Latin Style

In which Curt Cannon gives an account of exploring a new region of the world

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Reflection: What Did the Trip Mean to Me?  (or “How to Explain Our Trip to a 5-Year-Old”)

“One’s destination is never a place, but a new way of seeing things.” – Henry Miller

For me, the trip to Latin America was a great way to learn about the business environment in Peru and Chile. It was an interesting contrast to my previous experiences in developing countries, particularly the Middle East and Africa. There are common themes and challenges to doing business in emerging markets, although ultimately and somewhat paradoxically the most common theme of all is just how important deep knowledge of the local context and environment is to succeeding.

That said, the trip to Latin America was much more meaningful on a personal level. I do not know if I will ever have the opportunity to live or work in Peru or Chile, but this trip allowed me to reconnect with my deep and abiding love of travel itself, and recall why I fell in love with it in the first place. Over the last several years I have done a lot of business travel, which mostly meant long, sleepless nights on a computer next to a very comfortable looking bed that I did not use. 

The trip to Latin America was a refreshing opportunity to really and truly inhale the culture and environment of the places we were visiting. Yes, it was a busy schedule, and I was tired, but I felt like I really got a taste for Lima and Santiago and did not spend a lot of time preparing PowerPoint presentations. Instead, I spent a lot of time pondering where we were, reading about the history and economy of the countries, going on long exploratory runs in the early morning, and most of all, loving it.

One of the reasons I love travel is that it enables me to learn about other places, as well as take what I have learned and share it with those I love back home in the United States. I believe we Americans are often very misinformed about other cultures, and helping to “enlighten my own” is actually a cause I care deeply about.

That passion for sharing my travels and hopefully spreading my love of other cultures to others, is something else I rediscovered during this trip. It happened (like many good things) very serendipitously, when I was contacted by my 5-year-old nephew Jack for a project that he was doing. His Kindergarten class had recently read about “Flat Stanley”, a children’s book character who has something heavy fall upon him and “flatten” him. The upside to this unfortunate incident is that “Flat Stanley” is now able to fit in an envelope and get to a lot of places by way of mail. Jack’s Kindergarten class was using this as an opportunity to learn about geography – each student printed off and colored his/her own version of Flat Stanley, and then sent it in the mail to a relative or friend, asking that person to take some photos in the place they live and mail the Flat Stanley back. The class will be creating a pin map showing all the places their Flat Stanley went.

Needless to say, I took the Flat Stanley assignment very seriously, and had a ton of fun taking some photos and putting together a little children’s story of my own to send back to my nephew Jack. In doing so, I remembered just how much I love telling stories and helping others learn about other cultures. 

So to close out, here is the link to how I explained our trip to Jack and his classmates (with some preview pics below):

https://drive.google.com/file/d/0Byq_tYVD4fDxOGM4MFNEaWE4V0E/view?usp=sharing

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The Techo housing development provided an interesting alternative look at Santiago. Although I am always a bit skeptical when I see satellite dishes in places that apparently lack other more basic services, I was very touched by two houses that were growing flowers out front. A good sign when individuals are investing in making their homes a little bit more beautiful.

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Serving the Underserved

Of all the organizations we visited in Peru and Chile, the one that was the most thought provoking was Techo. Part of this was because of how much the experience highlighted something that was touched upon frequently but not discussed in depth: the pervasive and lasting inequality in Chile. In spite of its rapid growth, Chile remains one of the most economically unequal countries in the world. It is not unique as far as the region goes: all of the most unequal countries are in Latin America and Africa, but Chile has by far the highest gdp per capita and (aside from perhaps South Africa, which has its own unique history and circumstances) the most developed. Although everybody acknowledged that this was a big problem, we did not get many opportunities to discuss it in depth. How does this long lasting inequality affect business? What, if anything, can business do to address it? What can different Latin American countries learn from each other in dealing with these underserved populations? Brazil, Colombia, and Costa Rica all have similar levels of inequality, for example. Techo was one organization trying to serve those at the bottom of Chile's socioeconomic ladder, and it was indeed a stark contrast from the luxury malls. The drive to provide a decent shelter for Chile's poorest residents is an interesting and admirable mission, and their model of using an enormous number of volunteers is also interesting. I'm not sure how different this is from Habitat for Humanity, but I am sure there is a case study out there somewhere comparing their business models. On an organizational level, it was interesting to see how some of the challenges facing Techo were very similar to those being faced by large corporations: dealing with local conditions (regulations, culture) as they expand into new markets, attracting talent, and grappling with other issues like a general lack of education or financial literacy amongst their customer base. Techo has actually expanded into education as a complementary service they provide, which was an interesting if imperfect parallel to the CSR and even for-profit businesses we saw targeting more well-off customers at other big organizations like Intercorp and BCP. Photos of Techo to come, since I cannot figure out how to post both text and photos in the same post from my phone. I would blame weak South American Internet, but it's really just me 😎.

