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The Economy of Latin America

Question:

Write a report on the development path of the two countries of Latin America.

Latin America is defined as the group of nations in the two continents of America, with a predominance of Portuguese and Spanish. The group consists of many countries with varying level of economic condition. Until 1980s, the economy of Latin America was mainly based on the economic policy of import substitution. This policy had helped in the growth of the domestic economy and domestic businesses. However, this policy also reduced the international competitiveness of the domestic industry and increased the debt crisis of the nations. By 1990s, the continent switched to free market economy system. This resulted in reducing the debt crisis and established the industries of agriculture, mining and forestry (Oecd.org 2015).

Among the nations, Columbia and Argentina are two biggest economies in Latin America. Both the countries have demonstrated growth prospects and economic scopes. The economy of Argentina is the third largest in the Latin America and second largest in the South America. The economy is based on a rich source of natural resources, high level of literacy, export based agricultural industry and diversified industries. On the other hand, Colombia is just behind Argentina in the rank of largest economies of Latin America. This is also export based economy, petroleum being the major export product, followed by manufacturing (reports.weforum.org 2015). 


The investment decision on any economy depends on many factors. Majorly the macroeconomic factors of a nation influence the investment decisions. The element of political and economic uncertainties, stock of capital and other resources, income level of the country, level of liquid asset, aggregate demand, population growth, government policies, and many such economic factors determine the level of domestic and international investments in the nation. Hence, while making an investment in a nation of Latin America, the choice of the nation depends on such macro economic factors. In this case, the choice between Columbia and Argentina depends on the economic and political conditions of the countries and their growth prospects. The social factors also play a major role in investment decisions, such as, the crime rate, education level of the citizens, standard of living etc. The nations must be compared in order to take the final decision about the investments (Hatch and Howland 2015).

Economy of Argentina

Argentina is one of the most developed nations in the Latin America. It is a high income economy with the second position among the South American economies and third position among the Latin American economies. In 2016, the nominal GDP of Argentina was USD 545.9 billion (World Bank 2017). The major sectors contributing in the growth of the GDP are Agriculture, fishing and forestry (6%), mining (3.6%), manufacturing (17.2%), construction (5.6%), transport, utilities and communication (7.9%), government (9.5%), and business, social and other services (33.3%). The country has faced an inflation rate of 21.9% by June 2017, which is quite higher compared to the developed countries. Almost 32.2% people lives below the poverty line. The economy of Argentina is export based. In 2015, the total export of the country was $56.76 billion and the main export partners are Brazil, China and the United States. The country imported goods worth of $57.18 billion in 2015, and the major import partners were Brazil, United States, China and Germany. The key exports are petroleum, gas, corn, vehicles, wheat and soybeans, and the imported products are machinery, motor vehicles, organic chemicals, plastics, petroleum and natural gas (Arboleda and Gonzalez 2016).

Columbia and Argentina: largest economies in Latin America

Economy of Colombia

Colombia is another largest economy of South as well as Latin America. In 2016, the nominal GDP of Colombia was 282.5 billion USD (World Bank 2017). The level of inflation is 4.77% in 2017, which is at a moderate level and less than that in Argentina. The major sectors are textiles, oil, food processing, chemicals, clothing, footwear, cement, coal, gold, emeralds, home appliance, electronics, and shipbuilding. The country exported goods worth of $55 billion in 2014, and imported goods of $53.8 billion. The main export goods are petroleum, coal, nickel, apparel, televisions, smartphones, computers, steel, chemicals, emeralds, bananas, apparels etc. and import products are industrial equipment, consumer goods, chemicals, paper products, fuels, electricity and transportation equipment. The key trade partners are United States, Canada, EU, Venezuela, Ecuador, Peru, Netherlands, China, Mexico, Brazil, and Germany (Tabares, Alvarez and Urbano 2015).

GDP comparison of the two countries

             

Figure 1: GDP comparison of the two countries, 2005-2016

(Source: World Bank 2017)

The graph above depicts the growth of economies of the two countries in the past decades. It can be seen that, both the economies grew significantly, especially 2010 onwards; however, the level of growth of Argentina was higher than that of Colombia.

Competitiveness of a nation is dependent on the capacity of the industries to upgrade and innovate, and the companies gain the advantages against the competitors due to challenge and pressure. Over time, the competition has shifted more towards creation, innovation and assimilation of the knowledge. Thus, competitive advantage is generated and sustained through a localized process. Countries gain competitive advantage in some industries, in which they can create specialization. Hence, a nation cannot be competitive in all industries. In the industries, where the nation can produce most efficiently and at lower cost than the competitors, competitiveness is gained (Wagner III and Hollenbeck 2014).


