Despite growing populism and political tensions, Latin America is becoming more globalized, according to the 2006 Latin American Globalization Index from Latin Business Chronicle. But Brazil, Latin America’s largest economy, managed to become the least-globalized economy in the region.
The index of 19 countries looks at six factors that measure a country's links with the outside world:
- Exports of goods and services as a percent of GDP.
- Imports of goods and services as a percent of GDP.
- Foreign direct investment as a percent of GDP.
- Tourism receipts as a percent of GDP.
- Remittances as a percent of GDP.
- Internet penetration.
Panama cemented its position as the most globalized country, while Brazil replaced Argentina as the least globalized country in Latin America. The countries in the CAFTA trade pact uniting Central America and the United States lead the way, followed by the Andean Community members. Mercosur is making the least progress.
Of the 19 countries included in the 2006 index, 14 improved their score, while only three saw declines. The average score for the region is now 9.14, up from the 8.76 in the 2005 index. The 2006 index includes two new countries, Haiti and Bolivia. Cuba was not included due to insufficient data.
The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR, or more popularly known as CAFTA) is the big winner in the 2006 globalization index. Five of its members captured the top seven spots, including the number two position. All but one of the six CAFTA members improved their score from last year. Costa Rica and Nicaragua made most progress, but also El Salvador, Guatemala and Honduras became more globalized. Costa Rica jumped from third place overall to second place, while Nicaragua jumped from sixth to third place on the index.
Costa Rica ranked second in the categories exports, tourism receipts and Internet penetration, while it ranked third in imports and fifth in FDI. Nicaragua ranked second in imports and FDI, third in remittances and fifth in tourism receips. Those scores helped offset its low Internet penetration, the lowest in Latin America in 2005 (excluding Cuba). Honduras also did well. It came in second in remittances, third in tourism receipts as a percent of GDP and fourth in imports.
The Dominican Republic, which was second last year, fell to sixth place as a result of a significant decline in its score. Its trade, tourism receipts and remittances as a percent of GDP in 2005 fell compared to 2004. But it boosted its Internet penetration slightly. The declines in scores are largely due to GDP growing faster than trade, tourism receipts and remittances. The Dominican economy last year expanded by 9.3 percent, the highest growth rate in Latin America along with Venezuela. And despite the decline in tourism receipts as a percent of GDP, the Dominican Republic is still the leader in Latin America in that category.
While Costa Rica is the most globalized economy in CAFTA, the least-globalized economy in the pact is Guatemala. Its score improved, but its ranking fell. Guatemala had Latin America’s second-lowest exports as a percent of GDP and the sixth-lowest Internet penetration. These low scores offset good results such as having Latin America’s fifth-largest remittances and eigth-highest tourism receipts as a a percent of GDP.
All in all, CAFTA managed to reach an average score of 11.05, which was better than the Andean Community ( 8.17 ) and Mercosur ( 7.12 ).
Four of the Andean Community’s members improved their score, led by new member Chile, which jumped up one place on the overall ranking. But also Peru saw a significant increase in its score, followed by Ecuador and Colombia. The fifth member, Bolivia, was not included in last year’s index.
While Chile is the most globalized country in the Andean Community, Colombia is the least globalized nation. Its low score also qualified it to become the second-least globalized country in Latin America.
Chile is the leader in Latin America in the categories FDI as a percent of GDP and Internet penetration and came in fourth in terms of exports as a percent of GDP. Its tourism receipts as a percent of GDP, however, were among the lowest in Latin America and remittances were practically zero.
Colombia’s low rank is due to low scores in categories like third-lowest exports and tourism receipts as a percent of GDP and fifth-lowest imports. These came on top of average results in categories like FDI and remittances as a percent of GDP and Internet penetration.
The Andean Community overall is more globalized than Mercosur, but less than the CAFTA countries.
Mercosur is the big loser. Brazil has fallen to the last place in the index. Uruguay’s score also fell, while Venezuela, Argentina and Paraguay improved their score. Overall the total score became the worst of the three leading trade groups in Central and South America.
Brazil had the lowest imports as a percent of GDP in Latin America, and the fourth-lowest in exports. It had the second-lowest tourism receipts as a percent of GDP and the fifth-lowest remittances as a percent of GDP. And in categories where it should do well, like FDI and Internet penetration, it only came in sixth and seventh, respectively.
