EIU - Latin America

Country Forecast
Latin America
Regional overview
September 2012
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Latin America: Regional overview
Contents
Country Forecast September 2012
Fact sheet
Summary
Building equality in Latin America with an integrated vision

of development
10
10
15
Political outlook
Political environment
Election watch
Economic forecast
20
20
Global outlook
33
Business environment rankings
37
37
38
39
40
Latin America and the Caribbean

Expanded Mercosur
Andean Community
Central America
41
Guide to the business rankings model
42
List of indicators in the business rankings model
Data summary
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The Economist Intelligence Unit Limited 2012
Fact sheet
Latin America
Population (m)
Population growth (%)
GDP (US$ bn; at market exchange rates)
GDP growth (%)
GDP per head (US$; at market exchange rates)
GDP per head (US$; at purchasing power parity)
Inflation (av; %)
2011
575
1.2
5,634
4.3
9,797
12,619
6.5
Historical averages (%)

Population growth
Real GDP growth
Real domestic demand growth
Inflation
Current-account balance/GDP
FDI inflows/GDP
Debt/exports of G&S
2007-11
1.2
3.6
4.5
6.2
-0.6
2.1
89.8
Background: Military rule and populist economic policies created instability in Latin America for much of the second half of
the 20th century. A debt crisis that started in 1982 threw the region into recession and triggered political changes, as military
governments fell and economic policies became more market-oriented. The region is now much more stable, but political
fragmentation, the re-emergence of populism, particularlybut not exclusivelyamong the less politically stable naturalresource-intensive economies, and sub-par government efficiency remain reasons for concern. Very high crime rates and drugrelated violence plague many countries, most notably Mexico, Central America and the Caribbean.
Political structure: Except for Cuba, all countries have democratically elected governments, most with strong presidencies.
There is little risk of a return to military rule, but confidence in institutions remains weak, reflecting poor governance
standards, as well as persistently large income disparities and entrenched poverty. The loss of support for mainstream
parties is leading to more difficult legislative environments in the likes of Chile, Mexico and Brazil, while also fuelling
instability in Bolivia, Ecuador, and Venezuela.
Policy issues: Trade and investment regimes were liberalised across the region in the 1980s and 1990s. Many countries have
also adopted floating exchange-rate regimes, in some cases backed by an inflation-targeting framework. Reforms in the past
two decades have reduced fiscal and external vulnerabilities (though tax collection remains low and the external financing
requirement relatively high), lowered inflation and engendered much greater macroeconomic stability. The continued
predominance of primary commodities in the region's export basket has supported GDP growth rates in recent years, on
the back of high world prices from 2004, and has also helped the region to build up an abundant cushion of foreignexchange reserves (estimated at US$766.9bn in 2011). But the commodities boom has also complicated policymaking,
exacerbating currency appreciation pressures amid an influx of portfolio inflows in recent times. It has also created
concerns over the export competitiveness of the manufacturing sector. This has prompted some governments, notably
Argentina and Brazil, to adopt protectionist measures to shield their domestic manufacturing sector, with the risk of more to
follow, given the uncertain global economic outlook. Many countries in the region, particularly the smallest, are dependent
on remittances from emigrant workers, mostly in the US and Europe. Low skills levels remain a major weakness.
Taxation: Most regional tax systems rely heavily on indirect taxes and royalties from minerals extraction. Efforts to raise
generally low levels of tax collection are often thwarted by a culture of tax evasion and weak institutional capacity.
Foreign trade: The region has become more open. Although trade diversification has increased in recent years, the EU and
US remain the main export market for the region as a whole. China is a growing market for raw materials producers,
notably in South America; it accounted for 8.5% of the regions exports and for 19.6% of its imports in 2011. Mexico's maquila
(offshore assembly for re-export) industry accounts for about 40% of regional trade.
Leading markets 2011
EU
US
China
Canada
% of total
65.1
23.0
8.5
3.4
Leading suppliers 2011

US
China
EU
Japan
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% of total
56.1
19.6
17.4
7.0
Summary
Equality through integrated
development strategy
In an interview with Alicia Brcena, Executive Secretary of the UN Economic

Commission for Latin America and the Caribbean (ECLAC), the Economist
Intelligence Unit explores the challenges of building equality in the region and
ECLAC's view on how to do it through an integrated vision of development.
Political outlook
Despite important progress in achieving macroeconomic and political stability,

across the region still-high poverty levels and widespread income and regional
disparities are fuelling mounting frustration and social unrest in the most
vulnerable segments of the population, contributing to the continuing appeal of
populist leaders and policiesincluding some controversial nationalisations in
recent months. Drug- and gang-related crime and violence are on the rise and
represent a major concern in several countries in the region. Discontent with
traditional parties' policies, lax governance standards and the slow pace of
reform add to social turbulence. Structural reforms are needed to enhance
productivity rates. However, weak appetite for such reforms, given fragmented
congressional majorities and obstructionist legislatures, will make significant
progress unlikely in 2012-16.
Economic outlook
In the context of an outright contraction in the euro zone, sluggish growth in

the US and a slowing Chinese economy, Latin American growth will decelerate
to 3.2% in 2012 (revised down from 3.7% in June). Although the risks to even this
revised forecast remain on the downside given continuing global uncertainty,
our outlook for the region remains fairly positive and we assume that the
slowdown in 2012 is cyclical and not structuralGDP growth will then pick up
to an average of 4% in 2013-16. South America's economic prospects will
continue to be supported by Asian commodity demand, while persistently low
OECD interest rates will benefit those economies which are larger and more
closely integrated with the international financial markets. Occasional episodes
of global volatility will continue to trouble the region, given its still-large
external financing requirement.
Business environment
rankings
Only five countries in the region (Costa Rica, Colombia, Dominican Republic,
Mexico and Brazil) will boost their global ranking in the forecast period, while
five will lose ground. Although most countries in the region will make progress
compared with their past performance, this will not be fast enough to catch up
with other emerging markets. Latin America will register a particularly striking
gap compared with Asia and Eastern Europe.
Key indicators
GDP growth (% real change)
Consumer prices (av)
Current account balance (US$bn)
Current account balance (% of GDP)
External financing requirement (US$bn)
FDI inflows (US$ bn)
FDI inflows (% of GDP)
2011
4.3
6.5
-63.4
-1.1
-215.8
154.5
2.7
2012
3.2
5.9
-95.3
-1.7
-250.7
147.7
2.6
2013
3.9
6.2
-126.1
-2.0
-288.1
161.8
2.6
2014
4.1
5.8
-158.9
-2.4
-328.4
176.7
2.6
2015
4.0
5.6
-182.1
-2.6
-360.4
187.2
2.6
2016
4.1
5.5
-193.4
-2.6
-381.0
196.5
2.6
Editors: Irene Mia (editor); Fiona Mackie (consulting editor) Editorial closing date: June 10th 2012
All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected]
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Basic data, 2011
Argentina
Bolivia
Brazil
Colombia
Chile
Costa Rica
Cuba
Dominican Republic
Ecuador
El Salvador
Guatemala
Honduras
Jamaica
Mexico
Nicaragua
Peru
Paraguay
Panama
Trinidad & Tobago
Uruguay
Venezuela
Regional totals
Population (m) GDP (US$ bn)

41
370
10
20
191
2,142
47
286
17
216
5
36
11
58
10
52
14
58
6
21
13
41
8
15
3
14
112
1,035
7
7
30
154
6
18
2
27
1
20
3
39
29
386
569
5,031
Per head
(US$)
9,138
1,945
11,229
6,102
12,654
7,797
5,151
5,364
4,003
3,388
3,084
2,021
5,069
9,206
1,013
5,137
2,745
16,947
15,193
11,634
13,491
8,849
GDP at PPP
(US$ bn)
645
48
2,187
436
277
50
115
105
116
40
103
29
13
1,836
20
277
33
58
18
47
352
6,811
Per head
(PPP; US$)
15,919
4,785
11,466
9,296
16,177
10,733
10,217
10,924
7,992
6,444
7,741
3,806
4,740
16,323
3,039
9,231
5,160
36,984
13,768
14,049
12,286
11,980
GDP growth
(% change)
9.2
4.1
7.6
4.0
6.1
4.7
2.4
7.8
3.6
1.4
2.8
2.8
-1.2
5.5
4.5
8.8
15.0
7.6
0.0
8.9
-1.5
6.0
Inflation
(av; %)
10.5
2.5
5.0
2.3
1.4
5.7
2.9
6.3
3.6
1.2
3.9
4.7
12.6
4.2
5.5
1.5
4.7
3.5
10.5
6.7
28.2
5.9
Current-account
balance
(% of GDP)
0.8
4.4
-2.2
-3.1
1.8
-3.5
0.0
-8.6
-3.3
-2.3
-2.1
-6.2
-6.8
-0.3
-14.5
-1.7
-3.6
-10.8
18.9
-1.1
3.1
-1.1
Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala,
Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and
Tobago, Uruguay and Venezuela
Latin America 12: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba,
Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela
Mercado Comn del Sur (Mercosur, the Southern Cone customs union):
Argentina, Brazil, Paraguay, Uruguay and Venezuela (pending ratification)
Comunidad Andina (CAN, the Andean Community): Bolivia, Colombia,
Ecuador and Peru
Central America: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
and Panama
Caribbean: Cuba, Dominican Republic, Jamaica, and Trinidad and Tobago
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Building equality in Latin America with an

integrated vision of development
An Interview with Alicia Brcena, Executive Secretary of the UN Economic
Commission for Latin America and the Caribbean (ECLAC).
Using industrial policy as a
driver of structural change
Can you tell us more about ECLAC's vision for regional development and the role of
macroeconomic, industrial and social policy in achieving long-term goals for growth
and income equality?
Alicia Brcena: ECLAC has held its 34th Session in El Salvador on 27th-31st
August 2012, during which the institutional document, "Structural change for
equality: an integrated approach to development", was presented to member
countries. The document stresses the need for the countries of the region to
engage in structural change and outlines policy guidelines based on the
countries past experiences and present economic, social and institutional
structures. Latin America and the Caribbean have traditionally been locked in a
production structure centred on environmentally inefficient and lowknowledge-intensive activities, because the incentives in place have
systematically led investment to those activities. Achieving structural change
requires moving towards knowledge-intensive sectors, aiming at reducing
domestic and external gaps in terms of income and productivity in a
sustainable manner. This way, employment opportunities in sectors with higher
productivity are created, general employment levels rise, income goes up and,
ultimately, a more equal distribution is achieved. Transiting to economic
structures with higher and less heterogeneous productivity levels means
training workers for them to be able to shift from lower to higher productivity
sectors, reducing informality and productivity gaps between different sectors of
the domestic economies. At the same time, while firms are adapting to new
technologies and market conditions, changes in the labour market would result
in higher demand for skilled workers in high productivity sectors, leading to an
increase in inequality in the short and medium term. In devising a concise
policy framework with a stronger social safety net, instruments have to be
included to protect the vulnerable population that has no access to benefits
granted through labour markets. Non-contributory transfers are an example of
such instruments. The state acquires, therefore, a fundamental role in the
structural change for equality. Not only does it have to design coherent
economic policies, but also provide for an inclusive social safety net.
In a world that is being reshaped by two major forces, such as the technological
revolution and environmental sustainability, industrial policy is required to
redefine incentives structures away from static comparative advantages and
carbon-dioxide-intensive production systems. Industrial policy in Latin America
should aim at diversifying production structures by creating new knowledgeintensive sectors aiming at overcoming the inertia of the production structure,
while at the same time strengthening capacity and competitiveness in existing
sectors. Incentives for new forms of production incorporating new technologies
should be given out to micro, small and medium-sized enterprises (MSMEs).
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There is a thick set of laws passed in the countries in the region concerning
small and medium-sized enterprise (SME) promotion, but most of the initiatives
do not get implemented. Therefore, countries need to commit to promote
productivity in MSMEs with firm actions, aiming at transforming these firms in
centres for the dissemination of knowledge and technology. Industrial policy
means selecting sectors. This is not to disregard market incentives, but to
redefine them, altering cost and price structures to break through the lock-in,
aiming at creating dynamic competitive advantages and reaching national
development objectives. Smaller countries in the region will face more
difficulties in putting industrial policies (involving fiscal and credit incentives,
direct public investment, development banking institutions, government
procurement, among others) in practice, owing to their more restricted fiscal
space and institutional constraints. Multilateral development banks and
regional integration initiatives acquire particular importance in these cases,
increasing the pool of available resources and expanding the geographic scope
of domestic markets.
Bridging the infrastructure gap
ECLAC has identified a significant infrastructure gap in Latin America (relative both
to its development requirements and to infrastructure investment elsewhere in the
world). How can the region finance the investment needed to close this gap?
Alicia Brcena: Investment in infrastructure decreased sharply during the 1980s
and the 1990s in Latin America, from around 3.5% of GDP in 1980 to around 1%
of GDP since 2000, with a trough of 0.66% in 1997. It is estimated that the
region would need to invest 5% of GDP per year for the next 15 years in
infrastructure to meet the expected demands; that is, to close the infrastructure
gap. If it were to achieve the infrastructure levels in Southeast Asia, the region
would have to invest 8% of GDP per year. The decline in public investment
reflected, in large measure, the decreasing weight of government in the
economy in the region, particularly reflected in the privatisation processes
undertaken in the 1990s. After 2005 the downward trend was slightly reversed,
owing to increased scope to implement public policies in several Latin
American countries, provided mainly by the consolidation of government
accounts, the reduction of debt stocks and improved debt profiles, and the
increase in international reserves. Despite the abundance of external resources
that have been available in some periods, such as the recent commodity price
booms, public investment has shown limited dynamism and has not been able
to serve as a catalyst for private investment. Public spending on infrastructure
has shown pro-cyclical behaviour (with the exception of the 2008-09 crisis),
indicating that it has been used as an adjustment variable. However, because of
its significant impact on medium- and long-term growth, public investment
policies should be formulated in terms of their effects on the production
structure and growth over a larger horizon, rather than directed at cyclical
adjustment needs of aggregate demand. This would support changes in the
production structure and growth rates in accordance with the development
needs of the region. Increased policy co-ordination at regional and subregional
levels in the area of infrastructure (among other areas) is also important to
create the appropriate conditions for structural change for equality. The main
criterion in making investment decisions is not the availability of savings, but
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the expected return on investment. Misaligned exchange or interest rates and

