Doing Business In Latin America Economics Essay

Introduction

Todays world is ever changing. National borders are becoming less important in times of global capital movements, cross-border migration and highly interwoven transnational trade relationships. Globalisation is – since the 1990 and the collapse of the bipolar world – a well-known phenomenon and it is beyond question that nation states will have to adjust to its influences in the long run. The governmental response has so far been the creation of international free trade agreements and multilateral institutions like the WTO for instance, which are to oversee global trade systems and which also have as their task the liberalization of markets around the world.

Advocates of trade liberalization claim that the eradication of trade barriers ultimately leads to an increase in a countries overall wealth, whereas more leftist opponents stress that free trade predominantly benefits multinational corporations and the corporate ruling class. As a matter of fact, States themselves or Governments do not trade. Consequentially, companies and corporation are most likely to benefit from free trade Areas and investment opportunities abroad. However, doing business in third countries underlies varying circumstances. Taxation, environmental regulations, labour standards and investment regulations are factors of production that vary from country to country.

For businesses in order to make use of comparative advantages, it is therefore essential to know about the differences between countries in terms of the local business climate. This paper aims at unfolding those differences for three Latin American countries: Mexico, Belize and Cuba.

Furthermore, this paper shall function as a guide to companies who are interested in doing business in the Latino Americas and especially in one of the three countries mentioned above. The paper starts with a general economic introduction of the countries in concern. For this purpose, economic data will be analysed. Then in the second part, the document will focus on unravelling differences in terms of business climate and investment opportunities. Lastly, a conclusion will be drawn.

2.0 Introduction to Mexico

Mexico lies at the bottom of Central America, bordering the Caribbean Sea and the Gulf of Mexico, between Belize and the United States and bordering the North Pacific Ocean, between Guatemala and the United States. It has a population of about 112 million inhabitants.

From 1930 to 1970, although starting from a low baseline, Mexico experienced tremendous economic growth. Achievement historians call it ‘El Milagro Mexicano’ or ‘The Mexican Economic Miracle’. The annual economic growth of Mexico hit an average of 3% to 4% during this period, with an estimated annual rate of inflation of 3%. It was not really a miracle however; it was actually a result of the government policy. The policy put an emphasis on primary education which increased the enrollment rate between 1929 and 1949 by 300%. The policy also imposed high tariffs on imported domestic goods, and lastly, the policy publicly invested in agriculture, energy and transportation infrastructure. From the 1940s, foreign immigration into Mexico’s cities expanded the country’s urban population. Despite the falling foreign investment of the Great Depression during that period, the economy grew. The assumption of mineral rights and the subsequent nationalization of the oil industry into Pemex during the presidency of Lázaro Cárdenas del Río was a widely accepted move.

On 1 January 1994, Mexico became a full member of the North American Free Trade Agreement (NAFTA), joining the United States of America and Canada. In 2005, North American economic integration was further strengthened by the signing of the Security and Prosperity Partnership of North America.

Mexico has a free market economy that recently entered the trillion-dollar class. It contains a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in sea ports, railroads, telecommunications, electricity generation, natural gas distribution, and airports. Per capita income is one-quarter that of the United States; income distribution remains highly unequal. Trade with the United States and Canada has tripled since the implementation of NAFTA. Mexico has free-trade agreements with more than 40 countries, governing 90% of its foreign commerce.

2.1 State of the Mexican Economy

As mentioned before, Mexico has a free market economy in the trillion dollar class. It contains a blend of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports. Per capita income is roughly one-third that of the US; income distribution remains highly unequal.

Trade with the US and Canada has nearly tripled since the implementation of NAFTA in 1994. Mexico has free trade agreements with over 50 countries including, Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan, putting more than 90% of trade under free trade agreements. In 2007, during its first year in office, the Felipe Calderon administration was able to garner support from the opposition to successfully pass pension and fiscal reforms.