Argentina fared better than Brazil, but has little to brag about when it comes to globalization. Its exports, imports, FDI and remittances as a percent of GDP are among the five lowest in Latin America. Argentina did well in only one category — Internet penetration — where it came in fourth overall.
While Brazil is the least-globalized within the group, Paraguay is the most globalized. Its exports as a percent of GDP were among the top seven countries in Latin America, while its imports and remittances as a percent of GDP were higher than the other Mercosur countries. That helped offset relatively low scores in categories like FDI, tourism receipts and Internet penetration.
Panama improved its score from last year and solidified its status as the most globalized economy in Latin America. The country ranked first in categories like exports and imports as a percent of GDP, and fourth in FDI and tourism receipts as a percent of GDP. It scored lower in remittances and Internet penetration, but not enough to take way its top spot.
The high score in trade is largely due to the commercial activity at the Colon Free Zone, the second-largest free zone in the world (after Hong Kong). Panama’s high trade volumes have resulted in the country being the home of Latin America’s second-largest container port (Colon). (See Latin America’s Top Ports)
Panama’s high score in FDI is due to growing investments in sectors such as real estate, shipping and finance. The $500 million acquisition of BAC International Bank de Panama by GE Consumer Finance last year was the 22nd largest M&A deal in Latin America in 2005, according to Thomson Financial and Latin Business Chronicle’s Top 100 M&As in Latin America. Panama hosts the largest international banking center in Latin America, a major reinsurance center, the region’s largest company registry, the world’s largest shipping registry and a growing maritime sector taking advantage of the Panama Canal.
Mexico, the second-largest economy in Latin America, came in ninth place on the 2006 index — the same rank as in 2005. It thus fared much better than Brazil and Argentina (the other two big economies in Latin America) but lagged smaller economies like Haiti (the smallest in Latin America), Panama and most of Central America.
Despite being the undisputed trade leader in Latin America, as a percent of GDP its trade is at best average. Its exports reached 29.9 percent of GDP, while imports reached 31.5 percent of GDP in 2005. The same result is repeated in FDI, tourism receipts and remittances, where Mexico is the top Latin American country in real terms, but average when measured as a percent of GDP. Mexico did do well in Internet penetration, coming in at fifth place (ahead of Brazil, but behind Argentina).
Panama is expected to continue being the most globalized country in Latin America, getting a a significant boost from a $5.2 billion expansion plan for the canal. "Beyond the expanded capacity, another direct beneficiary of the enlarged Canal will be the Colon Free Zone," Robert McMillan, former chairman of the Panama Canal Commission argues in his new book, Global Passage. "The Panamanian facility will see increased traffic as large container ships are offloaded to distribute cargo to Eastern ports in North and South America."
Panama and the Central American CAFTA members are also expected to boost globalization further as they reach a free trade agreements with the European Union, possibly as soon as 2008. That will make it the only region in Latin America outside of Mexico with free trade agreements with both the United States and Europe.
Globalization in Colombia, Ecuador and Peru will likely get a boost from a free trade agreement with the European Union. The EU announced during the EU-Latin American summit in Vienna in May that it would start negotiations this year with the Andean Community for a free trade agreement. In reality that means Colombia, Ecuador and Peru as Bolivia is not participating and Chile already has a hugely successful free trade agreement with the EU. A further boost would come if Colombia and Peru were able to implement a free trade agreement with the United States. The agreements have been reached, but are pending US Congressional approval, which likely will be delayed as a result of the Democrat victory in US elections recently. Although Colombia and Peru will benefit from an extension of current duty free access to the United States, only a free trade pact will provide significant increases in two-way trade and foreign direct investments, three key factors in the globalization index.
The Mercosur countries are expected to continue to be laggards in globalization in Latin America. They are the only ones without any prospects for free trade agreements with the United States or Europe. Uruguay may boost U.S. trade and investment thanks to an Investment Framework Agreement (TIFA) with the United States, with is being negotiated and may be signed either by the end of the year or during the first months of 2007. In the short term, both Brazil and Argentina are benfiting from increased exports to China.
"Short term, Asia is the option for Brazil and Mercosur," says Riordan Roett, director of the Latin America studies program at Johns Hopkins University. But that may be a double-edged sword, he warns. There’s great demand short term, but no control over pricing, he points out. If "Brazil succumbs to the China card and places all of its trade cards in the export basket [that] dooms it to resource-dependent growth, which is a loser-policy," Roett says.