low public investment in a context of significant volatility have prevented
private investment from responding according to national development
requirements, with subsequent effects on growth, productivity and
employment. Therefore, in order to translate episodes of external resources into
opportunities for financing development needs in the countries of the region,
strong and efficient institutions are needed to align private incentives with
public policies, through promotion, guidance, selection and regulation and
funding defined in accordance with the national development strategy. There
are two potential areas combining the increase in fiscal resources with
strategies and action lines to advance in structural change with environmental
sustainability: environmental fiscal reform and good governance of natural
resources. The effects of these schemes can be powerful to the extent that
they can change profitability incentives among sectors, by forcing the
internalisation of negative externalities and reducing the rate of depletion of
non-renewable resources.
Promoting innovation
By some key measures, Latin America lags behind in terms of technological

diffusion and innovation. How can the region's governments implement more
effective ICT policies and create environments that are more conducive to
innovation?
Alicia Brcena: In the context of the ongoing technological revolution,
investment in broadband infrastructure is key, as it serves as a platform for the
provision of services that permeate the various sectors of the economy and
have direct effects on economic growth and social inclusion. These services
include education (access to remote information, information services,
development of new models of teaching and learning), health (remote
diagnostic services), governance (transparency, participation, access to
government information) and environment protection. Despite progress made
in recent years in some countries of the region, bandwidth remains expensive,
both in absolute terms and relative to income per capita. In addition,
broadband quality, measured in terms of connection speed and latency, is low.
According to the International Telecommunication Union (ITU), average fixed
broadband access in 2010 was 7% in Latin America and 26% in the OECD, while
on average, mobile broadband access was 8% and 57%, respectively. As for the
cost, in Latin America the average price for 1 Mbps is US$25, reaching more than
US$100 in extreme cases, while in Europe the average cost for the same speed
in countries such as Spain, Italy and France is close to US$5, and in South Korea
it is less than US$1.
The region shows, therefore, a significant lag in terms of broadband
infrastructure, reflected in growing gaps in access, connection speed and quality
of service. Solving this problem requires a combination of increased public and
private investment to expand infrastructure, including international connections
and development of traffic-exchange points both nationally and among groups
of countries. ECLAC has launched the Regional Broadband Observatory
(ORBA) in 2011, following a request by the Regional Dialogue on Broadband.
The Dialogue deals with issues concerning international connections and
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development of traffic-exchange points, and has fostered the implementation of

new information and communication technology (ICT) policies in the
participating countries. A noteworthy example is the inclusion in Article 50 of
the Telecommunications Act of Bolivia, adopted on 8 August 2011, of an
interconnection condition for Internet service providers, following discussions
and work developed within the Dialogue. This condition seeks to reduce
broadband service costs through more efficient use of existing networks.
Finally, it is worth noting that in recent years, countries of the region have
accorded increasing importance to science, technology and innovation policies,
gaining greater experience in their design. The main achievement has been to
incorporate in the policy agenda the "national innovation system" concept,
where innovation is seen as a complex, non-linear, systemic phenomenon that
depends on interaction between actors responding to market or non-market
incentives. Countries are now required to enhance their efforts by
putting greater emphasis on the implementation of these policies and ensuring
their financing.
Harnessing natural resources
for development
Latin America is abundantly endowed with natural resources and we are currently
witnessing another commodity export boom. How can the region harness this
boom and manage natural resources to maximise its contribution to the region's
long-term development? How can policy successfully address social and
environmental concerns (particularly among mining protestors) while continuing to
attract needed investments?
Alicia Brcena: In the context of commodity price increases between 2004 and
2010, revenue nearly quadrupled in the mining sector and doubled in the
hydrocarbons sector, compared with the average of the 1990-2003 period. The
government collects taxes, royalties and other duties on this revenue. Good
governance of natural resources refers to the policy framework concerning the
ownership of those resources and the appropriation and distribution of their
revenue to maximise their contribution to development. In this context, the key
is to combine the following objectives: a) achieving greater appropriation by
society of revenue of the extractive sectors, through progressive schemes, in the
cycles of rising prices, without compromising the dynamism of investment; b)
channelling these funds into investment in education and training, innovation
and technological development, infrastructure and other long-term investment;
and c) institutionalising an adequate macroeconomic management of such
revenue, while managing the possible negative effects that they may generate
on the exchange rate and the production structure. Latin American countries
have struggled to translate commodity export booms into development.
Challenges remain in organising and creating efficient institutions that can put
consistent policies in practice over the long run. This requires building political
consensus to improve institutions, regulatory frameworks and policy
instruments governing the exploitation of non-renewable resources, and also
reconciling macroeconomic and financial objectives with productive and
social objectives within the different heads in charge of economic policy.
Success stories that serve as examples are the cases of the resource-rich
Nordic countries.
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Leveraging the growing

relationship with China
How should Latin America leverage fully its growing relationship with China, while
facing up to the competition posed by its new trade partner's labour cost advantages
and higher value-added export capabilities?
Alicia Brcena: Between 2006 and 2011, Latin American exports to Asia-Pacific
countries grew at three times the rate of the regions exports to the rest of the
world, especially because of a steep rise in exports to China, which grew at
four times the rate of exports to the rest of the world. Trade between Latin
America and China stood at US$237bn in 2011 and now accounts for slightly
over one-half of all trade with the Asia-Pacific region. Owing to this dynamic
performance, China has overtaken Japan as the regions leading Asia-Pacific
trading partner. Moreover, according to ECLACs forecasts, China is poised to
overtake the EU as the regions second trading partner in 2014-15. Foreign direct
investment (FDI) links between the region and China still lag behind trade
dynamics, both in scale and stability. In 2009, Chinas FDI to Latin America was
US$255m, which compared with over US$75bn in exports in the same year. In
2010 Chinese FDI directed to Latin America soared to over US$15bn (9% of total
FDI received), making China the third-largest foreign investor in the region that
year, after the United States (17%) and the Netherlands (13%). Nevertheless, in
2011 FDI flows originating in this Asian country only represented about 1% of
total FDI to the region.
Trade with Asia is mainly of an inter-industry nature and highly concentrated
in primary products and natural resource-based manufactures. Therefore, one
major challenge is to prevent the growing trade between the two regions from
reproducing and entrenching a centre-periphery trade pattern in which Asia,
and China in particular, emerges as a new centre and the countries of Latin
America as a new periphery. During a visit to ECLAC this year, the Chinese
premier, Wen Jiabao, stated his country's wishes to have balanced trade with
Latin America by increasing future imports of products with greater added
value from the region. The visit of Mr Jiabao highlighted the urgency of
developing a regional agenda of concerted priorities towards China, over and
beyond national unilateral initiatives. China has defined such a strategy for the
region and it is important that the region defines a co-ordinated strategy,
underlining the need to move towards a trading relationship that simulates
growth with innovation, export diversification and employment quality. To
compete in international markets and pursue economic and social
development, the region needs to build up dynamic competitive advantages,
beyond its traditional natural resource-based or labour cost comparative
advantages. Therefore, embarking on structural change with equality, as laid out
in ECLACs institutional document, "Structural change for equality: an
integrated approach to development", will be key for facing competitiveness
challenges from China.
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10
Political outlook
In the past two decades or so Latin America has made important strides
towards political and macroeconomic stability after the recurring crises of the
1980s and 1990s. Solid GDP growth rates in the last few years (with the
exception of 2009, when the region as a whole contracted by 2%), together with
increasing public transfers to the most vulnerable segments of the population,
have also helped in reducing income disparity and lifting more and more
people out of poverty. According to the UN Economic Commission for Latin
America and the Caribbean (ECLAC), the Gini coefficient (a measure of income
inequality) fell from 55 to 52 between 2002 and 2008. Poverty and extreme
poverty fell from 43.8% and 18.6%, respectively, in 1999, to 30.4% and 12.8%,
respectively, in 2011, with a total of 41m and 18m people lifted out of poverty
and extreme poverty, respectively. The reduction of poverty and income
inequality has had a strong impact on the emergence of a new middle class in
the region, which has also been driven by greater economic stability, increases
in minimum wages and conditional cash transfer programmes geared towards
human capital development. In Brazil alone, 48.7m people have moved into the
upper- and middle-class categories from 2003 to 2011 (with 13.3m people
ascending to the middle class over the past two years or so), according to the
Fundao Getulio Vargas (FGV, a Rio de Janeiro-based research centre). Stronger
economic stability has also gone hand-in-hand with strengthened institutional
environments, with the establishment of democratic regimes almost
everywhere in the region (Cuba being the notable exception) and a progressive
reduction in the armed forces' interference in policymaking.
However, despite the economic and political progress detailed above, still-high
poverty rates and widespread income and regional disparities (according to the
OECD, one-third of Latin Americans still live below the poverty line, and twothirds of Latin American countries rank among the most unequal in the world)
continue to fuel frustration and social unrest in the most vulnerable segments
of the population, contributing to the continuing appeal of populist leaders and
practicesincluding some controversial nationalisations in recent months
across the region. Drug- and gang-related crime and violence are on the rise and
represent a major concern in several countries in the region, particularly
Mexico, Central America and the Caribbean. According to the UN Development
Programme (UNDP), Honduras, El Salvador and Jamaica had the highest
homicide rates in the world, with 82.1, 66 and 52.1 homicides per 100,000
people in 2011, while the cost of gang-related crime has been estimated by the
Caribbean Community (Caricom) at 2.8-4% of GDP in the Caribbean region.
Last but not least, discontent with traditional parties' policies, lax governance
standards and the slow pace of reform, coupled with demands for better
services from the emerging middle class, add to social turbulence throughout
Latin America, including in countries perceived as generally stable, such as
Mexico and Chile.
www.eiu.com
Use of natural resources remains a

contentious issue in the Andes
Poverty reduction remains a priority

across the region
11
Frustration with the perceived unfair allocation of the benefits of economic

growth, together with still-large regional disparities and high food prices,
continues to threaten governability in some of the Andean region, where an
investment boom has been accompanied by a substantial increase in the
number of social conflicts over the control and use of natural resources.
Controversies stem from the concerns of rural poor and indigenous
communities over how extractive projects will affect their livelihood and the
environment, in particular their access to water for agriculture. The latest and
most serious of such episodes has involved the largest single investment
(US$4.8bn) in Peru's history to date, the Minas Congas project (owned by
Minera Yanacocha, majority-owned in turn by the US's Newmont) in
Cajamarca. The project has been stalled since November 2011, despite different
attempts at mediation (also involving an international review of the project's
environmental impact assessment) and has cost two prime ministers their jobs.
In July a new state of emergency was imposed, after violent clashes broke out
again between security forces and protestors. Although the Economist
Intelligence Unit expects Minas Conga (and other major mining projects) to go
ahead, risk of social unrest associated with controversy over extractive
industries will remain high in Peru and in the Andes in the forecast period,
given that the underlying causes of this and similar protests (uneven
distribution of wealth in isolated rural areaswhere mines are often located
with a very limited state presence) are not likely to be addressed. On a related
note, in Bolivia, following the nationalisation of Transportadora de Electricidad
(TDE, a Spanish-owned electricity transmission firm) in early May (Regional
overview, June 2012: Political environment), the government expropriated the
Colquiri tin/zinc mine in June, controlled by a Swiss-based conglomerate,
Glencore, as a way to prevent local co-operatives of miners from illegally
expropriating the mine's assets, given that no understanding had been reached
with them. This highlights the rising tension with miners and does not bode
well for the ability of the administration of the president, Evo Morales, to reach
a compromise with this group over a new mining law.
Conditional cash transfer (CCT) programmes, pioneered by Latin America in
the mid-1990s, have been instrumental in reducing poverty and extreme
poverty in the region. By linking financial support for poor families to children's
health and education, these programmes not only boost poor households'
income, with a positive impact on domestic demand, but also promote the
development of human capital, providing an increasing number of children
with the instruments to compete in the labour market. It is estimated that CCT
programmes reach about 110m of Latin Americans, costing governments across
the region a relatively small amountaround 0.5% of national GDP. But while
these programmes, implemented in most countries in the region, have been
very successful so far, much remains to be done to eradicate still-high levels of
poverty, even in more advanced, middle-income countries. In Brazil the
president, Dilma Rousseff, is continuing to scale up her predecessor's Bolsa
Famlia programme. In this context, the government launched the Brasil Sem
Misria ("Brazil without misery") plan in June 2011, aiming to lift 16.2m citizens
out of extreme poverty through cash transfer initiatives, better access to
education, health, welfare, sanitation and electricity, and productive inclusion. It
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12
is targeted at Brazilians living in households with monthly incomes of R$70

(US$35) or less per person, mainly located in the north-east region and rural
areas. The Brasil Sem Misria plan has been extended more recently, in May
2012, with the Brasil Carinhoso plan ("Brazil that cares"), which targets Brazilian
families with children under the age of six living in extreme poverty and will
directly benefit close to 2m families. Meanwhile in Chile, the president,
Sebastin Piera, is trying to accelerate plans to reduce poverty levels, including
eradicating extreme poverty by the end of his mandate in 2014as part of an
attempt to address widespread protests over education reform and in favour of
increased state support to remote regions. He has introduced a programme of
targeted subsidies called Ingreso tico Familiar (IEF, ethical family income),
which will start in September at an officially estimated cost of US$400m per
year, targeted at the poorest 170,000 households with both non-conditional and
conditional cash transfers. In addition, the Bono por Logro Escolar (BLE, school
achievement bonus) programme encourages excellence at school, by offering
school children bonuses based on their performancePs50,000 (US$100) and
Ps30,000, respectively, for children in the top 15% and second next 15% in their
class by the end of the school year. The government expects that about 200,000
children will receive these bonuses. Moreover, women are encouraged to seek
employment through a monthly subsidy equivalent to 20% of their wage
while their employer gets a 10% subsidywhich yields Ps34,000 per month to a
woman earning the minimum wage, and higher figures for those who secure
better-paid jobs. All women who belong to the 1.38m poorest families in the
countryand not just those living in extreme povertyare eligible for this
female employment subsidy, and the government expects that about 300,000
will take advantage of this offer. Although fairly solid growth rates in the
forecast period should help to ease poverty, as well as income and regional
disparities, further, we expect governments in the region to continue to focus on
poverty reduction with specific targeted actions, also driven by the growing
demands of an increasingly vocal civil society.
Debate on drug policy gathers
momentum in the region
An international drug conference, held in the Peruvian capital, Lima, on June

