Political risk in Latin America driven by US protectionist policy

23 April 2018 Consultancy.lat

Political risk is a determining factor when businesses operate internationally. For multinational businesses, political risk will continue to be a major concern in this year according to the Marsh 2018 Political Risk Map. A number of events including Brexit, increasing national protectionism and a looming trade war between China and the US have created a divided political landscape worldwide. 

The past year has been politically tumultuous and its effects have been felt around the globe. According to the 2018 Political Risk Map from consulting firm Marsh, the political landscape in 2018 is likely to be as unstable. Marsh’s map is supported by data and insight from BMI Research and provides over 200 countries with a score out of 100, with the higher end being more stable. There are three categories of risk included in the overall score including political, economic and operational. These categories have integrated data for both short term and long term security and together they determine how politically stable a nation is. 

In Latin America, the map shows a decline in political stability overall and predicts a year of uncertainty ahead. In 2018, Brazil (56.9 points) and Colombia (58.5 points) will hold presidential elections hoping to bring clarity to political scandals and political polarisation respectively. Colombia’s elections mark FARC’s first election since the guerrilla group turned political party signed a contentious peace agreement with the government. Both countries are feeling regional instability over the crisis in Venezuela, with hundreds of thousands of refugees having crossed both borders. 

Venezuela will also hold elections but there is little hope for regime change. The country has a political stability rating of 32.5 points and although the president set a date for elections earlier this year, he has also quelled the opposition, stating that “the people have already decided…Nicolás Maduro is president of the republic for the period from 2019 to 2025,” at a pro-government rally. Only Haiti is presumed to be less politically stable within Latin America and the Caribbean.

Political risk in Latin America

Paraguay’s election only hours ago of a conservative president Mario Abdo Benítez shows a swing towards a regional pro-business agenda. The country has seen a decrease in ratings according to the map with a 2.7 point drop in the past year due to perceived political corruption. Argentina felt a similar political shift over the past years and has experienced a mildly stable political landscape. Chile’s ratings have dropped from the second highest bracket range (70-79) to the third (60-69), although it is still the most politically stable by far with 69.7 points, the highest in Latin America. 

Donald Trump & Latin American relations

Much of the global instability has come from the first year of Donald Trump’s presidency. For Latin America, this era has been riddled with anti-immigrant rhetoric, protectionist policies and the infamous Mexican wall proposal. On January 18, Trump took to Twitter to comment that Mexico is “the number one most dangerous country in the world.” This is just one example of his willingness to sacrifice Latin ties for domestic political gain. 

Recently, Trump exemplified his lack of interest in the region when he failed to attend the Summit of the Americas, the first US president ever to have done so. Trump’s neglect of the Latin America in combination with an overtly hostile policies against some Latin nations have sparked fear for relations with the world’s largest economy.

A regional news poll by Gallup released in January, 2018 analyses Trump’s approval ratings across Latin America. Overall the results were stark, showing that only 16% of Latinos across the continent approved of Donald Trump with many fearing his presidency would weaken ties between countries. Surprisingly, the country with the most approval for Trump was Venezuela. Mexico was on the other end of the spectrum with only 7% of Mexicans believing that Trump’s job performance has been up to scratch, a 55% decline from President Obama. 

Political risk in South America

The by-product of Trump

Although an estimated 25% of total US trade goes to Latin America, the region is positioning itself for heightened trade restrictions and a shift of global power relations. In the Political Risk Map, the US has fallen from the top tier bracket with a rating this year of 78.7 points. Amid growing levels of protectionism and local and regional tension, Latin leaders are looking regionally for solidarity. As a result of Trump’s policies, pan-American cooperation has been encouraged by the same negative rhetoric, anti-trade policies and US withdrawal from the TPP. 

A political scientist at New York University, Patricio Navia, said, “Trump’s policies and disparaging remarks about immigrants have forced other countries to say, ‘We have to help each other out and look for alternatives among ourselves.’” Naiva continued, “Trump has inadvertently done more for commercial integration in Latin America than many Latin American leaders managed to accomplish.”

Trade agreements and increased economic ties are on the cards for some of the most stable countries within the region. Two of the region’s biggest trading blocs are shaping up for regional expansion in the future. The Pacific Alliance’ members Chile, Peru, Colombia and Mexico are in negotiations to form a partnership with the Mercosur, which is comprised of Argentina, Brazil, Uruguay and Paraguay.

The two trade blocs combined make up over 90% of Latin America’s total GDP and foreign direct investment. The deepening of economic ties between the two trade blocs will have a profound impact on the way business is done in the region. “The convergence between Mercosur and the Pacific Alliance could mean the birth of a new dynamic pole of the world economy,” said Brazil’s Foreign Relations Minister last year. The move could boost economic risk perception in the region and drive political cooperation leading to increased stability. 

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Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019 Consultancy.lat

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of gob.mx, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of gob.mx, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.