they're as bad as the public monopolies of China or of Venezuela. But on the other hand, there has been a social change. Poverty has declined enormously. And there the work -- I have to mention the large countries -- I realize I'm being unfair to Panama and other small countries, but the work that has been done by Brazil, by Mexico, by Chile and other countries is tremendously important in having reduced one of the main points that were the weak part of Latin America.

The rise in the middle class in Latin America is also something that we I think creates a lot of noise. Obviously, middle class creates a lot of noise, and the -- what we saw in Argentina last week with the cacerolazo, which is the pot banging, is something of that type. But in the end you have there a process that has a -- together with democracy in general, has helped I would say create a degree of stability that we hadn't seen for a long time. I mean, I am not -- I'm not a political scientist. I'm barely an old economist, so I don't dare to go too far on that, but I think that these things have helped enormously in improving the conditions for stability -- political stability -- (inaudible).

VAN AGTMAEL: Could I just add one thing too, that in answer to the ambassador of Panama -- but I don't see him right now -- the -- I mean, I can understand the frustration he feels coming from a small country -- Holland, where people always talked about Germany and forgot about Holland, and -- but now when they're talking about the European crisis, they forget that Germany and Holland and Sweden and Norway and all of these countries actually doing well and together have a trade surplus that is three times that of -- 2 1/2 times that of China.

But in very short, I think -- I think you would agree that you could in general say that the countries other than Brazil and Mexico that are perhaps less in the news have actually been quite success stories on the whole, remarkable success stories, whether it's Chile, whether it's Colombia, whether it is Peru, as you already mentioned. This is really quite amazing, so --

MORAN: Yes, ma'am. Yes, ma'am, in the back. Yes. Please.

QUESTIONER: Thank you. Sonia Schott, with Globovision Venezuela and Blue Radio of Colombia. Since you have been mention Venezuela and Colombia, I would like to know how do you see the future of the oil industry and what kind of impact in the Latin American economy will have since everybody's talking about being independent of oil -- I mean, in the U.S., try to be independent of the oil industry in the U.S. Thank you.

LOSER: Let me try a first round. (Chuckles.)

There is no question that energy -- I'll talk -- I'll talk sort of loosely about oil and gas. And I think in this regard, the -- what is happening now in terms of -- what the U.S. is doing in terms of generating output that will result in becoming the largest producer of oil for a short while, but that is something that changes the balance.

I think that there will be a change in the oil industry. I think that a supply -- there is such a thing as supply elasticity to price, and we tend to forget it. We tend to sort of have this negative view of things, that nothing will change in terms of output. And I think that price incentives will work. You may find that, say, Argentina and Bolivia and even Brazil can start producing in a very significant way. And of course, Venezuela remains the country, certainly in Latin America, with the greatest potential.

But I would say that there is a lot of new output coming out. The fact that you have new technology is also being very important in this sense. The countries that are sort of heavily dependent on oil and gas exports may have a serious -- never serious difficulty, but they will have a harder time than what they've been having up to now. This is my perception.

VAN AGTMAEL: Yeah, well, two points. First of all, in the U.S., we always talk about Middle East and oil. We're not dependent on the Middle East for oil at all. We are dependent on Venezuela and Mexico, Canada for oil, not on the Middle East. So that's an important starting point.

Second, I have a somewhat unconventional view on oil. I think that over the next 10, 20 years, more transportation fuel will be gas rather than oil, and what that will mean is that you have, at the moment, a crazy difference, a completely crazy difference between the price of oil and gas, just to give you that -- gas costs about 3 1/2 (dollars) to $4, let's say $4. If you -- per million BTU. If you -- if you translate that into a gallon of oil, that is -- you have to multiply it by six. So let's say six times four is 24. Now, let's say that you add transportation cost, et cetera. (Inaudible) -- the price of oil -- there's no reason why the price of oil shouldn't be 35 (dollars) or $40. It's over a hundred (dollars) now -- makes no sense. So that will have a big impact on the oil industry.

MORAN: Yes, please.

QUESTIONER: Hi, I'm Adrean Rothkopf with Research In Motion. And I have a question about protectionism. We're seeing in some countries in Latin America increasing levels of protectionism, for example, local manufacturing requirements or restrictions on imports. And I would be interested in hearing your opinion on, first of all, whether you see this trend reversing or staying the same or deepening, and depending on your answer, what you think the long-term impacts are going to be on the region.

MORAN (?): (Inaudible.)

LOSER: OK. Let's put it this way. Let's distinguish between the rhetoric and the practical aspect. Unfortunately, starting in the United States, going through Europe and going to every country in Latin America, the rhetoric of protectionism is very much there, and it's disastrous because it's very easy to sell the idea. In Latin America, there are certain countries that have been going back. And I think that Mercosur, with the possible exception of Uruguay -- I think Uruguay actually is one small country that is doing it very well.

But Mercosur is really a region, meaning Argentina and Brazil, going back in terms of protectionism after the fantastic job that was done in the '80s, not imposed by the Washington consensus. It was really something that came from within. And having the miracle that Latin America saw -- I mean, if you look at it from the -- from the base point, has had the fastest growth in trade as a proportion of GDP than any other region -- (inaudible) -- highest, but it changed the most.

I would say that there are a number of countries where -- (audio break) -- as we see here in the United States, unfortunately. But fundamentally, it's the countries like the Pacific countries, which is Chile and Peru, and it's Colombia, Mexico, certainly the Central American countries that are part of the free trade agreement with the United States. They may be incidents of protectionism, but in the end, they know that -- they know that the integration and they know that the free trade is the way to go. But it is not an irreversible -- it's not an irreversible role, unfortunately.

VAN AGTMAEL: Now, Adrean, I've heard these concerns about protectionism in Latin America, but you can also call China or U.S. or wherever, for many years, and I actually do believe that we are on an irreversible trend away from that. I mean, all countries, and particularly larger countries, have a natural tendency to be protectionist. All the economists know that it's nuts to be protectionist, to put it in very simple terms.