25th-26th with representatives of 61 countries (including the main opium and
cocaine producersAfghanistan, Colombia and Peru) and various international
organisations involved in anti-drug policies, served as another reminder of the
mounting frustration with the meagre results of the war on drugs conducted so
far. Indeed, this seems not only to have failed in reducing global demand for
illegal drugs and coca cultivation but has also lead to spiraling violence and
murder rates in Mexico, Central America and the Caribbean. In Mexico alone,
the "iron fist" strategy adopted in 2006, which involved the deployment of the
army against drug cartels, has produced over 55,000 deaths to date. In light of
the above, the debate on drug policy is increasingly entering the regional
agenda, with the presidents of Guatemala and Costa Rica calling for a debate
on the merits of legalising cocaine (the world's main cocaine producer,
Colombia, has made it clear that it is open to discussion on the subject), and a
flurry of measures being adopted across the region at the national level, ranging
from decriminalisation of personal drug use to the proposed legal sale of some
drugs. However, the recent failure to include a review of drug policy
enforcement and a debate on drug liberalisation on the agenda of the last
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13
Summit of the Americas, hosted by Colombia in June 2011, highlighted the

difficulties in adopting a pan-regional approach, given the US's opposition to
addressing the failures in the current strategy. Although the US president, Barack
Obama, has finally acknowledged that US consumption is one of the main
causes of Latin America's increasing violence, he has not gone as far as
accepting a debate on possible alternatives to current drug policy and is
unlikely to change this stance in an election year. Against this backdrop, a
number of Latin American countries have started considering or adopting
innovative approaches to the drug problem on a domestic basis. The tendency
has been towards a decriminalisation of personal use of drugs and alternative
penalties for small-scale drug dealing in light drugs such as cannabis, with
Brazil, Argentina and Ecuador either having presented or beginning to debate
bills enabling the above. Uruguay, where possession of drugs for personal use
has never been a crime, has gone a step further and is considering the
controlled production and legal sale of cannabis. The momentum in the region
for exploring new approaches to drug-trafficking and for starting a concrete
debate on the pros and cons of drug legalisation is expected to gather pace in
the forecast period, although it is not likely to take the form of any panregional
approach, unless the US decides to join the debate (which is unlikely at least
until the election there in November).
Rising expectations contribute to social
mobilisation in some countries
Dissatisfaction with traditional parties' policies and the political status quo,
which is perceived as being unable to respond swiftly to rising expectations,
particularly among the emerging middle classes, is triggering social mobilisation
across the region, with negative implications for political effectiveness and
stability. This is particularly evident in Mexico, where the pre-electoral protests
of the loosely co-ordinated #YoSoy132 student movement against media bias
and for more transparency, education reforms and better opportunities for the
young (Regional overview, June 2012: Political environment), gathered
momentum after the July 1st election. Unrest against alleged fraud committed
by the winning Partido Revolucionario Institucional (PRI) during the election
campaign have led members of the student movement, along with other social
groups (including the indigenous and peasant groups, which in 2006 violently
resisted a government plan to build a new international airport in Atenco), to
hold a Convencin Nacional contra la Imposicin (National Convention against
Imposition), which took place on July 14th-15th, and schedule a series of
marches and demonstrations in major Mexican cities from then until October.
The above confirms that social unrest will continue to cloud the political scene
in Mexico and is likely to represent a challenge for the new administration in
the forecast period. In Brazil Ms Rousseff is facing tensions in the form of a
series of strikes and manifestations by civil servants, frustrated with the pace in
their pay rise. University teachers from state universities were the first to launch
a strike, in mid-May. The government offered a series of concessions to the most
qualified lecturers (pay increases ranging from 12% to 40%), but the initial
reaction of the unions in mid-July was mixed. In the meantime, another dozen
civil servants have mobilised and are now on strike, while 15 have launched
their own "work to rule" operations, including tax and federal police officers.
With most civil servant groups yielding to the offer, in late August, of a 15.5%
rise staggered over three years, the president looks set to prevail against the
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14
strikers' demands (which would cost the state around R92bn, or US$45bn),
against the backdrop of a still weak external environment and a sluggish
domestic economy, and with additional spending pressures coming from
Congress. Frustration over salary levels will be complemented by widespread
corruption practices and a lack of transparency within the government and
among politicians at large. Although the president has taken a tough stance
against the handful of ministers against which corruption allegations emerged
in 2011which boosted her popularity rating to a record high of 75.7% in
Augustthe ongoing "cachoeira" corruption scandal and the upcoming verdict
of the Supremo Tribunal Federal (STF, the Supreme Court) on the "mensalo"a
high-profile corruption scandal that erupted in the middle of the first term
(2003-06) of the former president, Luiz Incio Lula da Silvaare likely to
reinforce the public's chronic disillusionment with politicians.
Political fragmentation undermines
policymaking and reforms
Structural reforms to reinforce the region's competitiveneness fundamentals

(including fiscal, education, labour market and competition reforms) remain
unpopular and politically difficult, especially considering that governments lack
congressional majorities or are based on unstable ruling coalitions in many
countries in the region, including Brazil. Although the ruling coalition gives
Ms Rousseff a large congressional majority on paper, it also severely
compromises her room for manoeuvre and entrenches patronage in the
political system, making the enactment of the ambitious structural reforms
needed to improve Brazil's medium to long term growth potential very unlikely
before the end of her term in 2014, and beyond. That said, she has taken some
smaller, incremental steps (including a pensions reform affecting new entrants
to the civil service) and has recently announced a huge private sector
concessions programme to upgrade Brazil's rickety infrastructure logistics.
In Mexico, an obstructionist legislature in an opposition-led Congress has been
the main obstacle to effective policymaking since the shift to a multiparty
functioning democracy in the late 1990s. This has been a formidable obstacle to
the adoption of important structural reforms (including a labour bill and a
national security bill, as well as comprehensive tax, energy and education
reforms) needed to lift Mexico's productivity and growth rates. Prospects for
reform appear more promising after the victory of the PRI at the July 1st general
election. The new PRI administration will have a stronger presence in Congress
and the opposition Partido Accin Nacional (PAN) is likely to support it in areas
where the two parties share common ground, including energy, fiscal and
labour reforms. However, risks of congressional deadlock remain, notably in
areas such as education reforms, if the PRI allies with the powerful teachers'
union boss, Elba Esther Gordillo, and her Partido Nueva Alianza (Panal).
In Focus: Political reform and political effectiveness in Mexico

Parts of a political reform supported by the current president, Felipe Caldern, were
approved by a majority of state legislatures in July (having been approved by the
Chamber of Deputies in November 2011 and the Senate in April 2012), a necessary
step for making constitutional changes. But the version that was approved fell short
of the initial 2009 proposal, which intended to make some of the most significant
changes to Mexico's political environment in decades. Among the provisions of the
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15
reform that were approved are various direct democracy elements such as "citizen
initiatives" (similar to a referendum), as well as the ability for independent
candidates to run for office. It also modifies the powers of the president, allowing
him to present up to two "preferential" initiatives during every legislative session. The
reform also sets various alternative mechanisms to guarantee that an incoming
president can take the oath, even in the event that he is physically unable to do so, to
avoid a scenario similar to what happened in 2006, when Mr Caldern had to take
the oath in a rushed and chaotic atmosphere, amid jeers and protests from the
opposition. However, key provisions that were meant to give powers to the Supreme
Court to legislate on judicial issues, allow for a second round during presidential
elections, permit re-election for mayors (as well as local and federal deputies), reduce
the Chamber of Deputies and the Senate by 100 and 32 members, respectively, and
raise to 4% the minimum amount of votes necessary for a party to conserve its
registry (this is currently set at 2%) are not part of the approved reform. Re-election is
currently prohibited for all elected officials and this is increasingly seen as a hurdle to
forging a more professional political class, particularly for members of Congress,
who can serve only three years. The watered-down version of the reform approved
does not address the shortcomings in the political environment and will not
substantially improve political effectiveness in the country.
Election watch
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The electoral calendar for the remainder of 2012 includes a presidential election
in Venezuela on October 7th 2012. A general election is also scheduled for
January 17th 2012 in Ecuador. Meanwhile, following the impeachment of the
then president, Fernando Lugo, at the end of June in Paraguay, the election
scheduled for April 2013 may well be brought forward. Finally, a general
election was held in Mexico on July 1st.
www.eiu.com
16
Mr Pea Nieto wins the election in

Mexico amid controversy
Enrique Pea Nieto, of the PRI, won the July 1st election with 38.21% of the
votesfollowed by Andrs Manuel Lpez Obrador, of the Partido de la
Revolucin Democrtica (PRD), with 31.59%, Josefina Vzquez Mota, of the PAN,
with 25.41% and Gabriel Quadri, of Panal, with 2.29%according to official
results that have yet to be ratified by TRIFE. Although no major incidents of
violence were reported, the election day and the campaign were marred by
widespread allegations of fraud, prompting representatives of the left-wing PRD
to dispute the election results with the TRIFE, accusing the winning PRI of
fraudulent vote-buying and campaign overspending, among other issues. Most
of these charges will be difficult to prove, but the appeal will delay Mr Pea
Nieto's official appointment by months, as the TRIFE will have until September
6th to make a decision on the matter. However, also considering social
turbulence ahead of the election led by #YoSoy132, the controversy surrounding
the validity of the election could set the stage for a prolonged period of tension
and unrest, similar to that seen in 2006 (although this is not our baseline
scenario). At the time, Mr Lpez Obrador, following a narrow loss to the current
president, Felipe Caldern, did not recognise the election result and organised a
blockade of one of the largest thoroughfares in the capital, Mexico City.
Although Mr Lpez Obrador has vowed to use legal means to annul the
election, public mobilisation has not been ruled out, against a backdrop of
escalating public manifestations by student and other social movements about
the fairness of the electoral process, expected to continue over the next few
months. An escalation in social protest could put the new PRI government in a
delicate position, undermining its legitimacy and capacity to push its agenda
through. This would ultimately reduce political effectiveness and could
undermine the country's business environment and attractiveness.
Mr Chvez maintains the lead ahead of

the October election in Venezuela
Two months into the official campaign ahead of Venezuela's presidential

election, the president, Hugo Chvez, still appears to be the front-runner,
despite some progress made by the opposition candidate. Hampered by the
need to avoid undue exertionafter going through three operations for cancer
in under a yearMr Chvez has chosen motorcades as his preferred
campaigning method, followed by large rallies (mostly held in urban centres).
He is also making full use of government resources and statecontrolled media
as campaign platforms; a strategy that has been heavily criticised both at home
and abroad. By contrast, the opposition candidate, Henrique Capriles, continues
to criss-cross the country to address several rallies a day, often in locations far
away from one another. Polls continue to produce widely different results, but
none gives Mr Capriles the lead. Taken together, and discounting those that
appear consistently biased towards one candidate or the other, they suggest that
the opposition candidate has gained some ground ahead of the October 7th
presidential election, but remains behind. The campaign has also highlighted
concerns about the transparency of the electoral process, including questions
about the neutrality of the Consejo Nacional Electoral (CNE, the electoral
commission), which is seen by many critics as biased in favour of the current
government. With a strong mandate, very substantial financial resources and
unlimited access to the main media outlets, we expect Mr Chvez to continue
to fend off potential challenges, winning a new term in October, provided that
his health does not deteriorate dramatically before then.
www.eiu.com
Impeachment threatens governability

for interim and future governments
Mr Correa remains the frontrunner

in Ecuador's election
17
Following Mr Lugo's lukewarm response to the worst single incident of political

violence in Paraguay in decades on June 15th (when five police officers and 11
civilians were killed in a shoot-out during a police operation to evict landless
protestors in the department of Canindey), the former president was
impeached on June 22nd and replaced with the vice-president, Fernando
Franco, of the Partido Liberal Radical Autntico (PLRA). Even before the
triggering episode, Mr Lugo's presidency had been long marred by difficulties in
implementing his agenda and by a rapid erosion of support within Congress.
We expect Mr Franco to see out his term (although we do not rule out the
possibility of an early election) amid a challenging environment, with social
and political tension, as well as Paraguay's diplomatic isolation from regional
neighbours. Under our baseline scenario Horacio Cartes, of the right-wing
Partido Colorado (PC, Colorado party), will then win the April 2013 (or earlier)
presidential election, but his party will not secure a congressional majority;
therefore governability is likely to be fairly weak. A Cartes administration will
have to govern amid simmering social and political tensions stemming from
the impeachment of Mr Lugo, which heightened polarisation between the
political left and right and their respective constituencies. The political crisis in
Paraguay led to the country's diplomatic isolation in the region and to the
suspension from Mercosur (the southern cone customs union), incidentally
facilitating the entry of Venezuela into the bloc in August. Although diplomatic
links will be restored when a new government takes office in Paraguay,
relations with the neighbours will prove tricky, assuming that Mr Cartes wins
the election, owing to ideological differences. Relations with Brazil will be
lukewarm, although bilateral economic interests should be unaffected, but
relations with Venezuela (assuming that Mr Chvez wins the October 2012
election) will remain frosty.
After five years in office, the president of Ecuador, Rafael Correa, remains far
more popular than his recent predecessors. His populist style, coupled with a
commitment to maintain cash transfer programmes and subsidies, as well as
lavish spending on infrastructure and other social projects, has sustained his
popularity among low-income voters, who have been key to his electoral
successes. Given Mr Correa's still-high popularity ratings, our baseline forecast
envisions him securing re-election in the 2013 general election. Although his
exact approval rating is hard to gauge, owing to divergent results of the opinion
polls, his core support remains steady at around 50%. He also enjoys greater
recognition than any other candidate, as well as the advantages of incumbency
(frequent media appearances and the ability to increase spending on pet
projects). His chances of winning have also been greatly enhanced by the
opposition's inability to rally around a single candidate. Significant ideological
differences remain between a fragmented array of parties, which has resulted
in a high number of candidates registering to run against the current president.
This, and the discovery of irregularities in the party registration process, is likely
to fragment the opposition vote, increasing Mr Correa's chances of securing a
first-round victory as he did in 2009. Nevertheless, Ecuadorean elections have
often highlighted the fickle nature of public support, with winning candidates
often written off until a few weeks before the poll, as was the case with
Mr Correa in 2006.
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18
International relations
Periodic international and intraregional disputes will continue in parts of the

