During the 1990s, Spain’s largest banks and companies decided to cross the Atlantic in order to invest in Latin America with a vigor that was unknown until then. Spain became the world’s largest foreign investor in Latin America during both 1999 and 2000, and the foremost European investor during the entire decade of the 1990s. These developments, which were a landmark in the economic history of Spain, drew some criticism from Latin America where, on occasion, the successful strategy of Spanish companies was viewed as a “Spanish Re-conquest.”
The arrival of Spanish companies and banks on the South American continent has not been a walk in the park, even though they became leaders in four key sectors of the new regional economic landscape – banking, electric utilities, energy and telecommunications – and contributed in a positive way to the local economies. So much so, that from the years 1999-2000, “criticism intensified regarding the massive and rapid establishment of Spanish companies in the main markets of Latin America,” notes Ramón Casilda Béjar in his new book entitled, The Golden Decade: Economics and Spanish Investments in Latin America, 1990-2000. Casilda is a professor of the UniversityofAlcalá in Madrid and consultant to the Inter-American Development Bank (IBD).
In fact, more than half of Latin Americans believe that the privatizations have brought them no benefit at all, a figure that is growing, according to a survey carried out by Latinobarómetro. The survey shows that between 2000 and 2001 those who held that view grew from 57% to 64%.
According to the author, this attitude involves a certain component of nationalism and electoral opportunism, and is opposed to the “permanent commitment” of Spanish banks and companies in these countries. This commitment has continued despite the latest crises in Brazil and Argentina which have been big disappointments for Spanish interests in the region. Everything seems to indicate that Spanish companies have come to Latin America to stay, “unless something insuperable and unpredictable comes up that makes it impossible for them from an economic or financial point of view to stay in that region,” writes Casilda.
His book is a fundamental tool for getting to know and understand the recent past as well as the evolution of the Latin American economy up to the present time. The book, which took more than two years to prepare, can serve as a reference for students, journalists, teachers and business people. It also provides abundant and reliable data about what has been invested in Latin America and about the entrance strategies [used by Spanish companies] in this area. “You can also learn about the problematic economic situation of the continent and the main competitors in each sector,” the author told Universia-Knowledge at Wharton.
Companies such as Telefónica, Endesa, Iberdrola, Reposol, Gas Natural and Union FENOSA, as well as banks – Santander Central Hispano (SCH) and Banco Bilbao Vizcaya Argentaria (BBVA) – came to the [South American] continent drawn by a common culture and language, a favorable international situation and the privatization process that was taking place in most Latin American countries. In addition, having achieved a high level of maturity in their respective sectors [in Spain], these companies were looking for geographical diversification in those foreign markets that offered the best opportunities. During the 1990s, Spain invested more than $97 billion in the continent, mainly in the sectors of banking, energy, electricity and telecommunications, according to published data.
History of the Latin American Economy
Before getting around to analyzing the way Spanish banks and companies were internationalized, the first part of Casilda’s book takes us on a trip through the hidden history of Latin America ’s economic reality, from the beginnings of the century until the current age. In the course of this historical review, the reader learns, for example, about the first economies of the region – those of Brazil and Mexico – as well as about the Argentine crisis.
In regard to the most recent past, the author explains the keys of the region’s economic growth up until the 1970s, and how the exhaustion of the “import substitution” model created a crisis in foreign debt during the 1980s, the so-called “lost decade.” In this decade, according to data obtained by ECLAC [Economic Commission for Latin America and the Caribbean] and the World Bank, “per capita production declined by 8%, and in the period from 1983 through 1990, this led to growth of zero per cent.”
After the crisis of the 1980s, a series of structural reforms – the so-called Washington Consensus – was carried out in the region with the goal of changing Latin America ’s economic direction. Almost at the same time, roughly the years from 1982 to 1990, “about 15 countries managed to realize a political transition from dictatorship to democracy, all of them adopting a market economy as the economic model,” writes Casilda.
The Consensus consisted of a list of economic policy measures that served to guide new governments and multilateral institutions, such as the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank, “toward appreciating the economic progress of the former [i.e., the governments] when they were asking for assistance from the latter [i.e., the multinational institutions],” writes Casilda. The end of the Consensus came when, among other things, the governments reached a stable and balanced economic standard; created an efficient public and private sector; reduced the size of the state; searched for more orientation toward foreign markets, and put into practice various policies for combating poverty.
With the implementation of these measures during the 1990s, most of the countries managed to obtain good macroeconomic results. Inflation rates dropped to single-digit numbers in all the countries, foreign public debt dropped from 50% of GDP to less than 20%, and tariffs were dramatically lowered. All this led to an increased level of capital into the region that was unprecedented – expanding from $14 billion in 1990 to $86 billion in 1997.
Nevertheless, these advances did not translate into economic growth rates that were much higher than before. The annual growth of one percent was only slightly higher than what was achieved during the disastrous decade of the 1980s, and much less than the five percent figure reached during the 1960s and 1970s. Nor did the region manage to achieve a substantial improvement in social conditions or a reduction in poverty, the endemic problem of the continent. At the end of the decade, the local population was disappointed with the overall situation and wound up suffering what became known as “reformist fatigue.”