And so there's always a fight between these two -- (chuckles) -- sides. And occasionally in the short run, the protectionists win, but never for very long. And in the long run, I believe everywhere we are going away from this. There are more free trade agreements, there's more -- there's global -- I mean, globalization is another word for less protectionism. Let's face it. So that is the general tendency, I believe, for -- (inaudible) -- but we should always be on our guard against it and knock it down as fast as we -- (audio break) -- Carl (sp), I think, knows more about it than any of us.

MORAN: As we head to the next question, let me just say I never have pretended to understand Argentina, so I can't go there. The country that confuses me the most is Brazil, because Brazil has so much to gain from opening up not just in manufacturing but in services. And, I mean, the payoffs would just be enormous. And it's a -- it's a puzzle to me -- I mean, I'm sure you can explain it in political economy terms, but it's -- it really is a big puzzle to me.

Yes.

QUESTIONER: (Chuckles.) Thank you. Margaret Hayes (sp). I want to take this question -- the question of foreign direct investment in a little different direction and deal with the competitiveness of the Latin American private sector. There is beginning a lot of complaint amongst the private sectors in Brazil and elsewhere about Chinese investors and Chinese labor and the failure to create jobs in the region.

And it strikes me that China -- Chinese investment in the region is beginning to experience something that U.S. foreign direct investment experienced maybe 40 years ago or 50 years ago with the complaint and then the growth of the domestic private sector. How do you see the domestic private sector both addressing the Chinese substitution factor and then its own competitiveness in investing in their own countries or in the region more widely? Is that changing over time?

VAN AGTMAEL: I didn't fully get the -- could you repeat just the last part of your question? I didn't --

QUESTIONER: Do you -- do you see the Latin American private sector beginning to change its attitude, approach to its own role, responsibility and need to be competitive, innovative and some of these other words that you used earlier?

VAN AGTMAEL: Yeah, I wasn't quite sure whether you were talking about domestic or foreign investment. Yes is the short answer. Not as much, I think, as many people would like, but certainly the trend, I think, is in the right direction. I think there's also a growing understanding, at least among the CEOs from Latin America that I talk to, of what -- how being a responsible citizen actually works in your favor and how not being a responsible citizen does not work in your favor. And so there is more discussion about the need to have not only better elite education or more better elite education, but also to create a better educational opportunity, as that being a big issue.

There is an understanding of the fact that when you have huge income inequalities, as you do have in Latin America -- and by the way, Latin America is the only region where those inequalities have been diminishing --

LOSER: That is true.

VAN AGTMAEL: -- the only region in the world, whereas everywhere else, it has been growing. Now, they started from a bad point, but nevertheless, they have been improving. And I think the fact that corporate leaders understand that in the end, you have healthy economies only if domestic demand is healthy, and domestic demand is only healthy when people have money in their pockets -- that's what I would say.

LOSER: Yeah, I would look at it from a slightly different point of view. It's really supplemental what Antoine was saying.

The -- of course, the Latin American businessmen and women, as every businessman and woman in the world, will complain about competition. This is something that was discovered, with all due respect, by Adam Smith, who was our sort of forefather in economics. And so we have to be careful about that because we hear it in the U.S.; we hear it in Europe; we hear it in Japan; we hear it in China also.

Having said that, there are a number of world-class companies that are -- that are investing all around. Certainly within Latin America, you have -- I mean, Carlos Slim is a monopolist because he can in Mexico, but he's a highly competitive and innovative investor in other countries in Latin America. So that's number one. There is a Mexican company with all the -- it sounds like a strange name to have, which is Bimbo, the largest bread producer and wheat purchaser in the world, who -- they have invested, of course, in the United States, in China and in other places. You have Semex (ph); you have a number of other companies. Of course, you have Vale, and again, a number of other companies who have invested from Brazil. The Brazilians, the Chileans, the Mexicans have invested heavily in other -- in other countries in the region, Argentina to a lesser extent.

They are becoming more international. I think that there is -- they are not -- they may not be the biggest companies. We have no Apple in Latin America. But then Apple prices have declined by 20 percent in recent weeks, so even that one can -- may not work. But fundamentally, they are world-class companies.

It is still dominated, in a way, by a corporation spirit that is the family -- the family business, not obtaining financing from banks. The (bond ?) placement of companies, Latin American companies, is very small compared to what we see in the United States, or the type of borrowing that they do. I'm not saying that it is perfect, but I think that there is -- that there is an important presence, and they know how to compete, and they know how to compete also internally when there are companies that come -- when the Walmarts of the world or the Carrefours of the world come into Latin America, they find -- of course, there are political issues involved, but fundamentally, that they find competitors that are as savvy as they are.

VAN AGTMAEL: Yeah, just to put numbers on there, of the roughly hundred billion in foreign direct investment in Latin America, over 20 percent comes from other countries in Latin America, led by Chile, about 9 billion; then Mexico, about 7 billion; but even Colombia, 3 billion; Venezuela, 2 billion. You know, these are sizable numbers. So it does -- it does take place. And they do understand that, you know, having these outposts and -- as you -- the example of Carlos Slim is a great example of, you know, being totally monopolistic in your country and really seeking competitiveness (in others ?) and being very competitive. And there are many others like that.

MORAN: I see many other hands, but I am being given the guillotine by our sponsor. So please join me in thanking our panelists for the presentation today. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

THEODORE MORAN: So ladies and gentlemen, welcome to today's presentation on Latin America in the world economy. We all know that just three days ago the IMF lowered its growth rate estimates while noting the wide diversity among the different countries. I think we're not going to be trying to make specific predictions or discussion of microdata but to be talking about a little bit broader structural issues.