region. In a context of weakening global demand, currency volatility and
concern over export competitiveness, increasing trade protectionism in some
countries may become a source of diplomatic disputes, as witnessed by the
recent tension between Argentina and its partners in the Mercosur, over the
former's protectionist practices, and between Brazil and Mexico over the
renegotiation of an automotive trade agreement during the course of the past
year. At the same time, recent expropriations in Argentina and Bolivia will
continue to increase uncertainty over the environment for foreign direct
investment (FDI) in these and some other countries. Diplomatic disputes will
also continue to be triggered by efforts by beleaguered governments to deflect
attention from criticism at home. Both Peru and Bolivia have claims on Chilean
territory, which they have pressed when politically convenient. However,
assuming that Mr Chvez's health does not prevent him from remaining in
power until the end of his term and beyond (or that the chavistas retain a major
influence on politics in some form), Venezuela will remain the greatest
potential source of concern, as the government will keep using foreign policy to
deflect attention from difficulties at home and rally the president's supporters
around the claim of external threats. Venezuela's relations with Colombia
have been particularly fraught in recent years, given ideological differences
between the radical left-wing Chvez government and the centre-right
government in Colombia. Although there has been a convincing
rapprochement since the inauguration of Mr Santos as Colombia's president in
August 2010, renewed diplomatic tensions between the two countries cannot
be ruled out in the medium term.
Brazil may attempt to extend its

influence, but the US will retain key role
Brazil's emergence as a global economic power is adding to expectations that it

will seek greater diplomatic influence and provide a showcase for an
alternative, moderate democratic socialist model. Ms Rousseff, now well into
her second year in office, will adopt a generally pragmatic stance in Brazil's
dealings with Western nations, as well as with regional neighbours (as
evidenced in the Paraguayan political crisis, where she pushed for political
sanctions rather than the tougher economic sanctions for which some more
leftist governments were calling). This, in particular, has improved bilateral
relations with the US, even if Ms Rousseff's visit to that country in April
highlighted persisting differences (including her repeated attacks against the
currency war, which have caused unease in Europe and the US). Brazil's
growing dependence on China as an export market will reduce the risk of
radical protectionism against the former, although some measures against
surging imports from China have been taken and more can be expected. In
more general terms, in an effort to support the national manufacturing sector,
Brazil is increasingly adopting a more protectionist stance in its trade dealings,
as evidenced by the recent renegotiation of a 2003 bilateral automotive treaty
with Mexico, introducing import quotas to curb imports from Mexico's more
competitive car industry.
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19
The US is expected to retain a crucial role in Latin America, but the latter will
not feature among that country's top foreign relations priorities, which will be
more focused on other areas of the world, such as the Middle East and Asia.
That said, some Latin American issues will feature on the US agenda. With
violent crime in Mexico increasingly spilling over the US border, we expect
closer co-operation on security and drugs policy in the medium term between
the two countries. However, reducing spiralling crime rates will be difficult in
the absence of a comprehensive judicial reform in Mexico, and assuming that
there is no reduction in the flow of weapons from the US into the country and
that more effective measures to curb US demand for drugs are not put in place.
www.eiu.com
20
Economic forecast
Global outlook
Real GDP growth (%)
US
Japan
OECD
World (market exchange rates)
World (PPP exchange rate)
World trade growth (%)
Goods
Consumer price inflation (%)
US
Japan
OECD
Export price inflation (%)
Manufactures (US$)
Commodities (%)
World oil price (Brent; US$/b)
Non-oil commodities (measured in US$)
Food, feedstuffs, beverages
Industrial raw materials
2011
2012
2013
2014
2015
2016
1.7
-0.7
1.8
2.6
3.7
2.1
1.7
1.3
2.1
3.1
1.9
1.2
1.6
2.5
3.6
2.2
1.6
2.1
2.9
4.0
2.3
1.2
2.1
2.9
4.1
2.3
0.9
2.2
3.0
4.2
6.3
3.7
5.1
5.5
5.8
5.9
3.1
-0.3
2.8
2.1
0.3
2.2
2.3
-0.1
2.1
2.2
0.0
2.1
2.3
0.2
2.2
2.3
0.5
2.2
6.8
-0.9
0.5
0.6
0.9
1.3
110.9
24.3
29.4
18.2
109.5
-8.6
-2.4
-16.8
103.4
2.5
-0.8
7.7
104.5
-1.4
-5.3
4.1
107.3
-1.8
-4.0
1.2
110.0
1.3
1.2
1.6
The euro zone's debt crisis remains at the heart of the global slowdown.
Most economies in the currency zone are contracting, reducing demand for
exports from Asia, the US and elsewhere. Europe's crisis has also soured
business sentiment among US multinationals, which has, in turn, held back
hiring and dampened investment in the US. Industrial activity in China remains,
by China's standards, tepid, which is likely to lead to more stimulus from the
Chinese authorities.
The Economist Intelligence Unit expects the global economy to grow by

2.1% at market exchange rates in 2012, down from 2.6% in 2011. At purchasing
power parity (PPP) exchange rates, which give more weight to emerging markets,
we now expect growth this year to slip to 3.1% (from3.2% previously), well below
2011 (3.7%). This year's slight downgrade reflects a weaker showing in the US and
the substantial cut we are making this month to growth in India, where poor
monsoon rains are reducing output and consumption. We have also begun to
downgrade our outlook for 2013: we now expect the US to grow by just 1.9% in
2013 (down from 2.1% previously).
China will benefit next year from the stimulus now entering the pipeline,
pushing growth above this year's rate, but no part of the global economy will
significantly outperform in 2013. Economic growth will resume in the euro zone,
but conditions overall will remain weak. We have therefore lowered our forecast
for global GDP growth in 2013 to 3.6% at PPP rates and 2.5% at market exchange
rates, in both cases down by one-tenth of a point from our previous outlook.
Only in 2014 will global growth return to 4% at PPP ratesa moderate showing.
At no point within the five-year forecast period will global growth reach 5%,
which we would classify as strong, and which would be necessary to begin to
reduce substantially the high levels of unemployment globally.
www.eiu.com
21
That said, we are not expecting the world economy to tip back into
recession. The deployment of (additional in some cases) monetary stimulus
since the start of July, central banks in the euro zone, China, Brazil, South Korea,
South Africa, Israel, Colombia and the Philippines have reduced borrowing
costs, and the Federal Reserve (the Fed, the US central bank) is signalling that it
too may be ready to actwill support economic growth, and advanced
economies continue to repair the damageto banks, balance sheets and
budgetsthat sent them into recession in the first place. For at least the next
year, therefore, the global economy seems stuck in a low-growth, highrisk environment.
Nor are problems restricted to the developed world. The once-formidable

BRICs (Brazil, Russia, India and China) are struggling as well. We have cut our
2012 GDP forecast for Brazil twice in recent months, and we are this month
reducing our 2012 forecast for India once againto 6.1% from 6.5%. Although
India and Brazil are feeling the effects of their own policy shortcomings, they are
also suffering from reduced demand for their exports, weaker capital inflows
and general investor risk aversionall consequences of the never-ending euro
zone crisis.
In Europe, countries along the periphery have taken turns in the global
cross-hairs, based on the schedule of elections, bond auctions, policy
announcements and crisis summits. Although the crisis is not close to a
resolution, the European Central Bank (ECB) has made a series of bold pledges
in the last month that may prove to be a turning point. The bank is expected to
announce a plan in coming weeks to buy bonds, primarily at shorter maturities
and only of countries that have applied for help from euro zone rescue funds
and accepted the conditionality attached. Despite widespread criticism of the
move within Germany, senior officials in the government remained quiet, and
statements in subsequent days appeared to lend support to the ECB's plan. This
looks like a softening of Germany's position, and a reluctant acceptance of the
need for joint action to save the euro. We consider these developments to be
significant: the euro zone is edging, slowly, towards a comprehensive plan that
could stabilise the single-currency zone.
The outlook for the US is crucial for Latin America's growth prospects, since
it remains the primary trading partner for many countries in the region
(accounting for 23% and 56.1% of total regional exports and imports, respectively,
in 2011). The US economy, which seemed reassuringly robust in January, has
slowed of late, growing in the April-June quarter at an annual rate of just 1.5%. We
have, as a result, trimmed our 2012 GDP forecast for the US to 2.1% from 2.2%. On
a more positive note, US employers created 163,000 jobs in July, the most in five
months and well ahead of the average of 73,000 in the previous three months.
This is, however, well below the level required to lower the unemployment rate
substantially. Second, the US housing market is showing signs of a sustainable
recovery, although construction and pricing remain very weak by historical
levels. Nonetheless, a better showing in the labour and property markets could
help to support growth in the final months of the year. Weighing against this is
the so-called fiscal cliff: the expiration in January 2013 of a series of tax cuts and
the automatic imposition of a broad range of spending reductions.
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22
China has also emerged as a key market (accounting for 8.5% and 19.6% of
regional exports and imports respectively in 2011) and a source of foreign direct
investment (FDI) and financing for the region, and its growth prospects are
therefore important for Latin America. Its GDP growth in the second quarter of
2012 slowed to 7.6%, a three-year low. Europe's troubles are having a clear impact
on China's merchandise exports, which grew by just 9.2% year on year in the
first half of 2012, down from 24% in the year-earlier period. The latest economic
data (including industrial production, exports, loan growth) confirm that the
slowdown earlier in the year was not a one-off. Despite all of this, we remain
comfortable with a 2012 China GDP growth rate of 8.1%. China's stimulus efforts
will no doubt bear fruit, while a strong local income growth and reasonable
emerging-market demand will partly offset weaker export growth to the EU and
the US. Chinese demand plays a key role in setting global prices for
commodities. While we do not envisage the deceleration in Chinese growth in
2013-16 to precipitate a sharp fall in commodity prices, the significance is that
Latin American exporters will not benefit from the incremental, annual gains in
their terms of trade that they did in the pasta windfall that boosted national
income considerably.
The muddled outlook for the US and the near-certain recession in Europe
are forcing emerging markets in Asia, Africa and Latin America to adjust to
reduced import demand from their biggest customers, and less investment
capital. In particular, China surprisingly announced on June 7th that it would
reduce its one-year lending rate to 6.31% from 6.56%; in early July it went a step
further, taking the rate to 6%. India, which raised its official policy rate by 375
basis points between March 2010 and October 2011 in order to restrain inflation,
cut the rate by 0.5 percentage points in April, to 8%. Inflation remains
uncomfortably high in India, which will limit the scope for further reductions.
Also taking into account the increasing risk of a fully-fledged drought and
evidence of a slowdown in consumer spending, we have reduced our 2012
forecast for India's GDP growth to 6.1% from 6.5%. The effects of the slowdown
in the West will be greatest on emerging markets that are significantly exposed to
global trade. Weaker demand in the US and Europe will also weigh on countries
that are large commodity producers, as will slower growth in China, which for
some commoditiesmainly metalsis now the world's largest consumer.
Oil prices have rebounded strongly from a low of US$88/barrel in midJune and stood at US$113/b in mid-August. The recent price rise appears to be
largely attributable to disruptions to non-OPEC supply. The political risk
premium has also been rising again, on clear signs of depressed Iranian output,
as well as fears that the violence in Syria could spark unrest in neighbouring
countries. Based on our estimates of market fundamentals and our subdued
outlook for global growth, the oil market will be in comfortable surplus in 201213, and we expect prices to fall back again moving into 2013. We forecast small
gains in the oil price in 2014-16, as consumption growth picks up. Much of the
incremental oil will be from higher-cost sources, such as Brazil and Canada.
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23
After a strong start to the year, base metals prices fell in the second quarter
of 2012, amid a return of investor risk aversion and weaker economic data out of
China and the US. Unless the economies of China and developing countries
generally slow more than we forecast, demand growth will continue to support
prices in 2012, aided by tight fundamentals in some markets, such as copper.
Loose global monetary conditions will also be positive for commodity prices,
although some strengthening of the US dollar could deter investor interest. We
expect demand from developing countries to sustain prices in 2014-16, but the
pace of demand growth is expected to be more subdued than in the run-up to
2008, particularly as there will be efforts to enhance efficiency and increased
usage of secondary inputs.
A series of unseasonal weather patterns have seriously damaged the

