With the inauguration of Chile's first female President, Michelle Bachelet, on Saturday, 11 March, 2006, any business leader looking at Latin America over the past year sees a continent where change has been breath-taking and the prospects for future investment and development might appear murky, if not challenging. At the same time, in Peru, Bloomberg reported on 27 March, 2006, that Ollanta Humala, the Peruvian Nationalist Party candidate was leading in the polls prior to that nation's 9 April elections.

Does social change necessarily mean a change in economic policy? Where are the most promising sectors in which to seek business opportunities in Latin America and where are the roadblocks? Let's take a look at the picture on the ground.

"At the moment, every global investment firm that has launched an investment fund in euros and invested in Latin American stock markets is enjoying better results. In just one month, the HSBC GIF Brasil Equity fund rose 14 percent, the equivalent of a 40 percent return over three months. It is the best short-term fund. In the medium and long term, the results are much more spectacular. For example, the Merrill Lynch Latin America Equity fund (the most profitable three-year fund) has risen 241 percent since 2003. It is followed very closely by a similar product from JPMorgan, which has earned 229 percent. The 10 most profitable three-year funds on the stock market are investing in Latin America." from "Will 2006 Be a Happy Year for Latin America" Universia Knowledge@Wharton

When approaching business opportunities in Latin America, we need to take two facts under consideration:

1. New partnership configurations, including joint public-private ventures may be called for in certain countries, such as Venezuela and Bolivia, when dealing with energy industries like natural gas and crude oil.
2. One size does not fit all. Latin America is a regional, not a single political, entity and every country's economic policies will be different despite the commonality of language.

In this article, we'll also explore the rise of populism in the political arena and how it addresses the impatience and dissatisfaction of people in the new democracies of the region, but does not change the need for minding the balance of payments equations. Thus, many signs -- such as those exhibited during new Bolivian president Evo Morales' tour of Europe -- point to a continuation of a healthy investment climate and sustained growth in Latin American markets.

Dr. Gerald McDermott of the Wharton School of Business, a recognized expert on emerging markets in Eastern Europe and Latin America, has tracked the development of the economic environment in these countries for decades. One of the things he sees in South America is a stabilization of the investment environment that has evolved since the missteps of the 1980s and 1990s.

"Look at what happened in Argentina," McDermott told Enterpriseleadership. "The problems of the 1980s -- low growth, volatile inflation -- was in part the confluence of several points of instability as well as missteps in economic policy. For instance, Argentina was grappling with democratization, subduing the military, rebuilding the social fabric after the infamous "dirty war," and resolving the massive debt crisis that virtually locked the country out of international capital market until 1991.

"While the "lost decade" damaged the role of the state and the left in managing the economy, the missteps during the Menem years in budget and regulatory management as well as the financial collapse in 2001 and 2002 damaged the legitimacy of market-based reforms.

"There are not a lot of roadblocks to foreign investment today because the major actors are institutionally constrained. Chile was first [in opening the economy to investment], but then Lula in Brazil added a little more nuance and became the hallmark for economic growth on the continent."

A Regional Prospectus

Let's begin by looking at the investment opportunities and prospects on a country-by-country basis.

Brazil is Latin America's largest economy. By some estimates, 40 percent of all economic activity in the region originates in that country. While President Luiz Inacio Lula da Silva came to power as a "man of the people," his economic policies have been solidly centrist, resulting in an annual growth rate of 4 percent -- 5 percent. Though Lula's administration is now plagued by a corruption scandal that will likely lead to the resignation of his Minister of Finance, Brazil's anti-inflation economic policies will likely remain unchanged.

Brazil, in fact, represents an interesting case study on how pragmatic reformist social policies are recognized to be only achievable by maintaining a strong economy. Other nations in Latin America are thus watching Brazil closely and taking guidance from its example.

