The Populist Left in Latin America: Threat or Opportunity for Investors?Published: March 07, 2006 in Knowledge@Wharton
Bolivians recently elected Evo Morales, formerly the leftist leader of the country's coca growers, as their new president. His campaign focused on promises to nationalize oil-and-gas production, control land speculation and pay more attention to previously ignored sectors of Bolivian society, among other initiatives. Leftist or populist parties are also in power in Brazil, Argentina, and Venezuela, and have flexed their muscle in Ecuador, Guatemala and Peru. The upcoming election in Mexico could also bring the leftist PRD to power.
During a panel discussion at the recent Wharton Latin American conference, Wharton management professor Witold Henisz asked a provocative question to four of the conference's panelists: Is the democratic revival of the populist left a hallmark of consolidation of democracy or a potentially dangerous trend that will return Latin America to the lost decades? Should it be viewed as a threat or an opportunity by international investors?
Opportunity was the unanimous opinion of the panel, entitled "Structural Processes and Politicians: The End of the Latin American Pendulum?" The panel was part of the Wharton global Business Forum, whose theme for Latin America was "Capturing Untapped Potential."
According to panelist Caroline Atkinson, deputy director of the western hemisphere for the International Monetary Fund, "I want to believe in a good story -- that this is a consolidation of democracy." Evaluating the political landscape is not a traditional IMF function, she said. "At the IMF, we used to like to pretend politics didn't exist. We are now getting dragged into understanding that it does."
In general, Atkinson believes that Latin America is on better footing than it was during the lost decades of the 1970s and 1980s with their raging inflation and suffocating debt. Now, many countries are experiencing macroeconomic stability with a sound fiscal policy and a well-functioning real economy with sustainable debt ratios and healthy private ownership. Without such support, the region's political and social fabric would threaten to unravel, said Atkinson. But within a calm economic environment, democratic consensus can take root.
"From a private industry perspective," Jesse Deutsch, a vice president of finance for Kraft Latin America, told the conference, "Kraft is committed to Latin America. I see it as a pendulum that swings back and forth. It's over to the left this time. Each trend is different. I think this fits within a band of reasonableness. People are impatient. People want change. They want jobs, better [conditions] for their families and more wealth. That's where this trend is going."
Pablo Tenani, head of research for UBS Wealth Management Brazil, also had a bullish forecast. He pointed to high international liquidity and low Latin American interest rates as reasons why "it will be easy to keep the leftist economies stable and actually at the center. Looking forward, unless international liquidity dries up, there's reason [to think] that Latin America will move slowly to the right."
An example of confidence in the economic future of the region, according to Eduardo Wallentin, a manager in the Latin American and Caribbean Department of the International Finance Corporation (IFC), is the disposition of a recent syndicated loan in Uruguay that is the largest multilateral source of loan and equity financing for private sector projects in the developing world. The bond was "oversubscribed," said Wallentin. "There was 150% participation."
The Market for Jeans
Ricardo A. Weiss, a keynote speaker at the conference, discussed the future of one of Brazil's largest private conglomerates, Camargo Corrêa S.A., the holding company of the Camargo Corrêa Group. According to Weiss, who is managing director of the company, Camargo Corrêa is in the midst of a 10-year strategic plan that will make it among the five largest Brazilian private sector non-financial groups. "Project 2012" aims to promote sustainable growth by focusing on four to six important sectors of the economy and expanding internationally. Diversification, noted Weiss, contributes to protection against fluctuations typical of an emerging market economy and creates opportunities for revenue growth.
He acknowledged that the company's strategy of diversifying, growing through acquisition and maintaining several unique lines of business goes against current thinking. "The trend today is to be a focused company, but we are conglomerate-focused," said Weiss. "It's good to be diversified. You make money and you get a longer life." In addition, Camargo Corrêa's strategic plan is not based on which party is in power. "We want to be a business that is not dependent on the willingness of politicians," he said. The company will "expand and diversify without becoming reliant" on them.