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Complicated Stories

Perhaps it is just my ongoing fascination with history and love of stories in general, but I have always found it critical to get the historical context of any place or problem that I am studying. What strikes me as one of the fascinating aspects of both Peru and Chile as I have begun to become more acquainted with their stories is just how much of their recent histories of economic success and growth are rooted in complicated and controversial histories.

For Chile, its story as an economic success dates back to the 1970s and 1980s, when Augusto Pinochet’s government focused on economic liberalization, privatization, and the management of inflation. Pinochet declared that he did not want “a nation of proletarians, but a nation of proprietors.” Chile became the country where economic “shock therapy” was first used to kick-start the economy and serve as a means for rapid transition from a closed to an open economy. These reforms eventually brought economic growth and laid the foundation for the open economy of which Chile is so proud today. However, they also took their toll, as wages dropped for workers, family allowances declined, and the government budgets for education, health, and housing all declined.  Chile today continues to struggle with inequality – its Gini coefficient is above 50, making it one of the most unequal countries in the world.

Peru used Chile’s reforms as a model when, in the early 1990s, its controversial and brutal president, Alberto Fujimori, instituted what was later dubbed the “Fuji Shock” to tackle hyper-inflation. It also focused on curbing government spending, returning to full participation in global trade flows, and general economic liberalization. Fujimori and his successors continued to build upon these economic reforms. Today, he is more known for his human rights violations, but Peru’s “economic miracle” of the last 24 years is also a big part of his legacy.

These complicated histories are interesting, because for both countries they represent both a past that is embarrassing but has at the same time laid the foundation for their current growing levels of prosperity. Not that coming to terms with a complicated past is easy – as an American I am fully aware of how much of the country’s early “freedom” was actually built upon slavery, and how complex and bloody our nation’s progress has been. National histories simple and straightforward.

By the way, if you want more on the political and economic history of Peru and Chile, Wikipedia rocks.

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Peru's Gastronomy Clusters

One of the major challenges that the economy of Peru faces is in its attempts to diversify the economy. Its mineral wealth and open economy have meant that it has benefited immensely over the last couple of decades from China’s appetite for natural resources. However, in recent months it has also suffered from the decline in commodity prices.

Diversification, however, is really hard. Especially when it is being led in a top-down manner. It is the dream of governments and international bureaucrats in resource-rich economies the world over. In Saudi Arabia, for example, an entire government ministry is devoted to the idea of spurring business clusters.  Clusters (a term originally coined by Michael Porter in “The Competitive Advantage of Nations”) are ecosystems, where businesses within an industry that are competing with one another nevertheless choose to co-locate so that they can benefit from having a shared pool of suppliers, labor, and knowledge. Silicon Valley is the classic example of a cluster, though they exist everywhere.  It is no coincidence that successful competitors within an industry will often emerge from the same place – Microsoft and Apple are one example; Puma and Adidas another.

Of course, the creation of clusters is not something that usually happens by government fiat.  Usually it happens organically.  The development of a “gastronomic cluster” is happening in Peru, as the restaurant industry is becoming a global leader, as well as redefining Peruvians’ image of themselves and helping shape a national identity. It is also a powerful driver of the economy: nearly 6 million people are employed in a food services industry which is estimated to generate close to $9 Billion a year.  Some estimate that Peru generates over $1B per year in gastronomy tourism. 

This development is making international headlines, both from travel magazines and business magazines.  Conde Nast featured a glowing article about Peru’s restaurant scene, while the Economist recently discussed the phenomenon from the cluster development perspective.  

I, for one, am really looking forward to seeing (and tasting) this great example of economic development when I visit the country. 

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To Trade or Not to Trade

Chile’s economic growth has been driven by a large degree by commodity exports.  Copper, in particular, represents a large fraction of Chile’s GDP and an even larger fraction of its exports. 