But before we can speak about anything, we have to have introductory remarks, which says welcome, and please completely turn off, not just put on vibrate, your electronic devices. That's to avoid interference with the sound system, so you really have to turn them completely --

MR. : Except pacemakers -- (inaudible) -- (laughs) --

MORAN: Thank you. Thank you for reminding me. If you would like to use an electronic device today, please do so outside of the meeting room. An overflow room with a live feed is available. So if you are in charge of ongoing operations that you have to monitor on a real-time basis, you can go out and still watch us.

And the final reminder is that our meeting is on the record.

Claudio, I'm going to lead off with you. There are many ways of saying the same thing. When the United States catches a cold, Latin -- sneezes, Latin America catches a cold. When the international financial system shows some weakness, Latin America shows huge banking crises. But we didn't really have that coming out of the last financial crisis. We actually had a fairly resilient reaction in Latin America. Would you give us some perspective on that, please?

CLAUDIO LOSER: Yes. I -- first of all, thank you very much for inviting me and for having me participate in this presentation. I'm sorry for the bad remark about my pacemaker, which is a true event in my case.

Now, in terms of a perspective, I want to start with a warning, and that is that complacency is one of the great dangers that Latin America has. And during my previous jobs, I had the moments where I also -- as a member of the IMF -- I also practiced complacency regarding Latin America during the Asian crisis. So in this sense, whatever I say that is very positive -- and I will be very positive -- we should be aware that Latin America has this great capacity to go back to having a great time without really worrying too much. I don't think this will happen.

Having said this, I would say Latin America has changed enormously. And although Latin America was growing before the big recession at a lower rate than the world and it was staying behind, the last few years have been years where Latin America has shown that it has learned the lesson. Latin America is not growing at the fantastic rate. Brazil, the largest economy there, is not helping, in the sense that it has been growing at a rate of less than 2 percent. And Latin America may grow at 3.2 percent this year and a little bit more next year.

But what has happened is that over the last 10 years, there has been a change in the mindset. People don't want inflation. People want stability. And this is very much in Latin America the macroeconomic element. There has been something that is fantastic for many of the countries; that is, that we produce in Latin America a lot of primary commodities and they have been doing very well, thanks to the miracle of Asia. And this is also something that one has to have in mind, that the commodity prices in terms of trade have improved by 30 or 40 percent in recent years, and this is one important thing, but also, Latin Americans have learned the lesson.

I say complacency is the danger because we may fall into it, but at this moment, with a few exceptions that we can go into at a later stage, the main countries of Latin America have been doing very well in terms of macroeconomics, something that the Asians have been doing for a while.

MORAN: Before I go to Antoine, let me follow up on a specific question. When we had the subprime mortgage crisis here that affected us so much, but we saw villages and municipalities in Sweden and, I mean, you know, far-flung places had bought a lot of this toxic material, and based on past evidence, we would have thought, uh-oh, let's watch out for the Latin American banking system; there's going to be a lot of bad assets on -- but that wasn't the case.

LOSER: We in Latin America had our bad banking events, if I can call it that way, from the 1980s -- not to speak of the '70s, when we were doing all sorts of crazy things. We had the crisis in Chile in the early 1980s. We had it in Venezuela in the mid-'80s to the early '90s. We had it in Argentina. I can say many things about my own country there. But in terms of the banking crisis, we had it --

MORAN: (Inaudible.)

LOSER: -- the Mexicans had it in the 1990s. And the Latin Americans, one way or another, put a system of supervision that was very strong. It resulted in a system that is small. By all standards of any other region, Latin America has the smallest banking system, proportion of GDP. That is a bad thing in principle, but it is good in this case, with a lot of the type of supervision that the Europeans and the United States should have had before the great -- the big recession now. So I think this is the main element that explains it.

MORAN: Interesting.

Antoine, you actually coined the phrase "emerging markets," and that gives me a segue to say, how do you place Latin America -- again, with all its diversity, so we can't generalize too much -- within the context of other emerging markets? And could you give us a little perspective on this?

ANTOINE VAN AGTMAEL: You want me to give you scorecard? (Laughter.)

Well, let me start by saying, I agree with Claudio that that's -- you can certainly say that really through 2008, in -- really since the change of the century, Latin America in many ways, you know, hit the sweet spot. (Chuckles.) And that was a combination of, as you already said, getting their macroeconomic house in order.

I mean, basically, they rhetorically often resented the Washington Consensus and then embraced it with a vengeance. (Chuckles.) And that made a real difference. That was one factor.

But there was also tail -- a tail wind. And the tail wind, as you said, was China. Huge difference.

Now, what that means is, in terms of scorecards, in terms of macroeconomic policies, in terms of resiliency, I would give them very high marks.

But there's another side to that. And that may show up in the coming years because now -- at least I believe -- growth in China is going to go from a range of 10 (percent), 12 percent to a range of 6 or so percent. That makes a huge difference for what Latin America was so strong at, whether it's copper, whether it's iron ore, whether it's soy beans, whether it's -- (inaudible) -- you can -- commodities was their strength. But because it was their strength -- and I hate to say this as a -- as a Dutchman by origin -- they also suffered from a kind of Dutch disease, as it is -- I find that word horrible -- (laughter) -- but, you know, what happened was that they didn't focus on other sectors of the economy.

So in terms of the scorecard, to go back to that, if I look at competitiveness, if I look at productivity, if I look at equality of educational opportunity, if I look at innovation, if I look at diversification of the industrial base, they had a scorecard -- if you go -- if the first ones were an eight out of a scale of 10, here I would put them at a four to five. So that's less good.

MORAN: Let me follow up. Could you focus a little bit on Brazil because you -- we talk about emerging markets, BRICS. The first one, B, is Brazil. And how do you see that comparing with some of the other BRICS or some of the other more successful developing countries?