supply prospects of a number of key staples, notably maize and soybeans.
Severe drought conditions have devastated crops across much of the US and
have adversely affected other parts of the world, including Russia and Central
Asian producers, parts of Latin America and Australia. We have revised up a
number of our individual commodity price forecasts this month. In particular,
the price of maize (or corn, No. 2 yellow, central Illinois, US) is now expected to
rise by 4.2% this year, despite a very weak start to the year. The annual average
price of soybeans is also expected to rise this year, by nearly 10%. We have also
revised up our price forecasts for 2013, to reflect that fact that ultra-dry conditions
in 2012 will negatively impact prospects for next year's crops, particularly in the
US. Wheat crops have also been negatively affected by recent weather patterns,
but wheat stocks are at very high levels, suggesting that they can fill some of the
shortfall in the feed grain market caused by lower maize output. Furthermore,
high prevailing prices will encourage an expansion of planted area and enable
farmers to invest in fertilisers and pesticides, which should lead to higher
production in the next few seasons (barring further unfavourable weather
conditions). However, risks are to the upside for prices; any further disruption
to supply from a key producer would send prices soaring in the next
couple of years, given the fragile stock position of many individual
agricultural commodities.
Latin America
Key indicators
GDP growth (% real change)
Current account balance (US$bn)
Current account balance (% of GDP)
External financing requirement (US$bn)
FDI inflows (US$ bn)
FDI inflows (% of GDP)
2011
4.3
6.5
-63.4
-1.1
-215.8
154.5
2.7
2012
3.2
5.9
-95.3
-1.7
-250.7
147.7
2.6
2013
3.9
6.2
-126.1
-2.0
-288.1
161.8
2.6
2014
4.1
5.8
-158.9
-2.4
-328.4
176.7
2.6
2015
4.0
5.6
-182.1
-2.6
-360.4
187.2
2.6
2016
4.1
5.5
-193.4
-2.6
-381.0
196.5
2.6
In the context of an outright contraction in the euro zone and sluggish growth
in the US, Latin America will grow at 3.2% in 2012 (revised down from 3.7% in
June). Regional GDP growth will then pick up to an annual average of 4% in
2013-16. Although the risks to even this revised forecast remain on the
downside, given continuing global uncertainty, our outlook for the region
remains fairly positive and we assume the slowdown in 2012 is mainly cyclical
rather than structural. The 3.9% annual average growth over the forecast period,
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24
albeit lower than rates registered by Asia and Australasia (excluding Japan) for
the same period (6.4%), remain a respectable showing in historical terms for
Latin America. The region also remains on a strong footing to weather the
impact of a double-dip recession in the developed worldthe probability of
which we now estimate at 21-30% in our forecastthanks to solid economic
fundamentals (notably reduced debt levels and large stocks of foreign reserves)
and firm domestic demand, supported by increased access to credit and an
expanding labour force. Economic growth in South American countries will
also continue to be boosted by Asian demand for soft and hard commodities
exports and historically low OECD interest rates, which are facilitating
monetary easing in the region while supporting strong inflows of capital
(although this has proved a mixed blessing). That said, episodes of global
market volatility have hit Latin American currencies periodically over the last
year and have highlighted the continuing vulnerability of the region to shifts in
market sentiment, given its still-large external financing requirement and the
volatility of global portfolio flows. The resurgence of the euro zone crisis and
weaker data in the US have reflected again in renewed pressures on the region's
currencies, as investors have flown from risky assets.
In addition to the risks arising from an uncertain global economic outlook,
Latin American policymakers will have to focus their attention on a few
additional challenges in the short to medium term. In particular, authorities
throughout the region will continue to have to deal with the conflicting needs
of stimulating a weakening domestic economy with monetary easing while
controlling inflation, in the context of persistent inflationary pressures (as a
result of high food and oil prices and growing domestic demand). The recent
severe drought conditions that have devastated crops across the world will
reflect in higher prices for key staples, such as maize and soybeans, for this year
and next, and is likely to add to price pressures in some countries.
Ingrained structural competitiveness shortcomings in several of the region's
domestic manufacturing sectors, exacerbated by still-strong currencies (as a
result of high capital inflows) are leading to reduced export competitiveness of
manufactures (increasing the risk of "Dutch disease" for countries rich in
commodities) and will continue to loom as a potential constraint to the region's
prospects of moving up the value chain and developing more competitive and
profitable export baskets in the long term. In addition, growth in the import bill,
fuelled by domestic demand and by still-strong local currencies in historical
terms, will continue to exceed export revenue growth, producing large currentaccount deficits in the regioneven for commodities exporters. This situation is
particularly problematic for Argentina, for which current-account surpluses
have been a key pillar of economic stability in the past decade, given the
government's limited access to international capital markets, use of foreign
reserves to repay its external debts and extreme vulnerability to capital flight.
The region remains on a strong footing
vis--vis external shocks
On a positive note, the macroeconomic and financial reforms undertaken in the

past two decades (largely in response to the "lost decade" of the 1980s) have put
the region in a strong position vis--vis external shocks. Sounder
macroeconomic fundamentals, and in particular lower public-debt ratios, mean
that the region as a whole is better equipped than in previous decades to
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25
mitigate the impact of a renewed global slowdown, by adopting countercyclical policies and stimulus measures. In addition, growing domestic demand,
supported by an expanding middle class (which increased from 41% to 51% of
the population in the major economies of the region between 2001 and 2011)
with a rising purchasing power, is increasingly becoming an additional engine
of growth in many economies, which can partly compensate for weakening
external demand. Moreover, abundant international reserves (estimated at
US$766.9bn in 2011) will provide greater firepower to deal with currency
volatility and overshooting. The financial system also appears to be on a solid
footingas demonstrated by the sector's solid performance during the 2008-09
economic crisisthanks partly to the wave of foreign investment and
consolidation in the region's banking systems in the 1990s, which has gradually
brought more expertise in areas such as credit analysis, and the adoption of
stricter regulation and supervision in response to the experience of past crises.
At the same time, the region's banking system is deepening on the back of
demographic shifts that have seen more and more people moving to the
middle class rank, and have increased access to banking services for the
previously unbanked population. This, in turn, is helping to increase the deposit
base and expand loan portfolios.
Growth prospects remain solid despite
global uncertainty
After rebounding to 6% in 2010 and remaining solid at 4.3% in 2011, the regional
GDP growth rate will decelerate to an average annual rate of 4% in the forecast
period, on the back of a sluggish global economy and persistent uncertainties in
the region's main marketsnotably Europe and the US. While growth will
moderate to 3.2% in 2012, in the face of external headwinds, we then expect it
to pick up in 2013-16, sustained by sound macroeconomic policies, resilient
domestic demand and a recovery of economic activity in the OECD area.
Inflationary pressures are easing in response to sluggish external demand, but
they are set to remain a concern in the outlook period, fuelled by solid
domestic demand and by price hikes for some basic staples (as a result of recent
unusual seasonal weather patterns) in the short term. Although attention has
shifted to policy easing to stimulate growth in most countries in the region, in
the longer term the region's growth potential suggests that the problems of
currency appreciation generated by capital inflows will re-emerge, as
highlighted by a risk rally witnessed at the beginning of the year, now faded.
The upsurge in capital inflows experienced by the region for most of the past
two years has been a mixed blessing. On the one hand, it has supported the
recovery from the 2008 global economic crisis and made up for the region's
low saving rates, but on the other it has prompted currency appreciation and
increasing concerns over the export competitiveness of the local manufacturing
industry. The largest and most attractive markets in the region were particularly
affected by this trend in 2010 and most of 2011, and put in place an array of
measures to prevent their currencies from appreciating, while supporting the
competitiveness of their export sectors and trying to contain the causes of
inflation. These included "macro-prudential" measures (including tightening
reserve and capital requirements and reducing company and bank borrowing
overseas through taxation measures) in some countries, direct intervention in
the foreign-exchange market, or both in others.
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26
Growth concerns are taking precedence

over inflation containment
Since mid to late 2011 the heightened risk of recession in the developed world
has shifted the focus of policymakers throughout the region from inflation
containmentwhich had been the cornerstone of macroeconomic policy for
the past two decades or soto supporting growth via monetary easing.
Spearheaded by the Banco Central do Brasil (BCB, the Central Bank), most Latin
American central banks have reversed the monetary tigthening cycle and this
trend is likely to continue for the rest of the year. The last country to join the
group has been Colombia: reversing a tightening cycle of 16 months, the Banco
de la Repblica (Banrep, the central bank) cut its overnight lending rate by 50
basis points, to 4.5% since July, a clear sign that monetary authorities are
increasingly worried about growthGDP grew by 4.7% year on year in the first
quarter of 2012, well below Banrep's initial estimates of 5.5-6%, and economic
indicators for the second quarter suggest an even faster pace of deceleration.
With inflation falling to 3.2% in June and the financial system cooling down,
Banrep is likely to take a more active stance in boosting demand and reducing
peso appreciation, and we expect the intervention rate to reach 4.5% by end2012. Even Peru, whose growth continues among the strongest in the region
(stabilising around its long-term potential growth rate, of 6-6.5%) and where
inflation is on a downward trend, has kept its benchmark reference rate on
hold at 4.25% for the 16th consecutive month at the central banks' last monetary
policy meeting on August, continuing to highlight that external risks to Peru's
terms of trade remain elevated.
The new policy focus creates a new set of challenges for policymakers in the
region in striking the right balance between supporting growth and controlling
inflationary pressures, as highlighted by the case of Brazil, which was among
the first emerging markets to start the easing cycle in August 2011. Reversing a
tightening cycle of five rate rises since January 2011 (which had taken Brazil's
benchmark Selic rate to a peak of 12.5%), the BCB cut the Selic by a total of 500
basis points from August 2011 to August 2012to 7.5%, a historical lowwith
further cuts possible if Brazil's economy remains sluggish, assuming that
inflationary pressures remain subdued. Policymakers will start another
tightening cycle in 2013, as the economy picks up. Government pressure may
well influence the BCB to tighten partly via so-called "macroprudential
measures" to dampen credit growth, thereby limiting necessary rises in the
Selic. The conduct of monetary policy suggests that the Central Bank is
currently willing to accommodate inflation in the 4.5-6.5% upper target range,
rather than achieving the central inflation target.
Structural obstacles prevent region from

unleashing productivity improvements
Although the medium-term outlook for GDP growth in the region remains
fairly solid, Latin America has consistently underperformed other emerging
economies in the recent past, notably those in Asia, in terms of its growth rate
and potential, and our forecasts suggest that it will continue to lag behind.
Although this partly reflects Latin America's higher incomes per head
compared with most Asian economies, which give the region less scope for
catch-up with developed-country incomes, it is also the result of structural
shortcomings in most countries' business environments, which act as a drag on
productivity and growth rates. Reforms to simplify costly and complex tax
systems while broadening the tax base, notably by tackling widespread
informality, are greatly needed in most of the region. Tax revenue accounts on
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27
average for around 20% of GDP (compared with 40% in the OECD) and
remains overly reliant on indirect taxes, which are particularly regressive and
inimical to the strengthening of domestic markets in a region with high poverty
rates, and on commodity exports, which leave the public finances acutely
exposed to external shocks. Also required is a reduction of red tape and further
liberalisation of the factors markets, in particular by improving competition in
the goods and services markets and increasing the flexibility of labour markets.
Last but not least, underdeveloped infrastructure remains a key constraint on
the region's ability to achieve sustained growth rates in the forecast period and
beyond. Public investment in infrastructure never recovered from the
substantial cuts made under the stabilisation programmes of the 1990s and
remains at 2% of GDP, down from 4% in 1980-85, compared with 9%, 10% and
6% in Southeast Asia, China and India, respectively. The UN Economic
Commission for Latin America and the Caribbean (ECLAC) estimates that for
the region to address the mounting demands on infrastructure and for this not
to become a constraint to long-term growth, 5% of GDP needs to be invested in
infrastructure in the next 15 years; this is a far cry from what the region is
investing at the moment. Private investment is sorely needed to bridge the gap
in public investment in infrastructure. For this to happen, upgrading in the
regulatory frameworks for private-public partnershipsincluding a review of a
weak incentives structure and uncertain returns on investmentand scrapping
restrictions on private investment in some areas (notably energy) will need to
take place.
Mexico poised to overtake Brazil for
the second year
Against the backdrop of Brazil's recent downturn and increasing concerns about
the competitiveness of the manufacturing sector, Mexico outperformed Brazil in
terms of economic growth in 2011 (3.9% and 2.7%, respectively) and is forecast to
do the same this year (3.7% and 2%, respectively). After growing by an
impressive 7.6% in 2010, Brazilian growth has been disappointing, with
weakening external conditions exposing the country's competitiveness
shortcomings (including dilapidated infrastructure, rigid labour markets, skills
shortages and excessive red tape). At the same time, prospects for the structural
reforms needed to ease some of these bottlenecks appear bleak through the
remainder of the term of the Brazilian president, Dilma Rousseff, given her
difficulties in holding together an unwieldy governing coalition. Mexico's mixed
blessing of being closely associated to the US business cycle (with 80% of its
exports going to that market in 2011) has seemed to pay off in 2011-12, given the
US's more benign outlook compared with the euro zone. Moreover, the outlook
for fiscal, energy and possibly labour reform in that country is more promising
than it has been in decades for the new Partido Revolucionario Institucional
(PRI) administration, given its stronger congressional presence and the probable
support of the Partido Accin Nacional (PAN)although the risk remains that
political fragmentation and the need to rely on the opposition could slow the
pace of change or lead to watered-down reforms, insufficient to unleash
productivity enhancements. Going forward, both countries face challenges in
maintaining the status of most promising Latin American market. Mexico's
open economy (exports accounted for nearly 60% of GDP in 2010, compared
with less than one-fifth in Brazil) and close association with the US make it
vulnerable to the latter's economic fortune. Rampant drug-related violence is
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28
also a worrisome trend, weakening the country's business environment. Brazil,

in turn, can count on a more diversified export base (ranging from commodities
to high value-added manufactures) and its economy is much less open than
Mexico's, making the country less exposed to external shocks. At the same time,
the appreciation of the Real in recent times has exposed some structural
competitiveness weaknesses of its manufacturing sector. Although a weaker
Real and a host of stimulus and protection measures, put in place since August
2011 to support the sector, will provide some breathing space, a more structural
approach is required to make it competitive in the medium to long term. The
latest stimulus package, the Plano Nacional de Logstica Integrada (PNLI, the
national integrated logistics plan), launched in August, is a positive step
towards engaging the private sector to address infrastructure shortcomings, but
it still falls short of fully addressing the structural problems inhibiting
Brazil's competitiveness.
Progress on structural reforms, infrastructure upgrading and government
efficiency will be key to determining the two countries' growth prospects in the
forecast period.
In Focus: The Plano Nacional de Logstica Integrada, the panacea of