As Gerald McDermott pointed out during his conversation with Enterpriseleadership, the most significant achievement of Lula da Silva's rise to political power was that he single-handedly moved to reform the labor left. "He moved it [the labor left] from being a nationalist institutional structure, much like Peronism, into being a much more pragmatic system for economic growth," McDermott told Enterpriseleadership. "Lula represents a modern alternative for the left not only in Brazil but in other countries as well. That is, leftist movements in other countries, such as in Peru, Mexico, Bolivia, and Argentina, have Brazil and Chile as potential models to follow, and not simply those espoused by [Venezuela's] Chavez."

One indicator of the potency of Brazil's economic policies is the real estate boom throughout the country that began in late 2004. By 2005, three sectors in particular -- middle-income housing, tourism, and "build-to-suit" industrial warehousing were beginning to show impressive growth and return on investment. WalMart moved to Brazil during 2004 while a boom in shopping center construction was taking place in Brazil's largest cities. At about the same time, the agricultural belt of the nation was experiencing local investment due to the rise in the price of soybeans. Major American, French and Spanish hospitality chains were taking advantage of the foreign investment climate to open new hotels.

Chile's economy has been rated one of the most stable in Latin America by analysts for years. The climate for foreign investment is positive and, while widely known for its exports of wine, salmon, and copper, one of the most exciting investment sectors in the country is in information technology training and business-to-business transactional guidance.

Though Chile has the most advanced telecommunications infrastructure in Latin America, due to significant investment in the 1990s, few of its businesses have yet to move their activities to the Internet. Major businesses in neighboring Brazil and Argentina use IT for an array of their business and sales processes, but those in Chile still did not in 2004. A report from the Center for Study of the Digital Economy of the Santiago Chamber of Commerce (CCS) in 2004 stated that although 69 percent of Chilean companies were connected to the Internet, digital technology covered mainly just the fundamentals. Only 25 percent of Chilean companies had their own Web site, only 11 percent used the Web as a platform for sales, and only 16 percent used it to buy online and to connect with suppliers, the report concluded. This is despite the fact that, at the time, companies could use the Internet to pay national insurance contributions to employees and apply for bank loans.

Part of the resistance to adopting IT in Chile was, in fact, cultural, many believed, but part of it could be attributed to lack of local investment. In response, the Chilean government began a new initiative, the Digital Agenda. The Digital Agenda's stated goal is to "… convert Chile to a digital country by 2010." As part of the agenda, business incubators have been established at University of Chile and at the University of Adolfo Ibaiaez. The Association of Chilean Information Technology Companies has established the goal of raising the information technology sector to 3.8 percent of GDP from its current 1.2 percent of GDP.

Jay Bryson, an economist with Charlotte, North Carolina's, Wachovia Bank, noted at the beginning of this year that Chile had taken several major steps in the 1990s to open its economy. The country, he said, " … allowed imports to come in and exports to flow out. They also have had a fairly stable macroeconomic policy over the last few years, a relatively independent central bank and they haven't jacked up taxes. That's given foreign investors confidence, so we have seen investors increase [their holdings in Chile]."

Bolivia is Latin America's poorest nation. Nonetheless it has massive reserves of natural gas, which -- with the help of Spain's Repsol, Brazil's Petrobras, France's Total, Anglo-Dutch Shell, and British Petroleum -- it hopes to recover and export to its neighbors, Brazil, Argentina, and Chile. The Spanish financial institution La Caixa plans to invest $800 million to this project over the next five years. In addition, Bolivia is believed to have 70 percent of the world's iron and magnesium reserves. So extractive mining and traditional agricultural will remain the basis of its future economic growth.

Newly-elected President Evo Morales has been more moderate in his meetings with foreign investors, as noted above, than his rhetoric at home would have led us to believe. In that European tour, he told investors in France, Belgium (at the EU headquarters,) Spain, and Holland that "…any company that cooperates and pays its taxes can recover its investments and have the right to its profits, but under the principle of balance because the State and the people must also benefit."