Camargo Corrêa's strategic lines of business include engineering and construction, consumer goods (footwear and textiles), environmental services, and production of semi-finished industrial goods (silicon and cement). It has controlling stakes in Alpargatas, a footwear manufacturer whose brands include world-recognized Havaianas sandals, and in Santista Textila, one of the world's largest producers of denim for jeans. These subsidiaries have helped increase total revenue generated overseas and by exports from 9% in 2003 to 13% in 2004. That percentage is expected to increase because Camargo Corrêa has contracted for new business in Bolivia, Argentina, Colombia, Venezuela, Peru and Suriname. "We make 30 different models of flip-flops," said Weiss, who gave out sandals to conference participants.
Santista is Camargo Corrêa's most internationally exposed company, with 50% of revenues coming from imports. "Jeans are a very competitive market," Weiss said. "There are very low margins for denim producers and manufacturers. The owner of the brand captures the market." For that reason, Santista is looking to expand into Europe. "That's the prima market," he added, contrasting its high-end possibilities to the United States where he said 70% of jeans are sold at Wal-Mart.
The company's interest in environmental services includes working with the public and private sectors on waste management. Camargo Corrêa is one of Brazil's largest private investors in energy generation. Fifty percent of the country's installed hydroelectric power was constructed with its participation. It currently produces 17% of its own energy needs and by 2010, aims to be energy self-sufficient. In addition, "when transmission [of hydroelectric power] is privatized, we want to be a part of that," said Weiss.
Survey on Democracy
During the panel discussion, participants discussed some of their experiences doing business in Latin America. Kraft's Deutsch suggested that, in an emerging market economy, it is sometimes wiser for a company to turn down what seems like an opportunity to grow the business by taking advantage of special tax concessions or limited regulation. Kraft, for instance, initially had interest in acquiring Garoto, Brazil's largest chocolate maker. According to Deutsch, Kraft "felt it wasn't right for us" to own a majority stake in Brazil's chocolate manufacturing. Nestle ultimately bought Garoto for a reported $230 million in 2002. Following protests by the Brazilian units of Cadbury Schweppes and Kraft, the purchase was reviewed and vetoed by Brazilian antitrust regulators. Nestle "lost on the merits of the case," said Deutsch. "I think that was good for Brazil."
Multi-national companies often are called upon to provide social services when the government cannot. Henisz asked his panel how such activity can be reconciled with maximizing shareholder value. The question prompted some differing opinions. "One of our strategies is to act responsibly within the communities where we are," said Deutsch. "Sometimes we have to invest without a financial interest. Kraft is a food company. Our mission is for people to eat and live better. We put food in Cancun and New Orleans [after the hurricanes in those two areas]. Is that to get our name in the newspaper? No, we are really trying to help people. Clearly there are certain things with no quantifiable rate of return that are good for the company and I think good for the investor."
Tenani of UBS took a different view. "From the investor perspective, if investing in the community and increasing human capital will increase productivity, we would favor it. But if it's a social investment, and does not increase profits, I recommend investors look the other way. We must think for the investors."
"The trick," said the IMF's Atkinson, "is how you marry investor interest with country interest. If the state is ineffective, it may make sense even for investors to provide services. Buy generators and supply schools -- not to be nice but to provide the infrastructure that the government can't."
Camargo Corrêa has a strong social history of supporting social service programs, focusing on educational, health and cultural programs for children and adolescents from low income families, said Weiss. "Social responsibility is in the blood of the company. We realize the government doesn't have the ability to do it. We do it for them. It is a way to give the country part of our success. "
Henisz mentioned a worrying trend identified in the Latinobarómetro poll released in October 2005. This annual survey of political and economic attitudes in 18 countries is produced by a non-profit organization based in Santiago, Chile, and published exclusively by The Economist. The poll results suggest that support for democratic solutions to problems is tepid: Only about half of Latin Americans are convinced democrats -- i.e., respond positively to the statement that "democracy is preferable to any other kind of government" -- and only one in three is satisfied with the way their democracy works in practice, reported The Economist in October. Support for democracy is lower in a dozen countries today than in 1996. Only in Uruguay and Venezuela is a majority of respondents satisfied with the workings of democracy.