The administration passed an energy reform measure in 2008, and another fiscal reform in 2009. Mexico’s GDP plunged 6.5% in 2009 as world demand for exports dropped and asset prices tumbled, but GDP is expected to post positive growth late in 2010. The administration continues to face many economic challenges, including improving the public education system, upgrading infrastructure, modernizing labor laws, and fostering private investment in the energy sector. Calderon has stated that his top economic priorities remain reducing poverty and creating jobs.

2.2 Doing business in Mexico

In 2004 Mexico’s securities market was a tiny fraction of what might be expected for an economy of its size. And while Latin America received 9% of global private equity flows, Mexico, with more than a third of the region’s income, received only a tenth of that. More companies were delisting rather than issuing new shares on the Mexican stock exchange. It was time for reform.

Mexico overhauled its securities laws, with useful input from stakeholders. A new law attacked self-dealing, a major problem in the country, to better protect investors. Mexico also extended corporate governance obligations to subsidiaries. In addition, listed companies were required to set up committees of independent directors. Changes in the law were enacted to help protect investors and boost their confidence in Mexican markets.

Although Mexico’s economy took a plunge during the 1996 recession, the worst has passed and Mexico’s economy is headed towards a recovery. Mexico’s economy depends a lot on the United States; it derives a great deal of income and stability from the United States. When purchases, tourism, hiring, and investment from the United States declines, Mexico’s economy declines.

If the United States continues to suffer from unemployment, tight credit, and general market instability, Mexico will suffer from the same. If unemployment in the United States soars to 10%, Mexico’s unemployment will equally increase to follow suit.

A simple solution would of course to break away from the dependence on the American economy but it would not be viable. The American economy is a strong one and instead of breaking away from it, Mexico should instead attract investors from other regions of the world (such as the European Union), so that their economy would not be so tightly tied to just one economy.

4.0 Introduction to Cuba

Cuba, an island country, is located in the Gulf of Mexico. Cuba has a population of about 11 million inhabitants, most of them living in the cities of Havana, the nations capital, and Santiago de Cuba. The official language is Spanish. Cuba, like Mexico and most of the Latin American countries, has formerly been a Spanish colony, but managed to gain independence in 1902. In the 1950s the world famous Cuban revolution took place, which changed the political system in Cuba towards a regime based on communist socialism.

Fidel Castro, Cuba’s dictator had close ties to the Soviet Union, which was at the same time the countries mayor trade partner and financial contributor. During the Cold war, Cuba took side of its communist allies and became center of public attention, as Soviet nuclear weapons were placed on Cuban territory during the 60s and the U.S felt threatened by this behaviour. It was due to this incidence that the U.S. imposed a trade embargo on Cuba, which exists in some form up till today. Since the breakdown of the UDSSR, Cuba lost its greatest ally and exports and financial support fell drastically. By now, Fidel Castro who led the Regime for 50 years has been replaced through his brother Raúl due to bad health conditions.

Rául Castro is likely to impose economical and political reforms in the near future in order to open up Cuba’s economy to investment and international trade. In addition to the world wide economic recession, Cuba suffered in 2008 severe damage due to Hurricanes Ike and Gustav. The Economist estimated the damage to lie around 10 billion US$, an amount that is hard to bear for a country that weak in terms of productivity and economic stability (The Economist, 2008).

4.1 The state of the Cuban Economy

Socialism and poor governance have, over the years, hemmed economic development substantially. The country’s annual GDP is with 50 bn comparatively small and close to the poorest 25 % of the world’s countries. Cuba’s GDP has experienced an unstable development during the last decade (U.S. Department of State, 2010) [3.2 % growth in 2002, 1.4 % in 2001, 3.8 % in 2003, 5.8 % in 2004, 11.2 % in 2005, 12.1 % in 2006, 7.3% in 2007, 4.1 % in 2008, 1.3 % in 2009]. The decline in GDP growth during 2008 and 2007 can be ascribed to the global economic recession and it is apparent that the Cuban economy has been severely hit.