VAN AGTMAEL: Well, let me take them one by one. First of fall, China is many times bigger, both in terms of population, in terms of GDP. Also, they have done far more in infrastructure than Brazil has done. And so in -- they opened up in a way that was far greater than Brazil. Brazil opened up, but not as much as China did. So -- and their growth rate was never, except for a year or two, in the range of the growth rate of China.

Russia: Russia is more dependent on commodities than India. India, you could make the argument that -- and by the way, as a result, coming back to China, China really became -- and I -- there are some qualifications to that because I don't -- I think actually China is losing competitiveness at the moment, but they certainly became the manufacturing center of the world in a way that Brazil never did. India became the (back office ?) center of the world in a way that Brazil never do, although they do some good things there. And that is a level of innovation that you don't find in Brazil.

So I think I've hit the other three.

MORAN: Claudio, do you want to focus on Brazil for a moment?

LOSER: Yes. I want to talk about Brazil within the context of Latin America. There's another country we have not mentioned, which is Mexico, which is exceedingly important there, which is -- I think it has more prospects -- better prospects than Brazil, in my view, at the moment. But we can --

MORAN: I'll come back to that.

LOSER: Yes, we'll come back to that. (Chuckles.) But Brazil has grown enormously. If we read today's Washington Post, there's a long article about the fact that they will become the largest producer of soybeans in the world in a few years. And of course this is great. This is a gift of nature. There's also oil -- there is oil, "pre-sal," which is this oil at great depths, that they have been very happy thinking of how to spend and -- how to spend the proceeds without investing the money to get the oil out. That is a continental problem that we have.

But fundamentally, Brazil has the problem of technology and the problem of education, although it's improving. It's in -- fantastic in terms of the fight against poverty. All these things are exceedingly important.

But Brazil has one characteristic that none of the Asians have, and that is that among the major emerging economies, it has one of the lowest levels of savings and investment. It is -- actually, within Latin America, it is one of -- among the large countries, it's number one. Then comes Mexico. The distant third is Argentina, Colombia, Venezuela. They have a very low level of saving and investment. It's either that the numbers are wrong or they have been very productive and they've been helped by a lot of things.

But I think that Brazil, although it's tremendously important, it's actually -- at current prices, it's the second-largest economy among emerging economies today, not according to PPP, but it is -- it has a serious problem in terms of its future, in terms of productivity and in terms of the capacity to increase savings and investment.

VAN AGTMAEL: Yeah. I actually agree with Claudio that basically Brazil, you could say, benefited from the tail wind of the fumes of China, and Mexico suffered --

MR. : Yes.

VAN AGTMAEL: -- a headwind from the fumes of China because it made China less -- (inaudible).

Now what is happening now? What is happening now is, as China is slowing, basically the tail wind won't be as strong for Brazil. They will have to focus on ways to become more competitive. And Mexico, which in terms of wage levels, was way above China for a while, despite the fact that they had this advantage of being close to the U.S., now is regaining that advantage, as -- as I believe, U.S. manufacturing will undergo a renaissance over the coming 10 years. That will be disproportionately good for Mexico, in addition to the fact that they are more competitive relative to China. So I agree.

MORAN: Let me bring --

VAN AGTMAEL: But of course Brazil is -- we have to start with the fact that Brazil is very big, and Brazil should have had a leading role before that, but they screwed it up before.

LOSER: I agree.

MORAN: Well, let's come back to that, because I want to -- want us to go back to what policies we should favor in the post-Washington consensus environment or whatever we want to call -- I have done some research looking at the impact of foreign direct investment on the transformation of the Chinese economy, and then I did a comparison with Latin America. And what I -- what we found -- I use "we" because a lot of it was looking at -- other research had been done -- is that almost the entire high-tech export sector in China is, as we know, dominated -- dominated -- I mean, like 98 percent dominated by foreign multinationals. Very few -- I mean, we can name Huawei, Lenovo, HI AIR, I mean, just really a handful --

VAN AGTMAEL: Huawei's not foreign.

MORAN: What?

VAN AGTMAEL: Huawei is not foreign.

MORAN: No, no, no, we can name some indigenous Chinese companies that actually are exporters, but 96, 97, 98 percent of the high-tech end of Chinese exports are done by American, Japanese, Korean --

VAN AGTMAEL: Taiwanese.

MORAN: -- or Taiwanese or European multinationals. The value added is very small, so when you read the studies of how much of Apple is actually -- of the value added or of the profit is actually located in China as opposed to just assembling foreign components, that's not just Apple; that really extends across microscopes, across chemicals, across a whole range of electronics, et cetera. Point A.

Point B is, very few spillovers to local Chinese firms, and a lot of it can be explained by the fact that most Chinese firms are still state-owned enterprises that really aren't able to pick this up. So then we looked -- and this is drawing on the research of others as well as my own -- at both Mexico and Brazil, and you have much more value added in automobiles, in electronics, in chemicals, petrochemicals, in, you know, a range of industrial products, more value added by indigenous Mexican or Brazilian companies, and many more spillovers. I mean, spillovers is an econometrics thing. We don't -- we see the measurements, we see rises in productivity -- we don't exactly know where they are showing up.

But so you really have Latin American companies taking advantage of foreign investment in a way that China has not yet learned how to do. Does that strike you by surprise?

VAN AGTMAEL: I don't quite buy the thesis.

MORAN: Ah! This is going to be fun.

VAN AGTMAEL: (Laughs.)

MORAN: I'm sorry, I interrupted you, Claudio.

LOSER: Let me second Antoine's -- (laughter) -- I don't quite buy --

MORAN: We're ganging up on -- (laughter).

LOSER: First of all --

MORAN: We're on the record, so be nice. (Laughter.) You can't be too critical.

LOSER: We cannot be too critical of Latin America, of you. (Laughter.) Ah! No. You have described very nicely and very well a reality of Latin America incorporating foreign investment. Also there is an issue that there is Latin America investment going into developed countries, a very significant one.