Why did the Washington Consensus fail? “It is important to note that the Consensus was not applied in every country with the same intensity; in some countries more, and in others, less. What is said to have failed is the policy as a whole. For example, [policymakers] wanted to eradicate poverty but it has grown. The Consensus did not focus on redistributing poverty, and this is a fundamental point that they will have to discuss if they revise the Consensus,” notes Casilda. In his book, the author maintains that, if it were not for the reforms, the situation would have been even worse. He cites the existence of a current of partisan opinion for implementing a second round of reforms that would incorporate such goals as the reduction of poverty and a greater emphasis on education in order to achieve growth that is sustainable and more equitable.
Latin America was in the process of applying structural reforms as well as integrating itself into the global economy when, in the middle of 1997, the Asian financial crisis shook markets throughout the world. As a result of this crisis, capital flows toward developing countries were interrupted and reforms remained incomplete. The great challenge of Latin America is to contemplate the transition that was interrupted by the Asian crisis – “harmonizing economic efficiency with greater social justice,” notes Casilda.
In the first part of his book, the author also analyzes Latin America ’s economic integration processes, from Pan Americanism to the Free Trade Agreement of the Americas (FTAA), which is set to go into effect on December 31, 2005 . However, at this time “Latin America is not a priority on the American agenda. If the American agenda continues to ignore Latin America , negotiations [for the FTAA] will take place in a hasty way, almost in fits and starts,” the author told Universia-Knowledge at Wharton.
Spanish Companies Come on the Scene
In the second part of his book, Ramón Casilda takes us to those years shortly after Spain entered the European Economic Community and after Spanish companies came to understand the need for expansion. At the time, they were beginning to invest beyond their borders with unprecedented speed and volume toward a great base of operations – Latin America .
You have to remember that, at the time this strategy started, Spain couldn’t count on having enough international experience, nor was Spain treated as one of the major European economies. Its companies were not among the leaders on the continent and, to top things off, they competed against companies and groups that had a greater global presence.
In Casilda’s opinion, the Latin American investment strategy carried out by Spain’s banks and enterprises was not offensive but defensive. The author, using soccer slang, sums it up with the phrase: “There is no better defense than a good offense,” referring to the attacks of the major business groups and European financial conglomerates [on Spanish companies].
What were the Spanish companies defending against? According to Casilda, it was the environment of growing globalization that requires companies to expand their size. With their arrival in Latin America , these [Spanish] companies managed to satisfy this goal and, moreover, become leaders in strategic markets in the respective national economies [of Latin America .]
The arrival of Spanish banks and companies coincided with privatization plans of Latin American countries that were the result of the Washington Consensus, which began to bear fruit during the 1990s. The privatization boom didn’t play itself out in precisely the same way in every country and sector. The book notes that 57% of all privatizations were in public services, and 11% were in companies engaged in banking and similar services. The remaining 32% of cases involved various other kinds of operations.
It’s not just that this situation favored Spanish interests. It’s also that American banks and companies were withdrawing from Latin America as a result of the bad results they obtained during the foreign-debt crisis of the 1980s. This made it easier to open a path for Spanish companies, allowing them to “quickly seize important market share and, almost always, to become a leader in that sector at a reasonable price,” notes the author.
Spain’s investment strategy in the region was quite different from the strategy carried out by American companies, who were the leaders with respect to investment in the region. As Casilda notes, American investments focused on goods that were saleable, such as automobiles and the electronics industry. On the other hand, Spanish companies generally focused on the service sector, such as banking, electricity, energy and telecommunications. In most such cases, Spanish companies resorted to purchasing state enterprises and pre-existing assets when making their foreign investments.
Moreover, during the decade treated by the book, American and Spanish companies used a different focus to work out their strategies. On the one hand, Spanish companies opted to look at Latin America as an extension of their domestic markets, introducing the same products as in Spain but adapting them to the markets of each country. That is to say, according to Casilda, Spanish investments in the region tried “to be global and local at the same time.” American companies used a different focus because they generally were not used to counting on local partners, and their goal [in the region] was to improve domestic [U.S.] productivity. They were used to “locating production in those countries that are cheapest, with exportation as their final goal.”
An especially interesting chapter is dedicated to the Banca Espanola in Latin America . The author explains that its expansion in the continent was part of the globalization in the financial services sector. Spain did not want to remain an outsider in that regard. He describes, in detail, the causes of that expansion and the models chosen by the various financial institutions in the region. He also applies a vision, both global and country-by-country, to the main Spanish banks in Latin America , the SCH and BBVA. Also interesting is his analysis of those Spanish companies with the greatest involvement in the continent, such as Repsol YPF, Telefonica, Iberdrola and Union FENOSA, as well as Dragados, Compofrio and Gas Natural.
There is also a chapter on Latibex, the only international market in which Latin American shares are denominated exclusively in euros; it has been operating since 1999. Another chapter is dedicated exclusively to analyzing the country’s trademark as a competitive advantage – as well as the value and perception of “Made in Spain” in the Latin American context where it has eroded significantly in recent years. “The great matter that is pending is the reconstruction of the image of the Spanish brand, which has gone through creating perceptions of better quality, confidence, innovation and good value, without losing its idiosyncratic value.”
In conclusion, Ramón Casilda notes: “As the new century begins, it is very probable that Spanish companies are getting to the most complex phrase in their strategy of expanding in Latin America . That is, achieving full acceptance and assimilation on the part of the markets, authorities, and customers in the region.”
As a result of the apprenticeship they have undergone during the past few years, Spanish managers and bankers will have to understand this challenge “not in terms of mere economic perception, but in terms of fitting into the sensitivities of the entire cultural and social environment of the Latin American continent.”