It's very likely that Mr. Morales' government will meet these goals by using what some analysts call the "Venezuela Solution, " creating companies of mixed ownership from both government and private enterprise. Such creative solutions allow pragmatic government leaders to both appease their volatile constituencies while allowing profit taking to foreign investors.

Venezuela, despite the rhetoric of President Hugo Chavez and his penchant for grabbing headlines, is a major source of oil for the United States and has an ownership interest in Citgo. The relationship between foreign investment -- and particularly investment from the United States -- and national stability is unlikely to change, no matter the public pronouncements of the Chavez government or the U.S. State Department.

The pragmatic fact is that Venezuela means to remain a player in the global marketplace and can only do so because of its oil reserves. At the same time, the political stance of the government is to address the social agenda demanded by its citizens.

As the suggested in the overview of Bolivia, Venezuela is providing creative solutions, much as has Brazil, to attract foreign investment in state/private partnerships while also seemingly dealing with populist concerns.

The recent initiative on the part of the government to offer long-term oil contracts at below OPEC rates is also a positive sign of stabilization of the investment environment.

Argentina, notwithstanding the upheaval of the 1990s, has instituted economic safeguards and encouraged investment during this decade. McDermott, who has been intimately involved in development in this South American country, notes that the development of infrastructure, after the stresses of the large utilities companies were overcome, is now akin to that of Chile or Brazil.

Now that those stresses have been relieved by a change in governmental administration, the situation in Buenos Aires is promising.

The Spanish Tigers

One can look to success stories for guidance. For example, the strong influence of Spanish multinationals, the new tigers of Europe, who have established relationships in a diversity of industries from telecommunications to textiles in the region since the 1990s provide insight to the fertility of this emerging market.

A February 2006 feature in the Economist states: "…since the return of democracy, the Spanish have rediscovered the outside world, none more so than the country's businessmen, whose exuberant expansionism has led to them being dubbed the "new conquistadores.'" Among the areas in which Spanish companies have distinguished themselves are Telefónica, the world's fourth-largest telecommunications provider and the largest in Latin America; Repsol YPF, the ninth-largest oil company, and Iberdrola, an electrical utility that is the world's largest operator of wind generators.

The Spanish corporations were nimble and aggressive and, with the advantage of common language and heritage, quickly pounced in Latin America. Where a decade and a half ago, a Latin America concern might have gone to Washington, New York, or London seeking capital, today they as readily talk with financiers in Madrid. In fact, Spanish banks, like their counterparts in other countries, are now acquiring American banks. That they have bankrolled some of the major projects in Latin America over the last decade should come as no surprise.

Capitalizing on Emerging Markets

Whether one looks at the IT infrastructure and training opportunities in Chile or to the natural gas and mining needs of Bolivia, one thing is clear: the emerging democracies of Latin America present a wide array of investment and business development options.

While the political winds that have swept through the South American continent could, at first glance, seem confusing or unsettling, the astute observer will note that following pragmatic economic policies can only fulfill the social and political objectives of the new governments. Foreign investment and business growth are the underpinning of policies that will meet the expectations of their constituencies and be the benchmark for the successes of their new governments.

By following the examples of the Spanish tigers, the French energy concerns, and other businesses that have already established relationships on the continent, and by respecting the cultural nuances of South America, the return on investment to be accrued in this emerging market is promising.

As Dr. McDermott emphasizes, the key word for business leaders looking to the emerging markets of Latin America is nuance. Each government is attempting to be economically pragmatic while dealing with an inheritance of unaddressed political demands as they move from military dominance to representative democracy. The climate for investment, in part because of populist demands, has never been stronger.

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Rod Amis is a freelance technology writer based in North Carolina. He has written for various publications on- and offline, including IT Manager's Journal, NewsForge, Silicon.com and Access Internet Magazine. He is also the author of two books and was a newspaper journalist before going completely digital.