Now, what I would say -- Latin America -- I've been working with other people in Centennial, a company I'm in, and together with the Inter-American Dialogue we've been working on that, on analyzing Latin America in terms not only of the macro but other things. We in Latin America have had a very poor performance in total factor productivity, not output per unit of labor, because capital has been growing, but we have not innovated, by far, in any way comparable to the NICs, to Korea and to Taiwan and the others, and actually with regard to China and others. So in this sense I think that Latin America, which is incorporating these things very well in terms of output, has not contributed in terms of basic research, in terms of total improvement. There may be issues of measurement.

So I think that Latin America is sort of integrating, well, Mexico, for sure, within the North America Free Trade Agreement, and here we have one of the authors here, with Carla Hills, certainly. We -- I would say Mexico did very well, then did very poorly, and now it's doing well again. And in this sense you have this effect. But I think there is a lot of work that has to be done.

VAN AGTMAEL: Well, a couple of comments. I think we cannot forget that while what you call the value added has been limited, it still has given rise to extremely profitable companies and to what we complain about here, which is that all those jobs moved over, an enormous creation in China. Now, that job creation has pulled a significant segment of the population out of really boring jobs into slightly less boring jobs, but jobs where you actually can learn.

MORAN: Yeah.

VAN AGTMAEL: And I would not agree when it comes to there not being connections. I mean, you go to Shenzhen or you go to -- you know, all these places, you go around these factories of Hon Hai, Foxconn --

MR. : Right.

VAN AGTMAEL: -- and you see that there is a vast network of local companies that wouldn't be there without that. These are local companies. And by the way, most of the foreign investment is not from the U.S., as Carla knows. It's more from Taiwan, and to some extent Korea, but Taiwan is by far the biggest exporter from China.

So -- and then, you know, in terms of innovation, I agree with Claudio, if you look at the number of patents coming from Brazil, you know, Mexican companies, and compared to Taiwanese or Chinese companies or Korean companies, we are -- I mean, in Latin America they are way, way behind. So something is happening there as a result of this.

And then process engineering. I mean, all of these people working in these factories learn a hell of a lot about process engineering that we are not learning anymore and they're not learning in Latin America. So I think actually the spillover effects I would say are pretty dramatic.

MORAN: Good, because I disagree. (Laughter.) Now, if -- if -- if we were to look at where both value-added and spillovers are the largest, we would find them in Singapore, in Malaysia, in Thailand -- Taiwan I'm including as kind of a developed country now -- and then Costa Rica, Chile, Mexico, less so in Brazil, and maybe we can come back to that. So I -- actually what I'm saying is I think our data can be reconciled.

But I don't find it that much in China. That may change if -- OK, here we just had the Chinese party congress and everybody's debating are they going to become more reformers, or a lot of pessimism -- no, they're actually -- we are -- some experts who are afraid they're going to get even more status.

I think that the recipe for China becoming a genuine, innovative, expansive superpower is to head in the direction of Singapore, not in the direction of, you know, Mao or -- (chuckles) -- yeah, heavy-handed industrial policy. I don't think that's going to -- going to get them, because what you find is the state-owned companies still are -- they don't do much R&D, they're -- they don't have good management systems, they don't have merit promotion. So they're a long way from the Malaysian, Thai, Singapore model.

But when you go to Guadalajara and you look at the little Silicon Valley or you go -- you and I were discussing over lunch -- you go to the avionics section between Sao Paulo and Rio, you see an awful lot of activity that's very promising.

Well, I'm supposed to be the moderator and ask you questions. (Laughter.) So tell me I'm wrong. No?

LOSER: (Laughs.) It's just that the measurement of productivity has shown over the last 20 to 30 years that Latin America has lagged behind. There has been enormous investment. Foreign investment has been huge in Brazil, in Mexico, in Chile, Colombia. What happens is that when you measure the contribution in terms of output, it doesn't appear -- with your eyes you see it, but with the measurement, it doesn't work. It is a conflict, in a way. But --

MORAN: We're going to go shortly to questions and answers from the audience, but let's -- Colombia, Peru, Chile and Argentina -- I mean, we don't want to just focus on Mexico and Brazil. What are your -- and these are different kinds of countries, but what are your perspectives on some of these other major Latin American countries?

LOSER: OK. Of course, if you look at the last 10 years, the country that has grown the most is Panama. But then there is some minor waterway that is being -- (laughter) -- widened there, and this may have some impact, so we'll leave that. The second one is Peru. Then comes Uruguay. Argentina is below that.

I would say that Chile, interestingly enough, over the last 10 years has not grown that much because it is sort of in a state of maturity, and in that sense, they've already -- they've already truly been accepted by the OECD -- (chuckles) -- in a way.

Now, I would say that Peru is a country that has been the most surprising in a positive way in terms of the transformation. Poverty is there. Inequality is there. Now, that's not just in the case of Colombia, but still you've had a transformation that is -- that is very, very significant. And I think that it is one of those cases that we can say is a success.

Colombia, with the -- hopefully, with the end of violence as -- I mean, the war that you had internally, is also doing -- I think, doing very well. They will have an excellent team of people working there at the government level and now (elects ?) coming up. It's doing better.

If I have to talk about Argentina, I can do it in a minute -- (laughter) -- or I can do it in several hours. (Laughter.) I become a little bit more emotional there. I only will speak positively about the --

MORAN: Give us -- give us the one-minute summary of several hours. (Laughter.)

