With a political and legal environment that is steadily improving, and a young population of 567 million people that is enjoying rising incomes, Latin America's importance in global business is growing rapidly.

Over the past two decades, Latin America has steadily deepened its integration with the global economy.

Trade and investment regimes have been liberalized, foreign direct investment (FDI) has increased and new export markets have come on stream.

The region now attracts around 7% of global FDI and accounts for 6% of global exports.

Global recession’s effect on Latin America

Latin America was not as badly affected by the global recession as other member countries in the Organisation for Economic Co-operation and Development (OECD), though it performed worse than other emerging markets, notably India and China, which continued to grow strongly. 

Real GDP fell by an estimated 2.3% in Latin America in 2009, compared with 3.4% in the OECD. However, the aggregate regional figure disguises divergent trends, with a generally stark divide between countries heavily dependent on the US market (on the whole these performed worst) and those with stronger trade links to Asia (these proved more resilient). 

Of the latter, Brazil, the largest economy, barely contracted (falling by 0.3%), even against a strong base of comparison (GDP grew by 5.1% in 2008).

This resilience reflected several strengths, including a high degree of diversity of export industries and markets, a solid and mostly domestically owned financial system with minimal exposure to subprime securities and a large state banking system.

Chile is a good example of a particularly well-managed economy; despite being acutely exposed to the downturn in world trade owing to the weight of the export sector, substantial fiscal savings enabled an effective counter-cyclical policy that restricted the contraction to 1.5%.

Mexico, the region’s second largest economy, accounting for a quarter of regional GDP, performed worst, posting a 6.6% contraction; it relies on the US for over 80% of export sales, the lion’s share of FDI and significant inflows of worker remittances; its weak public finances prevented it from undertaking meaningful counter-cyclical policies.

Recovery from recession

Recovery is at hand. Latin America has long held huge promise as a prominent actor in the global economy. With abundant mineral and hydrocarbon wealth, fertile land and the largest tropical forests in the world, the region boasts a rich and varied supply of natural resources.

Yet, until recently, it has been slow to capitalize on this wealth, thanks to a long history of economic mismanagement and a general suspicion of free markets.

The US remains the main export market outside the region, and still accounts for close to 40% of export sales.

Asia seeks Latin America’s resources

But fast-growing Asian markets, hungry for Latin America’s minerals and agricultural products, are consuming a growing proportion of exports.

For example, China’s share in trade has risen significantly in the past decade, approaching 10% of export earnings and import spending. In 2009, the Brazilian and Chinese governments signed a deal between Sinopec, the Chinese oil company, and Petrobras of Brazil, through which the Chinese would lend US$10b in return for 200,000 barrels of crude oil a day over the next 10 years.

Trade barriers persist

Intra-regional trade has also been growing, but integration remains relatively shallow.

Latin America’s difficult topography and decades of underinvestment in infrastructure contribute to high transaction costs.

But institutional weaknesses have also been to blame, and official trade groups within the region have a checkered history. Mercosur, the Southern Cone customs union, has been plagued since its inception in the mid-1990s with trade and investment disputes between its two major economies, Brazil and Argentina, and the Andean Community has been split by factionalism.

As Latin America continues to open up to international trade and investment, companies in the region are growing in confidence and reach.

Some, such as CEMEX from Mexico and Embraer from Brazil, have already become sizable global players in their respective industries. Others from Brazil, such as the mining company Vale; the food manufactuer JBS Friboi; and the cosmetics company Natura, are wielding increasing international influence.

Equally, multinationals from Europe and North America, facing stagnant growth prospects in their own markets, have been increasing their exposure to Latin American markets.

With a political and legal environment that is steadily improving, and a young population of 567 million people that is enjoying rising incomes, Latin America’s importance in global business is growing rapidly.