Global Competitive Index (GCI) measures the effect of the primary factors, contributing to the conditions for competitiveness of a nation, with a specific focus on the macroeconomic environment, institutional qualities, supporting infrastructure and technology (Huggins et al. 2014). According to WEF Global Competitive Index of 2016-17, Argentina holds 104th position, and Colombia holds 61st position. In the list of 2015-16, Colombia was in the same position, while Argentina was at 106th position. Thus, from 2015 to 2016, Argentina has improved its competitive advantage compared to Colombia (WEF 2017). If the exports and imports of the countries are analyzed, then the areas of competitive advantage can be understood.

Factors influencing investment decisions

WEF has defined competitiveness as a set of policies, institutions, and elements determining the productivity of a nation. This in turn determines the rate of return on the investments in the economy. Investments drive the growth rate of a country, and a competitive economy draws more investments and grows faster. The 12 pillars of competitiveness are, Institutions, Infrastructure, Macroeconomic environment, Health and Primary education, Higher education and training, Goods market efficiency, Labor market efficiency, financial market development, Technological readiness, Market size, Business Sophistication, and Innovation (reports.weforum.org 2015). WEF also defined five stages of development and weighted index for measuring the growth and competitive advantage position of the countries, based on the 12 pillars. The stages are classified on the basis of the nature of growth. In stage 1, the growth is mainly factor driven and the nations compete on the basis of factor endowments. In Stage 2, growth is efficiency driven and in Stage 3, the growth is innovation driven. There are two transition stages in between these 3 stages. The classification of the countries happens on the basis of two conditions. Firstly, level of per capita GDP at the market exchange rate and secondly, the dependence on the resource sector than on the income (Gaportal.org 2017).

According to those stages, Colombia is in stage 2, which is efficiency driven, and Argentina is in the transition phase from stage 2 to stage 3, where stage 3 denotes the phase that is innovation driven. Hence, it can be said that, Colombia’s growth is dependent on the efficiency of the factors and resources, while Argentina is slightly more developed than Colombia. Its growth is generated from transition of resources being efficient and moving towards being innovative. However, the GCI ranking and score is better for Colombia than for Argentina due to various government policies to improve competitiveness (WEF 2017).


The sub-indexes of GCI are Basic Requirements, Efficiency Enhancers and Innovation and Sophistication factors. The GCI table also comprises of Rank and Score of the nations. In the 2016-17 Global Competitiveness Report by WEF, Argentina scored 3.81 out of 7. The average score of the nation was 3.87 from 2007 to 2017 (Tradingeconomics.com 2017). In 2016, Argentina went up the rank by two positions. This is driven by innovation and sophistication elements, which reflect better preparedness of the nation to adapt to the changing environment. The institution’s quality improved due to better protection of the intellectual property and more efficient jurisdiction. The education quality and efficiency of the goods market reflect signs of development. The improvement in both the score and rank came after the new administration implemented broad economic and social reforms in an adverse macroeconomic context, that is, Brazil’s recession. Brazil is the main trading partner of Argentina, and low commodity prices, high inflation, and adjustments in utility tariffs have created difficulties for the transition to flow towards a market oriented model. However, growth is expected to come along due to competitive reforms, although consumer sentiment is weak (weforum.org 2016).

Argentina's economy

In 2016-17, Colombia ranked 61 and scored 4.30 out of 7 in the Global Competitiveness Report by WEF (Tradingeconomics.com 2017). For the last 20 years, Colombia has worked on improving its competitiveness in the international market by implementing some reforms for consolidating the National System of Competitiveness, Technology, Innovation and Science. This has solidified the institutional framework for achieving private-public collaboration, required to develop the National Agenda and to strengthen the regions (Oecd.org 2015). With this institution, the system of innovation has made the competitiveness of the nation more efficient. All these systems worked separately and created impediments for the coordination between the competitiveness and science, technology and innovation (Williamson et al. 2013). Hence, the competitive strategies remained independent nationally as well as regionally. The new government has promoted the integration of all these factors into a single factor for competitiveness. Thus, not only competitiveness is achieved over the years, but other factors are improved also. At the same time, the government established many new departmental committees to promote the agendas for regional competitiveness, productivity, science, technology and innovation agendas, along with the national agendas (Harzing and Giroud 2015).