LOSER: Yeah. I will not talk about the wonders of the Argentine wine, because I come from Mendoza, Argentina. (Laughter.) I will not do any advertising in this regard. (Chuckles.) However, I think that the -- Argentina is and has been consistently the country that has disappointed us one way -- one time after another. The capacity -- and I can say that for the record. The capacity to implement the wrong policies on a sustained basis -- (laughter) -- in the case of Argentina, as this also in the case of Venezuela, I would say, is enormous. And therefore, although it has grown -- it has grown nicely because of the tailwind, and it has grown nicely because the numbers that they have used are the wrong ones. I think that there is a lot to be said about how much better they could do.

VAN AGTMAEL: Yeah, I want to, before we go to the questions, add two points. One is, again, Mexico versus Brazil. I think there's one more factor that will fairly dramatically change things over the coming 10 years, and that's shale gas. Not only will it make the United States much more competitive, but there's a lot of shale gas in Argentina, a lot of shale gas in Mexico, and you can get it out at a relatively low price. And so the question then becomes what is going to happen to the relatively expensive pre-salt exploration that, basically, Brazil is spending unbelievable amounts on? There's a question now suddenly that arises from that. So that is a big question mark I want to just put out. Then second point is --

MORAN: I see people heading for the telephones to call their brokers. (Laughter.) They're going to short Brazil -- (inaudible) --

VAN AGTMAEL: Well, second point is -- and as along as we're here at the Council on Foreign Relations, I think we cannot ignore the political side. I believe that we have been, both from an economic and from a political point of view, become too transfixed with Asia, and China in particular, and that we have basically treated Latin America with benign neglect. I think that's dumb, actually.

Why? Well, China is making big inroads into Latin America. It's now the second-largest trading partner, right after the U.S. It's the biggest export market for places like Brazil, Peru and Chile. I think that's something to be concerned about, even business. Think of telecommunications. Who -- I mean, where is -- where is AT&T or any of these companies in telecommunication in Latin America? Nowhere.

So some of the big industries that have developed in the last 10 years in Latin America -- the U.S. was nowhere. They were somewhere in extraction, somewhere in food and retail a little bit, but they have not been leading the way -- they have been leaving huge opportunities on the table. So those two points, just to make it interesting. (Chuckles.)

MORAN: Well, we are not going to leave opportunities on the table, so now we're going to turn to discussion and Q-and-A from the audience. Please wait for the microphone to come and speak into it. And if you could state your name and your affiliation.

QUESTIONER: Mario Jaramillo, ambassador of Panama. (Laughter.) Thank you for the invitation. I was invited by Mr. (name inaudible), good friend. I was the last American to (head ?) the canal, and all in Panama consider him the best reason why the transition was so smooth.

First of all, I was invited to a forum called Latin America. And it seemed like it was only Mexico and Brazil, OK? (Inaudible) -- the gentleman mentioned Panama in -- kind of in a bad way, because he said that the canal is -- (inaudible).

OK, let me -- I just want to make some comments and make an offer. Panama has grown because if I'm an investor here and they tell me that Latin America grows on 2 percent like you said -- you opened, Latin America grows at a 2 percent rate -- I'm not even look at Latin America to go invest at 2 percent, OK? So just remember, Latin America is not only Brazil and Mexico.

Just in the case of Panama -- and I could -- another ambassador could get up here for other country -- (laughter) -- Panama grew up an average of 8 percent the last seven years and the canal doesn't start till 2015, so you (make clear ?) about the canal. Panama grew 10 percent last year. We're going to grow 10 percent this year. When the canal starts, there's three more points that come right there.

What somebody said about the banks -- you talk about banks, you can mention Panama. The biggest banking sector in Latin America is Panama. The liquidity's -- 40 percent of the banks are liquid assets, which noplace in the world you find that. And the highest percentage of liquid assets to GDP in the world also. So they're very strong, and they give a big service. And we just gave a talk to the Wharton students of this -- big service to Latin America.

The fact on the competitives -- if you look at the reports not of Panama, World Bank, the doing business in countries, I look up there and you see how Panama and Chile are fifth or sixth in the world. And all this is without taking into account our mining. Talking about diversity, our mining, which is starting mostly by Canadian companies, is going to be even more than the canal. So I just wanted to make sure for the -- (inaudible) -- investors here, and you look at the newspapers today, obviously you will see all the articles, the canal, the big ships now are going to be 14,000 -- (inaudible) -- instead of 4,000, as it were, game changer in the world.

Well, beside the canal, I wanted to make sure this (prospector ?) investors -- remember when I took my first course in -- I studied marketing and then MBA. That professor at -- (inaudible) -- came with a -- (inaudible) -- they said, read this and come back. I said -- (inaudible) -- statistics. If I hear this, Latin American grows in 2 percent, I'm not even going to look at investing Latin America. So it's hard to make sure that people know that there's other countries than Brazil and Mexico in Latin America and that small is beautiful.

MORAN: Thank you very much.

QUESTIONER: I'm Howard Wiarda from CSIS. As a political scientist, let me ask the two economists on our panel. Moran is a kind of hybrid, as we all know. (Laughter.)

LOSER: He has improved with age. (Laughter.)

QUESTIONER: But towards political science rather than towards economics, no? (Laughter.) If the four tests are downed for the region in general, let me ask the economist what they think of as the political implications of that downward trend. Do you think that civil society or governance or bureaucratic infrastructure is sufficiently strong that in the various countries they will survive this downward economic trend?

VAN AGTMAEL: I personally believe that corporations and nations both become stronger through tests. They will be tested. I believe they will come out stronger, not weaker. It would be -- in very short, my answer to that, I don't believe that this will lead, nor has it led, in the last couple of years, to upheavals, revolts, things like that. I don't believe that at all. If I'm concerned about anything, it would be, what's going to happen to Venezuela? That's what I would be concerned about.

And Argentina, to some extent. (Chuckles.) But you know more about that than I do.

LOSER: Yes.

I would say the following, that there has been a strengthening of institutions, something that years ago, as an economist, as a sort of -- as a true believer in the Washington Consensus, I didn't pay as much attention to, but it is something that is extremely important. And this has occurred not in the way that we may want to see, but probably sometimes not any worse than we see in this country in terms of the conflicts of the institutions.