Brazil's competitiveness problems?
The economy's failure to respond to aggressive monetary easing and a series of fiscal
and credit measures since August 2011 has prompted the Brazilian government to
launch an ambitious stimulus plan focused on tackling the country's infrastructure
needs in August, particularly in the areas of transportation and logistics. Under the
Plano Nacional de Logstica Integrada (PNLI, the national integrated logistics plan),
the government has announced investments of up to R133bn (US$65bn) over the
next 25 years, R80bn of which is expected to materialise within the next five years.
The selection criteria will be the bidder offering the lowest tariff for the service (the
government is not seeking a revenue windfall that would otherwise ultimately be
added to tariffs), and the auctions are scheduled to take place in April 2013. Funding
conditions for the private sector are appealing, with between 65% and 80% of the
projects being funded by the Banco Nacional de Desenvolvimento Econmico e
Social (BNDES, the national development bank) at the Taxa de Juros de Longo Prazo
(TJLP, the long-term government-set interest rate), of 5.5% plus 1.5%, with 20-year
maturities and a grace period of three years. The government expects this plan to
double the capacity of Brazil's main highways. The package for roads and railways is
expected to be followed by similar announcements for the concessions of ports and
airports in the coming weeks.
The plan sends out a very positive signal to investors: helping to stem growing
concerns about the government's increasingly interventionist approach to
policymaking. That said, the biggest challenge will still be to get these concessions off
the drawing board amid the very cumbersome state bureaucracy that permeates all
levels of governmentfederal, state and municipal. From a medium to longer term
perspective, although the PNLI should be a boon for the country, it is unlikely to be
sufficient to help to lift, directly or indirectly, the overall investment rate from 18% of
GDP currently to levels of 23-25%. These are the rates needed to sustain GDP
growth of 5%, which are more in line with rates seen in other major Latin
American economies.
www.eiu.com
Panama and Ecuador will post the

highest growth rates in 2012-16
29
Panama and Peru will outperform the rest of the region in 2012-16 in terms of
their growth performance (at 7%, 5.8% and 4.9%, respectively) while Jamaica,
Trinidad and Tobago and El Salvador will lag behind (at 1.9%, 2.8% and 2.9%,
respectively). Chile, Dominican Republic, Bolivia and Colombia will also post
satisfactory performance, with growth rates over 4.4% in the forecast period.
Latin American countries: average GDP growth rates, 2012-16
(%)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
l
go dor ala tina uay uela azi xico gua uay uras uba Rica bia livia blic hile dor eru ama
P n
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Br Me ara rug nd
ua
a
B Rep
To Salv ate rge ara ene
st Colo
Pa
c
Ec
U Ho
P
A
Ni
V
Co
n
Gu
d & El
a
a
ic
d
i
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i
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Tr Source: Economist Intelligence Unit.
Do
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Ja
After GDP growth of 8.9% this year, Panama's growth will continue to be driven
by the Canal project (to be completed by 2014) and several other large-scale
investment schemes (including the construction of a metro system in Panama).
These infrastructure upgrades form part of wider plans to develop Panama into
a regional logistical hub and expand the country's capacity for reassembly
operationsthe latter also in view of helping to sustain employment levels
when infrastructure development finally starts to slow. Peru's economy, in turn,
does not show signs of deceleration, despite weakening external conditions,
supported by robust public financeswhich will allow the country to
implement a stimulus plan equivalent to 0.9% of GDP this year. We expect it to
grow at 5.6% in 2012 and to average 5.8% in 2013-16, slower than in the past
decade, but outperforming the rest of the regionbar Panama. The main
domestic risk to our forecast continues to be conflict over large mining projects.
Were these to lead to the cancellation of one of the large projects in the pipeline
(not our baseline forecast), part of the US$30bn in expected investment in the
mining sector in 2012-16 would fail to materialise, significantly reducing Peru's
medium-term GDP growth prospects. In such a scenario business confidence
would drop, dampening investment in other sectors as well. Colombia and
Chile, both considered among the main investment hotspots in the region, are
forecasted to post solid 4.4% and 4.8% growth rates, respectively, in the forecast
period. The two countries' strong macroeconomic fundamentals, as well as
their focus on further improving the business environment while promoting
more inclusive growth to reduce inequality and encourage job creation, will
support their performance and attractiveness for investors beyond the
forecast period.
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30
The region is less vulnerable to shifts in

market sentiment than in the past
The region's current-account deficit is expected to widen from 1.1% of regional

GDP in 2011 to 2.6% of GDP in 2016. After the surpluses registered during the
2004-07 commodities boom, the new trend is more in line with 1993-2003
levels, partly reflecting appreciating currencies in historical terms, declining
export competitiveness of the non-commodities sectors, and sustained
domestic demand boosted by higher incomes and access to credit. As a
consequence, the region's financing requirement (the current-account deficit
plus medium- and long-term external debt falling due) will remain moderate,
but the region will not be as exposed as in the past to swings in capital flows
because of greater investor confidence in the fundamentals of the major,
soundly-run, economies (Brazil, Mexico, Colombia, Chile and Peru), and thanks
also to a comfortable cushion of foreign reserves (estimated at US$766.9bn in
2011)projected to expand to just over US$1trn by 2016which will provide
some support. Latin America has one of the largest external financing
requirements in the world, at an estimated US$218.8bn in 2011, although at 3.8%
of regional GDP it represents a relatively moderate burden, and we expect FDI
to continue to cover a substantial portion of it in 2012-16. However, in times of
global volatility this leaves the region exposed to changing market sentiment, as
discussed previously.
FDI inflows are on track to set a

historical record in the forecast period
According to ECLAC, FDI to Latin America reached a record US$153.5bn in 2011,

surpassing its 2008 peak (US$137bn). This represented 10.2% of total FDI
worldwide, up from 6.9% in 2009. Brazil was the recipient of 43.8% (or
US$66.7bn) of total FDI into Latin America, followed by Mexico (US$19.4bn),
Chile (US$17.3bn), Colombia (US$13.2bn), Peru (US$7.7bn), Argentina (US$7.2bn),
Venezuela (US$5.3bn) and Uruguay (US$2.5bn). FDI reached historical highs in
Brazil, Chile, Colombia, Peru and Uruguay. In Central America, FDI increased by
36%, with Panama (US$2.8bn), Costa Rica (US$2.1bn) and Honduras (US$1bn)
among the largest recipients. In the Caribbean, FDI flows increased by 20% over
the previous year, with the Dominican Republic the largest recipient (US$2.4bn).
The solid upward trend in FDI, in the current context of sluggish global growth
and financial market volatility, is a testament to the economic stability and
relative dynamism displayed by most Latin American economies, coupled with
increasing investor interest in the energy and mining sector, given persistently
high commodity prices.
Recipient sectors for FDI inflows varied in 2011 by subregion. According to
ECLAC, 57% of FDI into South America (excluding Brazil) was directed to the
natural resources sector, 36% to services and 7% to manufacturing; while 7.8% of
inflows received by Mexico, Central America and the Caribbean were oriented
to natural resources, 39.7% to manufacturing and 52.5% to services. Meanwhile,
46.4% of the FDI received by Brazil was directed to manufacturing, 44.3% to
services and 9.2% to natural resources.
The EU, as a bloc, is the largest investor in the region, having invested an
average of US$30bn per year (or 40% of total annual FDI) in Latin America in
2001-11. European investment has mainly focused on South America, ranging
across many sectors, including electricity and banking. In particular, European
multinationals have been the most active in setting up research & development
(R&D) centres in the region (mainly in Brazil), with an increasingly high profile
www.eiu.com
31
in parent companies' global innovation networks and important spillovers in

the recipient country in terms of technology transfer and capacity building.
China has also established itself as an important source of FDI for Latin
America, investing, until now, mostly in extraction of natural resources.
However, there are signs that Chinese companies are beginning to diversify into
infrastructure and manufacturing.
Although we expect FDI to continue its positive trend and reach a new
historical record of US$196.5bn by the end of the forecast period, a low
percentage will continue to go to technology and high value-added sectors, also
exacerbated by weak growth prospects in the euro zone (traditionally a key
source of FDI in higher value-added sectors). The region will need to improve
its innovation ecosystem and human resource base to become an attractive
destination for higher value-added investment.
While FDI inflows grew strongly in 2011, FDI outflows from the region actually
fell, from US$44.9bn in 2010 to US$22.7bn in 2011, mainly owing to Brazilian
multilatinas (emerging transnational companies based in the region) investing
more in their domestic market than abroad (with net borrowings granted by
subsidiaries abroad to Brazilian parent companies increasing, and capital
contributions being cut). This does not point to less dynamism in Latin
American multinationals operating in the international markets, but to an
increased focus on domestic markets in 2011, amid an uncertain global
economic outlook. Chile led investment abroad in 2011 with US$11.8bn,
followed by Mexico (US$9.6bn) and Colombia (US$8.3bn).
Latin America looks to Asia
Latin America has made some strides in the past decade in developing its trade,
investment and co-operation links beyond traditional partners such as the US
and Europe. Unsurprisingly, the region has increasingly started to look east,
given the growing economic clout and greater dynamism of Asia. One of the
most interesting trends of the last decade or so has been the emergence of Asia
as one of Latin America's main trading and investment partners. According to
Inter-American Development Bank (IDB) data, Asia accounted for 21% of total
Latin American trade in 2011, behind the US (34%) but ahead of the EU (13%).
Within Asia, China, Japan and South Korea have been at the forefront of trade
and business expansion into Latin America. China, in particular, accounted for
19.6% of total Latin America's imports in 2011, second only to the US, becoming
the main trading partner for Brazil and Chile, as well as one of the main sources
of funding and FDI for the region. According to a recent independent report,
Chinese banks have lent over US$75bn to Latin America since 2005more than
the World Bank, IDB and the Export-Import Bank of the US (Ex-Im Bank)
combined in 2010. Relations with the other Asian giant, India, have been less
dynamic. Bilateral trade has significantly increased, from US$2bn in 2002 to
US$25bn in 2011, but it is equivalent to only 10% of China-Latin America trade
and accounts for less than 1% of Latin America's total external trade. Despite
obvious complementarities, there are obstacles to a closer trade relationship,
including elevated tariff barriers, particularly on the Indian side (the average
tariff on Latin American agriculture exports is 65%, compared with a 12.5%
average tariff imposed by China, according to the IDB), and high transport and
logistics costs, given the below-par infrastructure on both sides. In terms of FDI,
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32
Indian investment in Latin America has increased four-fold in the last decade,
growing from less than 1% of total inflows in the 1990s to an average of 4% in
2002-06. However, official initiatives to establish closer links between Latin
America and India seem to be stepping up, with a series of high-level
interactions between political leaders in 2012, and India hosting its first
"dialogue" with foreign ministers of Latin American countries in Augustits
preferential trade agreement (PTA) with Chile was also expanded.
Although growing links with Asia as a whole are good news for Latin America,
against the backdrop of persistent uncertainties in developed countries and in
view of the benefits of trade diversification, there are a number of challenges
going forward for the region to leverage the new relationship fully. These
include diversifying and increasing exports to Asia, in particular to China. The
region is currently running a trade deficit with Asia and would benefit from
trade diversification beyond commodities and towards more value-added
products (notably through business initiatives to promote intra-industry trade
among the two regions). There are also opportunities for enhanced co-operation
in innovation and human capital development, and to attract more knowledgebased FDI.
www.eiu.com
33
Business environment rankings

The Economist Intelligence Unit's business environment rankings model seeks
to measure the quality or attractiveness of the business environment in 82 of
the world's major economies. It provides cross-country comparisons of the
main aspects of a country's business climate, supporting companies in
formulating their global business strategies and investment location decisions.
The assessment of the business environmentbased on the opportunities for,
and hindrances to, doing businessallows countries to be ranked on the basis
of the overall quality of their business environment, as well as in each of the
ten categories comprising the index, on both a global and a regional basis. The
model ranks countries according to investment conditions over the past five
years (2007-11), as well as according to our projections of how business
conditions will evolve over the next five years (2012-16). This allows us to use
the regularity, depth and detail of our forecasting work to generate a unique set
of forward-looking business environment rankings on a regional and global
basis. The table below gives our index scores and rankings for the 12 Latin
American countries included in the rankings for the historical period (2007-11)
and the forecast period (2012-16).
Latin American business environment rankings
Argentina
Brazil
Chile
Colombia
Costa Rica
Cuba
Dominican Republic
Ecuador
El Salvador
Mexico
Peru
Venezuela
2007-11
Total score
(out of 10)
5.53
6.51
7.81
5.87
6.30
4.26
5.37
5.11
5.78
6.71
6.12
4.71
Global rank
(out of 82)
59
39
14
51
42
78
63
68
56
35
44
72
2012-16
Total score
(out of 10)
5.37
6.69
7.92
6.40
6.69
4.63
5.87
5.17
6.01
6.97
6.32
4.22
Global rank
(out of 82)
69
37
14
47
38
78
59
71
57
32
51
80
Change in
Total score a
-0.16
0.18
0.11
0.53
0.38
0.37
0.50
0.06
0.23
0.26
0.19
-0.48
Change in
rank a
-10
2
0
4
4
0
4
-3
-1
3
-7
-8
a From historical period to forecast period.
Improvements in the business environment achieved by Latin America in the

historical period will be harder to build on, with only six countries of the 12
covered in the business environment rankings, namely Costa Rica, Colombia and
the Dominican Republic (all up four), Mexico (up three), Brazil (up two), boosting
their global ranking from 2007-11 to 2012-16; two stable (Chile and Cuba); and five
losing ground. In particular, Argentina, Venezuela and Peru will fall dramatically
in the rankings, with drops of ten, eight and seven places, respectively. At the
same time, all countries in the region, barring Venezuela, will post improvements
in their overall score (a maximum of 0.53 and 0.50 for Colombia and the
Dominican Republic, respectively), signalling some progress with respect to their
past performance, but not sufficiently fast for the region to catch up with more
dynamic areas in the world and hence to advance in the global rankings.
www.eiu.com
34
This is evident by looking at the regional scores for the forecast period: the Latin
American score will improve by 0.18 in 2012-16, which is slightly more than the
world average (0.19), but a much weaker performance than that observed in the
other emerging markets. The gap in dynamism is particularly striking with
respect to Asia and Eastern Europe (up by 0.35 and 0.34, respectively). This will
largely reflect slower progress in competitiveness-enhancing structural reforms,
whose pace will continue to be delayed by a lack of political appetite in most
countries in Latin America to advance politically-sensitive reforms. Perversely,
the sustained growth rates experienced in recent times by most countries in the
region have reduced the urgency of these reforms. Continuing global
uncertainty and weak economic conditions in most of Latin America's main
markets are likely to increase the pressure on legislatures and societies at large
to reinforce national competitiveness fundamentals and address shortcomings
in their business environment, by adopting necessary, but often politically
costly, reforms.
The region displays a different degree of
attractiveness to investors
Latin America will continue to demonstrate significant diversity in the quality