It can be recommended that, investment have better scopes of return in Colombia than in Argentina. Colombia is more developed technologically, with the establishment of National System of Competitiveness, Science, Technology and Innovation. The exports of Colombia also reflect these changes, while Argentina still depends on agricultural and mining. Hence, in relation to the 12 pillars of competitiveness, framed by WEF, Colombia has achieved the maximum success in the past few years. The government is actively involved in the process of improving the competitiveness of the nation; thereby committees are created for specific purposes (Galindo and Meléndez 2013). Hence, the political, social and economic conditions of Colombia are favorable for investments.

Conclusion

Latin America has also suffered from the ill effects of global financial crisis. The export values dropped, creating economic crisis for the export based nations, such as, Argentina and Columbia. However, with time, Colombia has recovered from the shocks and increased its competitiveness than Argentina, another major economy of the Latin America. By observing at the economic, social and political conditions of the countries and evaluating their competitiveness based on the 12 pillars and stages of development, it can be said that, investments in Colombia would bring more positive impact than in Argentina. Although, Argentina have come up in the ranking list in the last year, and Colombia remained at same position, yet, the rank and score of Colombia is much higher than Argentina. Hence, investment in Colombia is more profitable as the nation is more competitive, especially in the field of technology and innovation, than Argentina

References

Arboleda, A.M. and Gonzalez, J.F., 2016. Creating a Competitive Advantage: The Exoticism of Tango and Salsa From Cali, Colombia. International Journal of Arts Management, 19(1), p.42.

Galindo, A.J. and Meléndez, M., 2013. Small Is Not Beautiful: Firm-Level Evidence of the Link between Credit, Firm Size and Competitiveness in Colombia.

Gaportal.org, 2017. Global Competitiveness Index. [online] Gaportal.org. Available at: https://www.gaportal.org/global-indicators/global-competitiveness-index [Accessed 7 Oct. 2017].

Harzing, A.W. and Giroud, A., 2014. The competitive advantage of nations: An application to academia. Journal of Informetrics, 8(1), pp.29-42.

Hatch, N.W. and Howland, C., 2015, January. When Does Competitive Advantage Improve Customer Welfare?. In Academy of Management Proceedings (Vol. 2015, No. 1, p. 18091). Academy of Management.

Huggins, R., Izushi, H., Prokop, D. and Thompson, P., 2014. The global competitiveness of regions (Vol. 75). Routledge.

Oecd.org, 2015. Trade and Competitiveness in Argentina, Brazil and Chile: Competition policies and competitiveness - A view from the literature and the case of Argentina. [online] Oecd.org. Available at: https://www.oecd.org/brazil/tradeandcompetitivenessinargentinabrazilandchilecompetitionpoliciesandcompetitiveness-aviewfromtheliteratureandthecaseofargentina.htm [Accessed 7 Oct. 2017].

reports.weforum.org, 2015. Competitiveness Methodology. [online] Global Competitiveness Report 2014-2015. Available at: https://reports.weforum.org/global-competitiveness-report-2014-2015/methodology/ [Accessed 7 Oct. 2017].

Siegel, J.I., Pyun, L. and Cheon, B.Y., 2014. Multinational firms, labor market discrimination, and the capture of competitive advantage by exploiting the social divide.

Tabares, A., Alvarez, C. and Urbano, D., 2015. Born globals from the resource-based theory: A case study in Colombia. Journal of technology management & innovation, 10(2), pp.155-165.

Tradingeconomics.com, 2017. Argentina Competitiveness Index. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/argentina/competitiveness-index [Accessed 7 Oct. 2017].

Tradingeconomics.com, 2017. Colombia Competitiveness Index. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/colombia/competitiveness-index [Accessed 7 Oct. 2017].

Wagner III, J.A. and Hollenbeck, J.R., 2014. Organizational behavior: Securing competitive advantage. Routledge.

WEF, 2017. The Global Competitiveness Report 2016–2017.

weforum.org, 2016. How can Colombia become more competitive?. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2016/06/how-colombia-has-become-more-competitive/ [Accessed 7 Oct. 2017].

Williamson, P.J., Ramamurti, R., Fleury, A. and Fleury, M.T.L. eds., 2013. The competitive advantage of emerging market multinationals. Cambridge University Press.

World Bank, 2017. [online] Data.worldbank.org. Available at: https://data.worldbank.org/ [Accessed 7 Oct. 2017].

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