By: Staff Writer
June 9, 2023
A regional think tank finds that “regional integration” is central to Latin America and the Caribbean’s (LAC) competitiveness and second only to “market size and scalability.”
The Atlantic Council, in a recent survey, said the first major growth opportunity in LAC identified by survey respondents is the region’s potential as a large, scalable, and well integrated market as 83 percent of respondents ranked “market size and scalability” among the region’s top three attractive qualities. Indeed, LAC—with a gross domestic product (GDP) of $4.56tr and home to 658m people and three Group of Twenty (G20) economies (Argentina, Brazil, and Mexico)—boasts a dynamic consumer base and a young workforce that entice globally minded companies.
The survey results also indicated: “In addition to the size of its individual markets, LAC offers a number of advantages for cross-border business expansion, aided by factors such as common languages—Spanish in eighteen countries and English in twelve. Such scalability factors are hard to come by in other geographies with larger GDPs or populations, such as South Asia ($4.09tr and 1.88bn people) or Europe ($24.02tr and 743m people).
“LAC’s home grown digital entrepreneurs have been particularly skillful in seizing the region’s scalability edge. Last year, Uala, an Argentine fintech unicorn, entered the Colombian market, its second overseas market in two years, with its eyes set on expansion into Chile, Paraguay, Peru, and beyond. Success stories of cross-border growth like this in LAC illustrate why 51 percent of survey respondents considered “regional integration” central to LAC’s competitiveness, second only to “market size and scalability.”
Despite market scalability as an attractive advantage and also most recent progress, LAC has yet to unlock the full potential of regional scalability and regional integration. For example, intra-regional trade needs a boost, as its share of LAC´s overall trade has steadily declined by a total of 4.2 percentage points since 2010. In 2020, just over 13 percent of national exports from LAC countries stayed in the wider region, much lower than in Europe (67.7 percent), Asia (58 percent), and Africa (17.8 percent).
Trade infrastructure needs to improve and technical and non-technical barriers need to be removed. By one estimate, a 10-percent decrease in freight transport costs could increase intra-regional exports in South America by 30 to 40 percent, expanding the size of the regional market.
Synergizing national-level efforts on trade facilitation will not only help strengthen regional integration, but can enhance LAC’s collective export competitiveness by combining country specific specializations.
The survey also noted, “A coordinated regional approach is also necessary for tackling non-trade challenges facing LAC countries, such as climate and the environment. The Leticia Pact, an agreement among seven nations to promote sustainable development models in the Amazon— supported by the IDB’s Amazon Initiative—is a good example. The creation of the Eastern Tropical Pacific Marine Corridor (CMAR), bringing together Colombia, Costa Rica, Ecuador, and Panama to preserve marine environments against exploitation, further illustrates the region’s collaborative spirit.”
It added: “The private sector, in coordination with the public sector, has a key role to play in scaling regional potential and furthering regional integration in trade, climate, digitalization, and other areas. Some IDB’s private-sector partners see a lack of regional integration as the defining challenge for the region.15 Three promising opportunities for private sector action in this space include: financing and managing hard infrastructure; improving soft infrastructure; and prioritizing nearshoring and reshoring efforts.”
Improving infrastructure will be an extremely difficult challenge considering that the COVID-19 pandemic made debt worse in all of the LAC countries. Finding adequate financing at rates that would help in solving both problems simultaneously- high debt and crumbling infrastructure- will be a challenge that the LAC must find solutions to solve.
Infrastructure integration should not focus solely on trade opportunities. Energy-integration projects, like the Central American Electrical Interconnection System (SIEPAC), can offer increased market access to and “lower costs for businesses and the region’s inhabitants” while “generating higher levels of productivity and economic competitiveness.”20 Integrating energy markets across Latin America while pursuing renewable energy would reduce greenhouse-gas emissions by 14.7 percent, and total system costs (including investment, operation, and maintenance) by $20.3bn, in a base scenario.
Several LAC countries, especially Brazil and its neighbours, have power-sharing agreements; Argentina and Chile concluded one in 2021, leveraging a privately owned transmission line between the two countries. As regional governments combine integration efforts while navigating fiscal and climate sustainability, this is a timely moment to better leverage private-sector financing and management of hard infrastructure.
As global economic and geopolitical events have triggered a reshuffling of supply chains in recent years, the groundwork is being laid for greater production relocation to the Americas. IDB estimates that potential nearshoring investments could translate into $78bn in export gains for LAC in the medium term. Greater regional integration and coordination, coupled with domestic reforms and efforts to boost competitiveness, are key “pull factors” for making reshoring and nearshoring a reality in LAC.
“The Alliance for Development in Democracy (ADD), for example, brings together Costa Rica, the Dominican Republic, Panama, and Ecuador to synergize trade and investment-attraction efforts. As ADD and other governments start taking decisive actions to foster reshoring, the international and local private sectors may follow suit. Multinational companies (MNCs) can contribute to—and benefit from—more efficient and resilient supply chains in LAC, whether by enhancing LAC’s hard and soft integration infrastructure or facilitating technical know-how sharing and workforce development. Gap Inc. is one of many companies increasing sourcing from Mexico and Central America while providing supplier training in the region.”