of its countries' business environments, with a very large differential (66 places)
between its best and worst performers, namely Chile and Venezuela. In
addition, while Chile, and to a lesser extent Mexico, Brazil and Costa Rica, are
characterised by business-friendly environments, Cuba, Venezuela and Ecuador
lag behind in the rankings, sharing a tendency for unpredictable state
interventionism that has undermined economic performance and discouraged
foreign investment. Argentina and Venezuela will post the worst declines in the
forecast period, of ten and eight places, respectively, to 69th and 80th,
respectively.
Argentina's declining attractiveness for investors reflects the progressive
deterioration in the legal and regulatory framework as a result of ad hoc
government interventionism, and policies that are unfavourable to trade and
investment, in an effort to prevent economic imbalances from mounting. Since
it gained another term of office in the presidential election in October 2011, the
government's policy decisions suggest that instead of shifting away from the
unpredictable interventionism that has dominated economic policymaking in
recent years, it will turn to even greater use of ad hoc controls. This, in turn,
implies that economic distortions will worsen and contract and property rights
will continue to be eroded (as demonstrated by the nationalisation of Spanish
owned YPF a few months ago), while the institutional underpinnings of
macroeconomic stability will deteriorate, impairing the outlook.
Venezuela's low position in the rankings, the worst in the region, reflects
unpredictable state interventionism, a highly heterodox macroeconomic
environment, sub-par legal security and difficulties accessing foreign exchange.
Weak and politicised institutions, an unpredictable tax regime, an increasingly
rigid labour market and deteriorating infrastructure will also impair the business
outlook. A change in government in 2013 could lead to some improvements in the
business environment, including improved transparency, a halt of nationalisations
and more friendly policies towards private enterprise and foreign investment.
However, there would be little progress in dealing with the country's structural
constraints and in curbing corruption and bureaucratic inefficiency.
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35
Peru will also see a deterioration in its relative performance, with a drop of
seven places in the forecast period to 51st, notwithstanding a sound
macroeconomic environment and strong growth prospects. This is mainly the
result of enduring obstacles in the business environment, including labour
market rigidities, poor infrastructure and deficiencies in average education
levels. However, with policy towards private enterprise and foreign investment
unlikely to undergo significant changes, Peru's business environment will
remain attractive as a business location in the forecast period.
At 78th, Cuba will also continue to lag behind the rest of the region (barring
Venezuela) in the quality of its business environment, as room for domestic
private business and foreign business involvement will remain heavily
constrained. We anticipate that, starting from 2013, an adjustment of the
unofficial exchange rate to bring it into closer alignment with the official rate
will begin to reduce economic distortions, but imbalances resulting from the
fixing of many prices below their market level and the persistence of the dual
exchange-rate system will remain, continuing to deter investment. However, a
clear tax framework, low crime levels and an educated labour force will remain
attractive elements for investors who will venture into the country.
On a more positive note, Costa Rica (38th), Colombia (47th) and Mexico (32nd)
will record notable improvements in their business environment rankings.
Despite its small size, Costa Rica will remain one of the most attractive
countries in Latin America for businesses, owing to its entrenched political
stability, skilled human capital, favourable tax regime and increasing economic
openness. Colombia, meanwhile, will continue to build on sustained growth
rates to improve policy towards private enterprise and competition, foreign
investment and foreign trade. Mexico's attractiveness, in turn, rests on its
privileged access to the US market, integration into US manufacturing supply
chains, an extensive network of free-trade agreements (FTAs) and a large
internal market. The country will realise gradual progress in addressing some of
the main structural constraints to competitiveness, including the unwieldy tax
system, poor infrastructure and business monopolies in the forecast period.
Indeed, as discussed previously, prospects for progress in key structural reforms
are more positive than ever with the incoming Partido Revolucionario
Institucional (PRI) administration.
At the top end of the regional rankings, Chile will remain the most attractive
business destination in Latin America. Its success rests on a long-standing
commitment to free markets, as well as on strong institutional underpinnings, a
sophisticated financial market and a very open economy, with an extensive
network of FTAs. The country will step up social and infrastructure investment
and boost fiscal efficiency in the forecast period. Labour regulations are a
relative weakness, but more flexibility is expected to be introduced in 2012-16.
www.eiu.com
36
Brazilthe region's largest economywill improve by two places in the

rankings, to 37th, with its large and growing domestic market, diversified
economy and political stability as main competitive advantages. However, the
failure to conduct a complete overhaul of the tax system and lower the tax
burden significantly (and improve the quality of its public services) will remain
a serious handicap, although the government will introduce changes that may
ease the burden at the margin. Labour markets will lack flexibility and suffer
from skills shortages. Efforts to upgrade infrastructure will start to pay off, but
shortcomings will persist.
Overall regional scores
(Total score, out of 10)
2007-11
8.21
7.43
6.53
5.99
5.84
5.49
6.58
North America
Western Europe
Asia & Australasia
Eastern Europe
Latin America
Middle East & Africa
World average
www.eiu.com
2012-16
8.23
7.40
6.89
6.34
6.02
5.79
6.78
37
Data summary
Latin America and the Caribbean
Latin Americaa
2007 b
Economic growth (%)

GDP
5.7
Private consumption
6.3
Government consumption
5.6
Gross investment
11.0
Exports of goods & servicesd
5.6
Imports of goods & servicesd
13.0
Domestic demand
7.2
GDP growth per head
4.4
GDP (PPP weights)
5.9
Population, income and market size
Population (m)
547.5
GDP (US$ bn at market exchange rates)
3,722
GDP per head (US$ at market exchange rates)
6,798
Private consumption (US$ bn)
2,286
Private consumption per head (US$)
4,176
GDP (US$ bn at PPP)
5,844
GDP per head (US$ at PPP)
10,674
Economic structure (% of GDP)
Private consumption
61.4
15.0
Gross fixed investment
20.1
Exports of goods & services
23.7
Imports of goods & services
22.6
Price inflation (%)
5.3
Current account (US$ bn)
Current-account balance
15.8
Current-account balance (% of GDP)
0.4
Trade balance
68.3
Services balance
-18.6
Income balance
-98.9
Current transfers balance
65.0
Memorandum items
Share of world population (%)
8.3
Share of world GDP (% at market exchange rates)
6.9
Share of world GDP (% at PPP)
8.6
External debt
Total external debt (US$ bn)
840.1
Total external debt (% of GDP)
22.6
Debt-service ratio, paid (%)
15.2
2008 b
2009 b
2010 B
2011 b
2012 c
2013 c
2014 c
2015 c
2016 C
3.9
4.2
3.0
10.0
1.4
7.8
5.4
2.7
4.2
-1.9
-1.1
4.0
-14.1
-9.5
-15.2
-3.4
-3.1
-1.5
6.0
6.1
4.2
16.2
11.4
22.4
7.9
4.7
6.1
4.3
5.2
2.6
7.1
6.3
10.1
5.2
3.1
4.5
3.2
4.1
3.5
3.3
4.2
6.9
3.8
2.1
3.2
3.9
3.9
3.1
7.2
5.4
7.3
4.5
2.8
4.0
4.1
4.3
3.6
7.6
5.7
8.5
5.0
3.0
4.2
4.0
4.5
3.1
6.6
6.3
8.8
4.8
2.9
4.1
4.1
4.6
3.1
6.5
6.6
8.7
4.8
3.0
4.1
554.3
4,332
7,816
2,645
4,772
6,284
11,337
561.1
4,063
7,241
2,550
4,545
6,297
11,223
568.2
5,028
8,849
3,083
5,425
6,804
11,974
575.1
5,634
9,797
3,460
6,017
7,257
12,619
581.7
588.3
5,731
6,162
9,853 10,475
3,575
3,863
6,146
6,566
7,618
8,090
13,096 13,753
594.8
6,682
11,233
4,237
7,123
8,606
14,467
601.4
7,102
11,809
4,552
7,570
9,136
15,192
607.5
7,562
12,449
4,888
8,046
9,693
15,956
61.1
15.2
21.2
23.4
23.5
62.8
16.6
20.0
20.0
20.0
61.3
16.5
20.1
21.1
20.7
61.4
16.3
20.3
22.1
22.0
62.4
16.2
20.4
22.5
23.4
62.7
16.2
20.8
22.9
24.4
63.4
16.2
21.2
23.3
25.7
64.1
16.2
21.7
24.5
27.7
64.6
16.2
22.2
25.9
29.9
7.7
5.8
5.9
6.5
5.9
6.2
5.8
5.6
5.5
-30.5
-0.7
38.0
-25.5
-108.7
65.7
-17.9
-0.4
50.4
-26.4
-100.6
58.7
-53.8
-1.1
47.7
-41.8
-118.2
58.4
-63.4
-1.1
71.9
-55.7
-140.1
60.5
-95.3
-1.7
42.1
-58.7
-144.3
65.5
-126.1
-2.0
21.7
-62.4
-157.8
72.4
-158.9
-2.4
-1.2
-69.2
-168.9
80.3
-182.1
-2.6
-13.7
-77.7
-176.0
85.4
-193.4
-2.6
-11.5
-86.7
-185.9
90.6
8.3
7.3
8.8
8.3
7.2
8.8
8.2
7.4
8.5
8.2
8.2
8.6
8.2
7.9
8.5
8.3
8.0
8.5
8.3
8.1
8.6
8.3
8.0
8.5
8.3
8.1
8.8
900.0
20.8
13.1
918.2
22.6
15.6
1058.6
21.1
13.0
1148.6
20.4
15.1
1200.9 1264.0
21.0
20.5
14.6
13.9
1341.8
20.1
13.3
1427.3
20.1
12.9
1517.8
20.1
12.6
a Comprises Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica,
Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay and Venezuela. b Economist Intelligence Unit estimates.
c Economist Intelligence Unit forecasts. d Includes intra-regional trade.
www.eiu.com
38
Expanded Mercosur
Mercosura
Economic growth (%)
GDP
Private consumption
Gross investment
Domestic demand
GDP growth per head
GDP (PPP weights)
Population (m)
GDP (US$ bn at PPP)
Private consumption
Price inflation (%)
Trade balance
Services balance
Income balance
Memorandum items
External debt
2007 b
2008 b
2009 b
2010 b
2011 b
2012 c
2013 c
2014 c
2015 c
2016 c
6.8
7.6
6.1
18.2
3.7
21.9
9.5
5.6
6.9
5.5
5.9
3.7
13.3
0.7
12.5
7.2
4.2
5.5
-0.5
2.9
3.5
-13.4
-9.2
-12.2
-0.8
-1.6
-0.4
6.8
6.5
4.6
20.9
8.0
28.3
9.0
5.5
6.9
4.0
5.2
3.3
6.5
4.4
12.2
5.2
2.8
4.2
2.3
3.9
3.7
0.3
1.8
7.5
3.0
1.3
2.3
3.7
3.7
3.2
6.1
4.4
6.9
4.1
2.6
3.6
4.0
4.1
3.9
6.9
5.2
8.5
4.7
3.0
4.0
4.0
4.4
3.2
5.9
6.3
8.9
4.6
3.1
4.0
4.0
4.6
3.2
5.1
6.8
8.9
4.5
3.1
4.0
261
1,895
7,272
1,115
4,281
2,782
10,676
264
2,344
8,893
1,360
5,159
3,000
11,382
267
2,304
8,643
1,409
5,286
3,019
11,322
270
273
2,961
3,306
10,978 12,125
1,748
1,968
6,482
7,218
3,264
3,473
12,102 12,735
276
3,314
12,026
2,016
7,318
3,613
13,111
278
3,533
12,693
2,171
7,802
3,827
13,750
281
3,818
13,588
2,384
8,484
4,067
14,474
284
4,056
14,307
2,559
9,024
4,316
15,221
286
4,317
15,094
2,738
9,576
4,575
15,998
58.9
18.1
19.3
17.5
15.1
58.0
17.9
20.1
18.0
16.1
61.2
19.2
19.2
13.8
13.6
59.0
18.9
19.7
15.0
13.9
59.5
18.9
19.6
15.5
14.8
60.9
18.6
19.1
15.1
15.4
61.5
18.7
19.3
14.8
15.7
62.4
18.8
19.5
14.7
16.3
63.1
18.8
19.7
15.2
17.2
63.4
18.7
20.0
15.7
18.1
6.3
8.8
7.5
8.4
9.3
8.0
8.6
8.1
7.7
7.5
26.2
1.4
75.7
-20.5
-33.4
4.3
10.7
0.5
81.4
-26.3
-48.9
4.4
-7.3
-0.3
60.5
-27.2
-47.0
6.4
-33.5
-1.1
59.9
-39.4
-56.6
2.6
-26.2
-0.8
86.7
-48.2
-67.5
2.8
-45.6
-1.4
67.3
-52.0
-65.0
4.1
-65.7
-1.9
54.8
-55.5
-69.4
4.5
-79.3
-2.1
51.5
-60.8
-74.8
4.9
-90.0
-2.2
48.3
-69.4
-74.2
5.2
-97.9
-2.3
50.3
-78.5
-75.3
5.5
4.0
3.5
4.1
4.0
3.9
4.2
4.0
4.1
4.2
4.0
4.8
4.3
4.0
4.9
4.3
3.9
4.8
4.3
3.9
4.9
4.3
3.9
4.9
4.3
3.9
4.9
4.3
3.9
4.8
4.3
416.6
22.0
19.2
447.6
19.1
15.7
467.5
20.3
18.0
546.7
18.5
16.1
595.7
18.0
17.7
615.8
18.6
19.0
648.5
18.4
19.5
694.2
18.2
19.2
745.4
18.4
19.2
799.9
18.5
19.3
a Comprises Argentina, Brazil, Paraguay, Uruguay and Venezuela. b Economist Intelligence Unit estimates. c Economist Intelligence Unit
forecasts. d Includes intra-regional trade.
www.eiu.com
39
Andean Community
Andean community a
Economic growth (%)
GDP
Private consumption
Gross investment
Domestic demand
GDP growth per head
Population (m)
GDP (US$ bn at PPP)
Private consumption
Price inflation (%)
Trade balance
Services balance
Income balance
Memorandum items
External debt
2007 b
2008 b
2009 b
2010 b
2011 b
2012 c
2013 c
2014 c
2015 c
2016 c
6.8
7.0
5.6
15.4
5.8
14.3
8.6
5.2
6.0
5.6
3.9
15.5
5.3
13.0
7.6
4.5
1.3
1.1
7.8
-9.9
-4.0
-12.4
-0.8
-0.1
5.4
5.6
6.0
16.9
1.9
15.2
8.2
3.7
6.5
6.4
3.5
12.9
9.6
14.1
7.6
5.0
5.0
5.4
3.9
8.2
4.7
8.5
5.9
3.6
5.1
5.1
4.3
9.8
5.2
9.6
6.2
3.7
5.0
4.9
4.4
7.9
6.5
8.6
5.6
3.6
4.9
5.1
3.8
7.4
6.9
8.7
5.6
3.6
5.0
4.8
4.0
8.4
7.0
8.9
5.7
3.9
96.8
373
3,856
237
2,450
741
7,649
98.2
442
4,500
280
2,847
803
8,172
99.6
430
4,317
277
2,776
822
8,251
101.3
518
5,111
327
3,230
877
8,653
102.7
600
5,839
370
3,606
953
9,279
104.1
663
6,371
416
3,994
1,018
9,778
105.5
727
6,890
458
4,343
1,093
10,367
106.8
790
7,393
502
4,698
1,172
10,975
108.2
840
7,761
540
4,989
1,256
11,602
109.4
900
8,226
581
5,311
1,344
12,289
63.5
13.2
21.9
23.3
22.8
63.3
13.0
23.8
24.0
25.0
64.3
14.2
22.7
20.8
21.1
63.2
14.2
22.9
21.6
22.3
61.7
13.6
23.4
24.9
24.4
62.7
13.7
24.1
23.1
24.1
63.0
13.7
24.5
22.8
24.5
63.6
13.7
24.8
22.6
25.2
64.3
13.7
25.4
22.9
26.7
64.6
13.7
26.0
23.4
28.1
4.2
7.2
3.9
2.3
3.9
3.8
3.6
3.3
3.3
3.2
-1.3
-0.4
10.6
-5.6
-18.8
12.4
-8.6
-1.9
6.7
-7.2
-20.9
12.9
-4.3
-1.0
8.9
-5.7
-18.8
11.4
-12.3
-2.4
8.6
-8.1
-23.8
11.1
-12.1
-2.0
15.9
-9.2
-30.7
11.9
-15.3
-2.3
11.2
-8.9
-30.9
13.3
-16.7
-2.3
12.8
-9.7
-34.7
14.9
-20.3
-2.6
12.3
-10.0
-39.0
16.4
-22.6
-2.7
13.2
-9.8
-43.4
17.3
-24.0
-2.7
14.8
-9.4
-47.7
18.2
1.5
0.7
1.1
1.5
0.7
1.1
1.5
0.8
1.2
1.5
0.8
1.2
1.5
0.9
1.2
1.5
1.0
1.2
1.5
1.0
1.2
1.5
1.0
1.2
1.5
1.0
1.2
1.5
1.0
1.3
98.6
26.4
22.1
103.9
23.5
14.1
108.4
25.2
18.5
119.4
23.1
15.6
130.4
21.7
14.0
136.7
20.6
13.8
142.0
19.5
12.6
144.8
18.3
12.3
148.9
17.7
11.8
153.2
17.0
11.4
a Comprises Bolivia, Colombia, Ecuador, and Peru. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Includes
intra-regional trade.
www.eiu.com
40
Central America
Central Americaa
Economic growth (%)
GDP
Private consumption
Gross investment
Domestic demand
GDP growth per head
GDP (PPP weights)
Population (m)
GDP (US$ bn at PPP)
Private consumption
Price inflation (%)
Trade balance
Services balance
Income balance
Memorandum items
External debt
2007 b
2008 b
2009 b
2010 b
2011 b
2012 c
2013 c
7.0
5.4
5.1
11.8
12.1
9.9
6.6
5.0
6.9
4.1
2.7
5.1
4.2
6.6
4.2
3.2
2.1
4.1
-0.2
-2.6
7.1
-24.4
-5.1
-16.0
-6.2
-2.1
0.0
4.0
6.0
5.9
13.3
4.8
12.4
7.2
2.0
3.9
4.9
4.1
5.2
13.6
8.4
10.0
5.9
2.9
4.9
4.6
4.0
6.1
10.7
4.4
6.2
5.5
2.6
4.5
4.4
4.0
6.7
10.8
6.0
8.3
5.6
2.4
4.3
40.5
118
2,919
93
2,294
270
6,654
41.3
134
3,236
105
2,553
282
6,838
42.1
132
3,146
99
2,351
286
6,794
42.9
147
3,421
112
2,615
300
6,991
43.8
165
3,778
126
2,879
319
7,298
44.6
183
4,094
138
3,086
338
7,581
45.5
201
4,417
151
3,323
358
7,879
78.6
11.2
22.0
43.4
56.5
78.9
11.5
22.6
43.4
57.2
74.7
12.7
19.5
40.7
45.7
76.5
13.7
19.2
39.6
48.9
76.2
13.9
20.1
40.7
51.2
75.4
14.1
20.9
40.0
51.2
75.2
14.4
22.0
40.1
52.6
6.8
11.1
3.2
3.9
6.0
4.7
5.1
-8.6
-7.3
-20.9
3.0
-4.0
13.4
-12.3
-9.2
-25.8
3.6
-4.0
13.9
-2.5
-1.9
-14.7
5.0
-5.0
12.3
-7.4
-5.0
-20.3
5.3
-5.2
12.9
-11.6
-7.0
-25.6
5.9
-5.7
13.7
-12.8
-7.0
-27.5
6.8
-6.8
14.7
-13.9
-6.9
-30.1
7.9
-7.6
15.9
0.6
0.2
0.4
0.6
0.2
0.4
0.6
0.2
0.4
0.6
0.2
0.4
0.6
0.2
0.4
0.6
0.3
0.4
0.6
0.3
0.4
49.1
41.5
7.9
51.9
38.8
9.0
51.5
38.9
8.6
54.6
37.2
7.7
59.6
36.1
8.0
67.1
36.7
7.2
70.7
35.2
6.8
a Comprises Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. b Economist Intelligence Unit estimates. c Economist
Intelligence Unit forecasts. d Includes intra-regional trade.
www.eiu.com
41
Guide to the business rankings model

