Resilient in the Face of Crisis

Feature Article | January 28, 2009 by Stefan Nicola, journalist

Granted, even Latin America will not manage to entirely duck the global economic firestorm – the record growth of the past five years will slow down. Yet as some economies go up in flames, Latin America will only be singed, experts say.

The International Monetary Fund (IMF) predicts economic growth in the region to be at roughly 3 percent in 2009. That’s down from the past years, but still better than world economic growth, which will be just 2.2 percent according to IMF experts.

Of course the region can not be classified with one broad brush. There is a big difference between rising economic star Brazil and a poorer country like El Salvador. And while Mexico could be in trouble because its economy is so closely linked with ailing United States, experts remain optimistic that the region as a whole is able to shine as an economic star in 2009.

Reliance on US has decreased

“Latin America will still have healthy growth,” says Lidice Fernandez, an analyst with International Data Corp. (IDC). “Most countries are not as dependent on the U.S. economy as they were a few years ago. They have more diversified markets and are better at managing their debt and their economies.”

Latin America’s growth engine for the past years has been a highly prosperous small and midsize enterprise (SME) sector. The SMEs in the 37-country region will succeed also in the future, observers say.

“Latin America is a region of entrepreneurs,” says Luis Murguia, senior vice president, SME, SAP Latin America. “Everything is driven by locally grown businesses. These are the companies that will produce the food and goods the world needs in the next hundred years.”

Stable IT spending

The Good

  • In the past decade more than a dozen universities have set up programs to educate underserved people.
  • A large young and motivated workforce
  • A favorable business infrastructure
  • Strong IT spending – Brazil subsidizes the purchase of computers and educates seniors and students in computer literacy.
  • A growing number of education improvement programs: SAP and IBM are partnering in Venezuela to improve English skills.

And they are buying technology to support their rapid growth. IDC predicts that IT spending growth in the region will be a healthy 7 to 8 percent, with the seven economic powerhouses (Brazil, Colombia, Mexico, Venezuela, Chile, Peru and Argentina) expected to spend nearly U.S.$50 billion on IT in 2009, according to The Economist Intelligence Unit. These estimates were published in April 2008 and may therefore be slightly downgraded, but their general trend remains valid, observers say.

Roughly half of IT budgets will be spent on hardware, 20 percent on services and 15 percent on software. That differs from more developed countries, where most of the money goes into services and software.

But what matters more than computers is manpower. Companies in Latin America can rely on a large pool of motivated workers between the ages of 18 and 39. Many are entrepreneurial, driven to succeed, and acutely interested in technology and business. They have a good work ethic and great interpersonal skills, which make them desirable to many companies. And especially in the major cities, they are often bilingual, a trait necessary to work for the growing number of U.S. and multinational companies in the region.

‘Drive to grow and discover’

“Latin Americans have a drive to grow and discover,” says Rodrigo Slelatt, an analyst with A.T. Kearney. He adds that their drive to succeed contributes to attrition rates much lower than in India or Asia.

After a large number of multinational companies settled in Latin America in 2007, several countries in 2008 updated their regulatory environments to please businesses — among them Colombia, Argentina, Brazil, Costa Rica and Mexico.

Because it successfully lowered hurdles for starting a company, Colombia was even named “a top global and regional reformer,” by the International Finance Corporation and the World Bank. Several Central American countries have moreover benefited from the Central American Free Trade Agreement (CAFTA), which hands signatories duty-free access to the U.S. markets. “When a small- or medium-size economy in Latin America signs a trade agreement with the U.S. or Europe, its market is suddenly increased 10-fold,” says Richard Feinberg, a professor at the University of California in San Diego, and former Director of the Office of Inter-American Affairs for the White House National Security Council.

Gap between rich and poor remains wide

The Bad

  • A wide gap between the rich and the poor, with affluent people securing a better education, often by studying in the U.S.
  • Of the 200 top universities in the world, only three are in Latin America.
  • Student performance in Latin America is declining relative to other regions with similar income levels.

Yet it’s not all smiles and happiness in Latin America. The gap between rich and poor remains wide in Latin America. Rich families send their children to the United States or Europe for an education. The quality of universities in Latin America is still poor, but all over the region, governments are trying to change that. Even SAP has become active: The SAP University Alliances program equips Latin American students with key IT and business skills.

And a booming economy coupled with sound politics is also able to close the gap between rich and poor. Brazil, Mexico, Chile and Colombia have prospered for the past five years or so as their governments have become more stable. “The countries that put ideology and the political agenda aside from the trade agenda are the ones that are reaping the benefits,” Rodrigo says.

In Brazil, the region’s economic poster boy, only six years ago more than half of the population was classified as poor. In the meantime, some 50 million people joined the middle class, reducing that number to 26 percent.

“And these are people that are consuming food, beverages, clothing, and cosmetics, thus fueling the economy and creating a new market,” says Rodolpho Cardenuto, president and CEO of SAP Latin America.

SAP in Latin America

SAP has 1,700 employees and 15 offices in Latin America. Some 4,800 companies are SAP customers in the region, with about 4,000 in the SME sector. Two years ago SME sales were just 18 percent of SAP’s business there. Today, they are 33 percent and within three years, Rodolpho Cardenuto, president and CEO of SAP Latin America, aims for that number to grow to 50 percent.

(Sources: World Bank, the Times Higher Education, the Hudson Institute, the Chronicle of Higher Education, CNET News, SAP)

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