But the important thing is, Latin America has had the economic transformation. It has serious problems. When we talked about telecommunications, the fact is that you have the Carlos Slims and others that are the private monopolies, and they're as bad as the public monopolies of China or of Venezuela. But on the other hand, there has been a social change. Poverty has declined enormously. And there the work -- I have to mention the large countries -- I realize I'm being unfair to Panama and other small countries, but the work that has been done by Brazil, by Mexico, by Chile and other countries is tremendously important in having reduced one of the main points that were the weak part of Latin America.

The rise in the middle class in Latin America is also something that we I think creates a lot of noise. Obviously, middle class creates a lot of noise, and the -- what we saw in Argentina last week with the cacerolazo, which is the pot banging, is something of that type. But in the end you have there a process that has a -- together with democracy in general, has helped I would say create a degree of stability that we hadn't seen for a long time. I mean, I am not -- I'm not a political scientist. I'm barely an old economist, so I don't dare to go too far on that, but I think that these things have helped enormously in improving the conditions for stability -- political stability -- (inaudible).

VAN AGTMAEL: Could I just add one thing too, that in answer to the ambassador of Panama -- but I don't see him right now -- the -- I mean, I can understand the frustration he feels coming from a small country -- Holland, where people always talked about Germany and forgot about Holland, and -- but now when they're talking about the European crisis, they forget that Germany and Holland and Sweden and Norway and all of these countries actually doing well and together have a trade surplus that is three times that of -- 2 1/2 times that of China.

But in very short, I think -- I think you would agree that you could in general say that the countries other than Brazil and Mexico that are perhaps less in the news have actually been quite success stories on the whole, remarkable success stories, whether it's Chile, whether it's Colombia, whether it is Peru, as you already mentioned. This is really quite amazing, so --

MORAN: Yes, ma'am. Yes, ma'am, in the back. Yes. Please.

QUESTIONER: Thank you. Sonia Schott, with Globovision Venezuela and Blue Radio of Colombia. Since you have been mention Venezuela and Colombia, I would like to know how do you see the future of the oil industry and what kind of impact in the Latin American economy will have since everybody's talking about being independent of oil -- I mean, in the U.S., try to be independent of the oil industry in the U.S. Thank you.

LOSER: Let me try a first round. (Chuckles.)

There is no question that energy -- I'll talk -- I'll talk sort of loosely about oil and gas. And I think in this regard, the -- what is happening now in terms of -- what the U.S. is doing in terms of generating output that will result in becoming the largest producer of oil for a short while, but that is something that changes the balance.

I think that there will be a change in the oil industry. I think that a supply -- there is such a thing as supply elasticity to price, and we tend to forget it. We tend to sort of have this negative view of things, that nothing will change in terms of output. And I think that price incentives will work. You may find that, say, Argentina and Bolivia and even Brazil can start producing in a very significant way. And of course, Venezuela remains the country, certainly in Latin America, with the greatest potential.

But I would say that there is a lot of new output coming out. The fact that you have new technology is also being very important in this sense. The countries that are sort of heavily dependent on oil and gas exports may have a serious -- never serious difficulty, but they will have a harder time than what they've been having up to now. This is my perception.

VAN AGTMAEL: Yeah, well, two points. First of all, in the U.S., we always talk about Middle East and oil. We're not dependent on the Middle East for oil at all. We are dependent on Venezuela and Mexico, Canada for oil, not on the Middle East. So that's an important starting point.

Second, I have a somewhat unconventional view on oil. I think that over the next 10, 20 years, more transportation fuel will be gas rather than oil, and what that will mean is that you have, at the moment, a crazy difference, a completely crazy difference between the price of oil and gas, just to give you that -- gas costs about 3 1/2 (dollars) to $4, let's say $4. If you -- per million BTU. If you -- if you translate that into a gallon of oil, that is -- you have to multiply it by six. So let's say six times four is 24. Now, let's say that you add transportation cost, et cetera. (Inaudible) -- the price of oil -- there's no reason why the price of oil shouldn't be 35 (dollars) or $40. It's over a hundred (dollars) now -- makes no sense. So that will have a big impact on the oil industry.

MORAN: Yes, please.

QUESTIONER: Hi, I'm Adrean Rothkopf with Research In Motion. And I have a question about protectionism. We're seeing in some countries in Latin America increasing levels of protectionism, for example, local manufacturing requirements or restrictions on imports. And I would be interested in hearing your opinion on, first of all, whether you see this trend reversing or staying the same or deepening, and depending on your answer, what you think the long-term impacts are going to be on the region.

MORAN (?): (Inaudible.)

LOSER: OK. Let's put it this way. Let's distinguish between the rhetoric and the practical aspect. Unfortunately, starting in the United States, going through Europe and going to every country in Latin America, the rhetoric of protectionism is very much there, and it's disastrous because it's very easy to sell the idea. In Latin America, there are certain countries that have been going back. And I think that Mercosur, with the possible exception of Uruguay -- I think Uruguay actually is one small country that is doing it very well.

But Mercosur is really a region, meaning Argentina and Brazil, going back in terms of protectionism after the fantastic job that was done in the '80s, not imposed by the Washington consensus. It was really something that came from within. And having the miracle that Latin America saw -- I mean, if you look at it from the -- from the base point, has had the fastest growth in trade as a proportion of GDP than any other region -- (inaudible) -- highest, but it changed the most.

I would say that there are a number of countries where -- (audio break) -- as we see here in the United States, unfortunately. But fundamentally, it's the countries like the Pacific countries, which is Chile and Peru, and it's Colombia, Mexico, certainly the Central American countries that are part of the free trade agreement with the United States. They may be incidents of protectionism, but in the end, they know that -- they know that the integration and they know that the free trade is the way to go. But it is not an irreversible -- it's not an irreversible role, unfortunately.