Outline of the model
Calculating the rankings
The business rankings model measures the quality or

attractiveness of the business environment in the 82
countries covered by Country Forecasts using a standard
analytical framework. It is designed to reflect the main
criteria used by companies to formulate their global business
strategies, and is based not only on historical conditions but
also on expectations about conditions prevailing over the
next five years. This allows the Economist Intelligence Unit to
utilise the regularity, depth and detail of its forecasting work
to generate a unique set of forward-looking business
environment rankings on a regional and global basis.
The rankings are calculated in several stages. First, each of

the 91 indicators is scored on a scale from 1 (very bad for
business) to 5 (very good for business). The aggregate
category scores are derived on the basis of simple or
weighted averages of the indicator scores within a given
category. These are then adjusted, on the basis of a linear
transformation, to produce index values on a 1-10 scale. An
arithmetic average of the ten category index values is then
calculated to yield the aggregate business environment score
for each country, again on a 1-10 scale.
The business rankings model examines ten separate criteria

or categories, covering the political environment, the
macroeconomic environment, market opportunities, policy
towards free enterprise and competition, policy towards
foreign investment, foreign trade and exchange controls,
taxes, financing, the labour market and infrastructure. Each
category contains a number of indicators that are assessed by
the Economist Intelligence Unit for the last five years and the
next five years. The number of indicators in each category
varies from five (foreign trade and exchange regimes) to 16
(infrastructure), and there are 91 indicators in total.
The use of equal weights for the categories to derive the

overall score reflects in part the theoretical uncertainty about
the relative importance of the primary determinants of
investment. Surveys of foreign direct investors' intentions
yield widely differing results on the relative importance of
different factors. Weighted scores for individual categories
based on correlation coefficients of recent foreign direct
investment inflows do not in any case produce overall
results that are significantly different to those derived from a
system based on equal weights.
For most quantitative indicators the data are arrayed in
ascending or descending order and split into five bands
(quintiles). The countries falling in the first quintile are
assigned scores of 5, those falling in the second quintile score
4 and so on. The cut-off points between bands are based on
the average of the raw indicator values for the top and
bottom countries in adjacent quintiles. The 2007-11 ranges
are then used to derive 2012-16 scores. This allows for
intertemporal as well as cross-country comparisons of the
indicator and category scores.
Almost half of the indicators are based on quantitative data

(eg, GDP growth), and are mostly drawn from national and
international statistical sources for the historical period
(2007-11) and from Economist Intelligence Unit assessments
for the forecast period (2012-16). The other indicators are
qualitative in nature (eg, quality of the financial regulatory
system), and are drawn from a range of data sources and
business surveys adjusted by the Economist Intelligence
Unit, for 2007-11. All forecasts for the qualitative indicators
covering 2012-16 are based on Economist Intelligence Unit Measurement and grading issues
assessments.
The indices and rankings attempt to measure the average
quality of the business environment over the entire
The main sources used in the business rankings model
historical or forecast period, not simply at the start or at the
include CIA, World Factbook; Economist Intelligence Unit,
end of the period. Thus in the forecast we assign an average
Country Risk Service, Country Finance, Country Commerce;
grade to elements of the business environment over 2012-16,
Freedom House, Annual Survey of Political Rights and Civil
not to the likely situation in 2016 only.
Liberties; Heritage Foundation, Index of Economic Freedom;
IMF, Annual Report on Foreign Exchange Restrictions;
The scores based on quantitative data are usually calculated
International Institute for Management Development,
on the basis of the numeric average for an indicator over the
World Competitiveness Yearbook; International Labour
period. In some cases, the "average" is represented, as an
Organisation, International Labour Statistics Yearbook; UN,
approximation, by the recorded value at the mid-point of the
Human Development Report; US Social Security
period (2009 or 2014). In only a few cases is the relevant
Administration, Social Security Programs Throughout the
variable appropriately measured by the value at the start of
World; World Bank, World Development Report; World
the period (eg, educational attainments). For one indicator
Development Indicators; World Economic Forum, Global
(the natural resources endowment), the score remains
Competitiveness Report.
constant for both the historical and forecast periods.
www.eiu.com
42
List of indicators in the business rankings model

1. Risk of armed conflict
2. Risk of social unrest
3. Constitutional mechanisms for the orderly transfer of
power
4. Threat of politically motivated violence
5. International disputes or tensions
6. Government policy towards business
7. Effectiveness of political system in policy formulation
and execution
8. Quality of the bureaucracy
9. Transparency and fairness of political system
10. Corruption
11. Impact of crime
Macroeconomic environment
*1.
*2.
*3.
*4.
*5.
Inflation
Budget balance as % of GDP
Government debt as % of GDP
Exchange-rate volatility
Current-account balance as % of GDP
Market opportunities
*1.
*2.
*3.
*4.
*5.
*6.
*7.
*8.
GDP, US$ bn at PPP

GDP per head, US$ at PPP
Real GDP growth
Share of world merchandise trade
Average annual rate of growth of exports
Average annual rate of growth of imports
The natural resource endowment
Profitability
Policy towards private enterprise and competition

1. Degree to which private property rights are protected
2. Government regulation on setting up new private
businesses
3. Freedom of existing businesses to compete
4. Promotion of competition
5. Protection of intellectual property
6. Price controls
7. Distortions arising from lobbying by special interest
groups
8. Distortions arising from state ownership/control
Policy towards foreign investment

1.
2.
3.
4.
Government policy towards foreign capital

Openness of national culture to foreign influences
Risk of expropriation of foreign assets
Availability of investment protection schemes
Foreign trade and exchange controls

1.
**2.
*3.
4.
Capital-account liberalisation
Tariff and non-tariff protection
Openness of trade
Restrictions on the current account
Taxes
**1.
*2.
*3.
*4.
5.
6.
The corporate tax burden

The top marginal personal income tax
Value-added tax
Employers' social security contributions
Degree to which fiscal regime encourages new investment
Consistency and fairness of the tax system
Financing
1.
2.
**3.
4.
5.
6.
Openness of banking sector

Stockmarket capitalisation
Distortions in financial markets
Quality of the financial regulatory system
Access of foreigners to local capital market
Access to medium-term finance for investment
The labour market

**1.
*2.
*3.
4.
5.
6.
7.
*8.
Incidence of strikes
Labour costs adjusted for productivity
Availability of skilled labour
Quality of workforce
Restrictiveness of labour laws
Extent of wage regulation
Hiring of foreign nationals
Cost of living
Infrastructure
*1.
**2.
**3.
*4.
**5.
**6.
7.
*8.
*9.
*10.
Telephone density
Reliability of telecoms network
Extent and quality of road network
Production of electricity per head
The infrastructure for retail and wholesale distribution
Extent and quality of the rail network
Quality of ports infrastructure
Stock of personal computers
R&D expenditure as % of GDP
Rents of office space
Note. A single asterisk (*) denotes a purely quantitative indicator.

Indicators with a double asterisk (**) are partly based on data.
All other indicators are qualitative in nature.
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