Chile has also benefited from having a very open economy. It boasts the most free trade agreements (FTAs) of any country in the world, with 17 free trade agreements signed with individual countries, plus FTAs with Mercosur and the European Union.

Experts differ on just how much the free trade agreements benefit the Chilean economy, but they are sizeable.  The impact of free trade agreements with NAFTA, Mercosur, and the EU are estimated at between 3-6% of Chile’s GDP. When indirect benefits such as productivity improvements are taken into account, this estimate can get as high as 10% of GDP. 

See more about these benefits here: http://repec.org/esFEAM04/up.16719.1080661396.pdf

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Just How Big Are Peru & Chile?

Sometimes I find it useful to put the size of places I am studying / thinking about in perspective by comparing it to other places. In terms of real GDP, Peru and Chile of roughly $202B and $277B, respectively comparable to the GDPs of Phoenix and Miami.  Even the giants of Latin America can be compared to the larger American cities: Brazil’s real GDP is roughly equivalent to that of New York and Los Angeles combined, while Mexico’s is about the same as Los Angeles and San Francisco.  Colombia and Philadelphia are roughly equal, along with Argentina and Chicago. 

Of course, when measured by PPP (which takes into account the vast differences in cost of living), then Peru and Chile have much larger economies, nearly doubling to $403B and $430B.  Still, this means that they are of similar size to those of the states of Maryland and Washington. 

Population figures are another way to put these economies in perspective.  At just above 31M people, Peru is roughly the combined size of New York and Pennsylvania, while Chile’s 18M people make it roughly the same size as Indiana and Ohio put together. 

The vast economic challenges that face the urban areas of these countries make this contrast starker.  Lima has a population that is about the same as New York City (8.5 million).  Santiago’s 6 million is roughly equivalent to Miami. 

Both of these cities are expected to grow in the future, as urban areas continue to grow faster than rural areas. Lima should grow to more than 11 million in the next 10 years, and Santiago should top 7 million.  For an interesting view of how this compares to other urban centers around the world, take a look at this interactive map from the McKinsey Global Institute.

The chart below shows an interesting view of how various Latin American countries compare to US states and cities in terms of GDP and population:

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Copper Lining

Copper is integral to Chile's economy, comprising some 20% of GDP and 60% of its exports. This represents a number of risks.  First of all, Chile's dependence upon the export (most of which goes to China) leaves it highly vulnerable to the capricious twists and turns of the broader commodity market.  This  leaves it vulnerable in the short run.  However, in contrast to some other commodity dependent countries (e.g. Venezuela, Russia), the collapse in prices is not a complete disaster.  Chile's generally good management, including the development of a sovereign wealth fund, leave it in good stead to handle the bad times if/when they come. 

http://www.economist.com/news/leaders/21638197-why-some-commodity-exporters-are-coping-better-lower-prices-others-what-vlad-can-learn

http://www.reuters.com/article/2015/01/15/chile-copper-economy-idUSL6N0UU4WA20150115

Chile is also developing value added products to make copper less of a commodity.  Of course, in the long run, the real challenge for Chile is not that the price will drop, but simply that they will run out. The more copper you extract, the harder what is left will be to get out.

http://latino.foxnews.com/latino/news/2014/11/13/chile-antofagasta-minerals-to-close-michilla-mine-at-end-2015/

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Subway Challenges

As someone who is a relative novice to Latin America’s geography, business context, and political situation, I must apologize for my previous ignorance of some of these issues.  However, the following news articles hit home on a very personal level.  I, along with much of the rest of the city of Boston, have been complaining in recent months over the delays associated with Boston’s subways and buses and the apparent mismanagement of the city’s public transportation system during the last few weeks of massive snow.  Seeing that Santiago has faced two bombings of subway stations in the last 6 months, I feel very silly in my complaining. I was in Boston during the 2013 Marathon bombings, and the ensuing shootouts and manhunt in Watertown occurred a few blocks from my home, so I am aware of just how challenging such security risks can be, and the general fear that they can instill in people. 

I hope that, as a result of learning more about how Latin American cities have dealt with these challenges, we North Americans can do better at empathizing and working with these cities in dealing with these extremely difficult issues.

http://www.cnn.com/2014/09/08/world/chile-subway-explosion/

http://www.telesurtv.net/english/news/Explosion-Rattles-Subway-in-Chile-20150115-0001.html