VAN AGTMAEL: Now, Adrean, I've heard these concerns about protectionism in Latin America, but you can also call China or U.S. or wherever, for many years, and I actually do believe that we are on an irreversible trend away from that. I mean, all countries, and particularly larger countries, have a natural tendency to be protectionist. All the economists know that it's nuts to be protectionist, to put it in very simple terms.

And so there's always a fight between these two -- (chuckles) -- sides. And occasionally in the short run, the protectionists win, but never for very long. And in the long run, I believe everywhere we are going away from this. There are more free trade agreements, there's more -- there's global -- I mean, globalization is another word for less protectionism. Let's face it. So that is the general tendency, I believe, for -- (inaudible) -- but we should always be on our guard against it and knock it down as fast as we -- (audio break) -- Carl (sp), I think, knows more about it than any of us.

MORAN: As we head to the next question, let me just say I never have pretended to understand Argentina, so I can't go there. The country that confuses me the most is Brazil, because Brazil has so much to gain from opening up not just in manufacturing but in services. And, I mean, the payoffs would just be enormous. And it's a -- it's a puzzle to me -- I mean, I'm sure you can explain it in political economy terms, but it's -- it really is a big puzzle to me.

Yes.

QUESTIONER: (Chuckles.) Thank you. Margaret Hayes (sp). I want to take this question -- the question of foreign direct investment in a little different direction and deal with the competitiveness of the Latin American private sector. There is beginning a lot of complaint amongst the private sectors in Brazil and elsewhere about Chinese investors and Chinese labor and the failure to create jobs in the region.

And it strikes me that China -- Chinese investment in the region is beginning to experience something that U.S. foreign direct investment experienced maybe 40 years ago or 50 years ago with the complaint and then the growth of the domestic private sector. How do you see the domestic private sector both addressing the Chinese substitution factor and then its own competitiveness in investing in their own countries or in the region more widely? Is that changing over time?

VAN AGTMAEL: I didn't fully get the -- could you repeat just the last part of your question? I didn't --

QUESTIONER: Do you -- do you see the Latin American private sector beginning to change its attitude, approach to its own role, responsibility and need to be competitive, innovative and some of these other words that you used earlier?

VAN AGTMAEL: Yeah, I wasn't quite sure whether you were talking about domestic or foreign investment. Yes is the short answer. Not as much, I think, as many people would like, but certainly the trend, I think, is in the right direction. I think there's also a growing understanding, at least among the CEOs from Latin America that I talk to, of what -- how being a responsible citizen actually works in your favor and how not being a responsible citizen does not work in your favor. And so there is more discussion about the need to have not only better elite education or more better elite education, but also to create a better educational opportunity, as that being a big issue.

There is an understanding of the fact that when you have huge income inequalities, as you do have in Latin America -- and by the way, Latin America is the only region where those inequalities have been diminishing --

LOSER: That is true.

VAN AGTMAEL: -- the only region in the world, whereas everywhere else, it has been growing. Now, they started from a bad point, but nevertheless, they have been improving. And I think the fact that corporate leaders understand that in the end, you have healthy economies only if domestic demand is healthy, and domestic demand is only healthy when people have money in their pockets -- that's what I would say.

LOSER: Yeah, I would look at it from a slightly different point of view. It's really supplemental what Antoine was saying.

The -- of course, the Latin American businessmen and women, as every businessman and woman in the world, will complain about competition. This is something that was discovered, with all due respect, by Adam Smith, who was our sort of forefather in economics. And so we have to be careful about that because we hear it in the U.S.; we hear it in Europe; we hear it in Japan; we hear it in China also.

Having said that, there are a number of world-class companies that are -- that are investing all around. Certainly within Latin America, you have -- I mean, Carlos Slim is a monopolist because he can in Mexico, but he's a highly competitive and innovative investor in other countries in Latin America. So that's number one. There is a Mexican company with all the -- it sounds like a strange name to have, which is Bimbo, the largest bread producer and wheat purchaser in the world, who -- they have invested, of course, in the United States, in China and in other places. You have Semex (ph); you have a number of other companies. Of course, you have Vale, and again, a number of other companies who have invested from Brazil. The Brazilians, the Chileans, the Mexicans have invested heavily in other -- in other countries in the region, Argentina to a lesser extent.

They are becoming more international. I think that there is -- they are not -- they may not be the biggest companies. We have no Apple in Latin America. But then Apple prices have declined by 20 percent in recent weeks, so even that one can -- may not work. But fundamentally, they are world-class companies.

It is still dominated, in a way, by a corporation spirit that is the family -- the family business, not obtaining financing from banks. The (bond ?) placement of companies, Latin American companies, is very small compared to what we see in the United States, or the type of borrowing that they do. I'm not saying that it is perfect, but I think that there is -- that there is an important presence, and they know how to compete, and they know how to compete also internally when there are companies that come -- when the Walmarts of the world or the Carrefours of the world come into Latin America, they find -- of course, there are political issues involved, but fundamentally, that they find competitors that are as savvy as they are.

VAN AGTMAEL: Yeah, just to put numbers on there, of the roughly hundred billion in foreign direct investment in Latin America, over 20 percent comes from other countries in Latin America, led by Chile, about 9 billion; then Mexico, about 7 billion; but even Colombia, 3 billion; Venezuela, 2 billion. You know, these are sizable numbers. So it does -- it does take place. And they do understand that, you know, having these outposts and -- as you -- the example of Carlos Slim is a great example of, you know, being totally monopolistic in your country and really seeking competitiveness (in others ?) and being very competitive. And there are many others like that.

MORAN: I see many other hands, but I am being given the guillotine by our sponsor. So please join me in thanking our panelists for the presentation today. (Applause.)

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