According to the an article published by the Guardian, “Cuba faces a long, hot summer of discontent. Virtually every key economic indicator is moving in the wrong direction as the global economic slowdown is excerbating deficiencies long been apparent in Cuba’s economic management” (The Guardian, 2009). Cuba’s GDP per Capita was 4, 450 US$ per year and therewith around 10 times smaller then the capita GDP in the United States. The average monthly salary amounts to 18 $ which would mean that the average Cuban would live of 50 cents a day. As a consequence of this low income, “Cubans are obliged to scrimp and hustle on the black market even when things are going relatively well” (The Guardian, 2009).

However, due to Cubans social policy, citizens receive free food vouchers and other governmental support. About 60 % Cuba’s labor force, which covers 5 million people, work in the services sector, with tourism being the largest part. The rest of the Cuban workers are either employed within the agricultural sector or the industry with the latter only producing light industrial goods. . The unemployment rate is with 1.7 % considerably low and is in fact the 9th lowest in the world. This , however, cannot be taken as a reliable figure as the socialist government tries to hide away unemployment through public occupation campaigns. The public dept in 2009 amounted to 35 %, according to the CIA’s World Fact book (CIA, 2009).

Moreover, the industrial production growth rate is declining (-1 % in 2009).

Cuba’s main export partners are China (25 %), Canada (20%), Spain (6%) and the Netherlands (4.53%), importing primarily sugar, nickel, tobacco, fish, medical products, citrus and coffee. The value of Cuba’s exports in 2009 was 2.458 billion U.S. $. With imports in comparison being 4 times higher, Cuba runs a steeply negative trade balance.

According to the World Fact Book, Cuba mainly imports food, machinery and equipment and chemicals. Summing up, the Cuban economy finds itself in a critical situation and economic reform are utterly necessary to guarantee stable economic growth.

Unfortunately, data about Cuba from this year’s competitiveness index can’t be presented here, since neither the World Economic Forum nor the IMF process the Cuban case.

4.2 Doing business in Cuba

Since Canada is one of Cuba’s main trade partners, the Canadian Foreign Ministry releases information on the Cuban business climate as well as import regulations.

For U.S. companies, doing business in Cuba is even more complicated as the international relationship still suffers from the trade embargo of the 1960’s.

Firstly, it turns out that importing can only be undertaken by Cuban government entities and joint ventures holding permits for the specific goods in question. Certain Agents and intermediaries are allowed to handle certain goods, but due to the political regime, these persons are not allowed to import on their own (Government of Canada, 2009).

Furthermore, to obtain import licences, Canadian businesses will most likely see themselves forced to cooperate with Cuban partners first before any governmental approval will be issued.

For about 4.500 products and commodities Cuba applies its MFN tariff, which is 10.4%. However, for some well protected commodities, Cuba applies a 30 % import tariff. According to the Canadian Government, “Entities with foreign partners may be granted duty free status for some or all of those products as part of their economic association or joint venture agreement” (2009). Mostly, this clause applies to members of the Latin American Integration Association (ALADI) in which Canada is not taking part.

Canadian exporters are obliged to hire Cuban custom brokers for the carrying out of custom formalities. Moreover, it is essential to fully comply with all regulation and elaborate documentation is furthermore of great importance. According to the Canadian Government, “Seemingly minor discrepancies can lead to confiscation of improperly imported goods. Although compliance with these regulations is technically the responsibility of the importer or the agent handling consignment shipments, careful documentation on the part of the shipper will reduce errors and delays” (2009).

Also, exporters have to comply with labelling, sanitary, phytosanitary and product safety standarts.

What is more, due to Cuban investment law, foreign companies will find it difficult to set up representative offices and subsidiaries in Cuba since they are “expected to establish a substantial trade relationship with Cuba for at least three years, before being allowed to establisha presence in Cuban national territory” (Canadian Government, 2009).

Regardless of these restrictions, consignment sales – sales in which goods cross the border and are still considered to be owned by the exporter – are possible as long as they are covered by a contract for sales of merchandise imported on consignment.

Summing up, one can see that doing Business in Cuba is complicated in most of the instances we have addressed here. The Cuban government has to restructure its economy and especially open it up for foreign investment since foreign investment is one crucial factor for economic growth of a country.