1 Analysis of the Latin American Business Environment

1.1 Economic Environment

Economic growth accelerated

Early 2010 forecasts predicted around 3.0% GDP growth, which would have signaled
a promising recovery from the almost 2.0% drop in 2009.

Inflationary pressures grew but inflation stayed on target

Central banks responded to signs of increasing inflationary pressures by tightening

monetary policy during H1 2010. With growth moderating in H2, they stopped
raising interest rates, but tightened monetary controls again in mid-September
when growth did not soften as much as expected.
Stronger financial markets

By mid-September the region’s most important stock markets were up for the year,
except Brazil (down slightly in reais but up in dollars). Domestic credit and other
banking services expanded, including mortgage lending, especially to lower income
groups.

Solid external performance

Latin America made significant gains on all external fronts except overseas
remittances, which picked up but remained below pre-crisis flows. Foreign direct
investment (FDI) gained momentum during the year and did return to pre-crisis
levels, although there continued to be significant differences among countries .
Current account balances varied across the region. Favorable trade and investment
flows enabled governments to effectively manage their foreign debts. A final sign of
growing external confidence in Latin America were improved country risk ratings.

1.2 Social Environment

The rapid resumption of growth helped head off a reversal in the social advances –
declining unemployment, poverty and inequality – achieved during the growth-with-
low-inflation cycle prior to the crisis. Conditional cash transfer programs also played
an important role in reducing poverty and lowering inequality. Between 2002 and
2008, 41 million Latin American were lifted out of poverty (ECLAC).

Improving social environment reinforced economic recovery and centrist

politics

Rising wages translated into a surge in consumer spending that helped cushion
Latin America from the weak recovery of its traditional trading partners, most
importantly the U.S.

Crime and threats to personal security persisted

Although most alarming in Mexico, drug-related violence deepened in Central

America where it was linked to urban gangs. Venezuela emerged as an even more
dangerous place. Even countries like Peru and Chile have seen an increase in rural
violence related to indigenous land claims and informal mining.

1.3 Political Environment

Latin America’s political environment has become more business friendly over the
past decade. Last year’s quick economic recovery helped institutionalize the
centrist democratic politics that were taking hold in much of the region. In the four
countries with populist political arrangements – Venezuela, Nicaragua, Ecuador and
Bolivia – the business environments remained problematic, more so in the former
two than the latter two.

Elections confirmed convergence around center

Of the six presidential elections held since September 2009, the candidates of leftist
parties won in Uruguay and Bolivia; the candidates of the right in Honduras, Chile
and Colombia and an avowedly centrist candidate won in Cost Rica.

1.4 Policy Environment

Moderate policies reflected – and reinforced – the growing centrist political

consensus. The quick recovery confirmed the efficacy of consistent macroeconomic
policies prioritizing fiscal discipline, inflation-rate targeting and floating exchange
rates. The more successful countries further added conditional income transfer
programs, thereby moving beyond the Washington consensus model of the 1990s
to a hybrid Latin American approach.

Policy adjustments

Once it became clear that a sustainable recovery was underway, governments

began to shift from expansionary to restrictive fiscal and monetary policies. Central
banks raised benchmark interest rates, which had dropped to historically low levels
in 2009, as surging GDP growth generated inflationary pressures. The 2009
downturn and countercyclical policy responses produced budget deficits in 2009.
1.5 Legal Environment
Disputes over executive power

While Venezuela and the Dominican Republic abolished term limits by law, in
Nicaragua President Ortega secured a victory when the Supreme Court declared the
constitutionally established term limit “unenforceable.” Colombia President Alvaro
Uribe secured consent of congress to change the constitution to allow him an
additional term. However, when the constitutional court found the new law
unconstitutional, Uribe acquiesced and did not stand for another presidential term.
Several countries, notably Bolivia, Venezuela, and Panama, witnessed a troubling
increase in the politically-motivated prosecution of the opposition.

Debates about amnesty laws

The debates over the legacy of military rule were revived with calls to annul
amnesty laws for human rights abuses and war crimes.

Indigenous rights

Conflicts between governments and indigenous groups grew more acute in some
countries. Economic, land and water disputes led to violence in Chile and Peru. But
even in countries like Bolivia and Ecuador whose leadership enjoyed the support of
indigenous communities, tensions arose between the state and indigenous groups
over issues such as local autonomy, development rights and electoral
representation. The expansion of traditionally applied justice within indigenous
communities was also controversial, especially in Bolivia.