2004 LATIN AMERICAN BUSINESS ENVIRONMENT
REPORT

Terry L. McCoy
~:

N UNIVERSITY OF
(iFLORIDA
September 2004

X

I

I0)

E "7-,

September 2004

Preface

This is the sixth annual Latin American Business Environment Report (LABER). The
report was launched during a period of growing investor interest in Latin America that
was fueled by expectations that the market-opening reforms of the New Economic Model
(NEM) would deliver macroeconomic stability and sustained growth to the region. But
economic performance cooled off, and financial volatility reappeared on the heels of the
Asian financial crisis and Brazilian maxi-devaluation of 1999. Investors began to have
second thoughts about Latin America and capital flows declined.

Entering the last quarter of 2004, Latin America is again growing. But is this another
cyclical recovery or the beginning of the long-term growth promised by advocates of the
NEM? Do current political developments mark a shift to the left and retreat from the
NEM in favor of the closed, protectionist policies of the past?

These are some of the questions examined in the 2004 Latin American Business
Environment Report. It does not make recommendations, but synthesizes and interprets
what has occurred in Latin America over the past 12 months in a manner relevant to
business and investment decision-making. Readers may use the report for an overview of
recent trends and future prospects at the regional level and/or for analysis of the business
environments and outlooks of the 20 largest economies.

The 2004 LABER draws on a variety of publicly available sources to monitor
developments in the region. I have revised the analytical framework to better account for
long term changes. This and previous reports are available at
http://www.latam.ufl.edu/publications/publisting.html. Writers may cite the report
without permission, but are asked to acknowledge its use.

The Center for Latin American Studies and Center for International Business Education
and Research (CIBER) at the University of Florida provided support for the preparation
and publication of the 2004 Latin American Business Environment Report. Paolo
Spadoni assisted me in its preparation. Amanda Wolfe provided useful editorial
suggestions. I alone, however, am responsible for the content and interpretation.

Terry L. McCoy, Director
Latin American Business Environment Program
University of Florida
tlmccoy@latam.ufl.edu

CONTENTS

Preface

EXECUTIVE SUMMARY.......................................................................4

I. INTRODUCTION......................................................................5

II. REGIONAL OVERVIEW.............................................................

EXTERNAL ENVIRONMENT....................................................7

Global Developments
Regional Developments

DOMESTIC ENVIRONMENT...................................................9

Economic and Financial Performance
Social Welfare
Politics
Policy/Regulatory Environment

III. COUNTRY PROFILES...................................................................16

NAFTA REGION...........................................................................16

Mexico

CENTRAL AMERICA..................................................................17

Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN.........................................................................21

Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA........................................................23

Bolivia
Colombia
Ecuador
Peru
Venezuela

BRAZIL AND THE SOUTHERN CONE.....................................27

Brazil
Argentina
Chile
Paraguay
Uruguay

IV. CONCLUSION..................................................... ....................32

REGIONAL OUTLOOK..............................................................32

External Environment
Domestic Environment
Paradigm Shift?

COUNTRY OUTLOOKS..............................................................35

Attractive Environments
Problematic Environments
Mixed Environments

TABLES........................................................................................... 40

SELECTED SOURCES ON LATIN AMERICAN BUSINESS

2004 LA TIN AMERICAN BUSINESS ENVIRONMENT REPORT

Terry L. McCoy, Director
Latin American Business Environment Program
University of Florida

EXECUTIVE SUMMARY

The environment for business and investment in Latin America has improved steadily
over the past 18 months. It is the most attractive it has been since 2000. Regional GDP
will increase by an estimated 4.5% in 2004 the highest rate since 1997 and 19 of the
20 economies covered in this report will grow. Inflation remains under control; exports
are increasing; the debt is manageable; and local currencies are stable. Finally, there are
indications that foreign investment is increasing after several years of sharp decline.

The leading determinant of Latin America's current upturn is the U.S.-led global
recovery, although the Chinese economic boom is an added factor. Both translate into
higher commodity prices and improved terms of trade for the region. Low global interest
rates and increased capital flows are also benefiting Latin America. Internal consumption
is now on the upswing. At the policy level, floating exchange rates, strong fiscal anchors
and inflation targeting send positive signals. On the other hand, some governments are
backing away from structural reform, most notably privatization in the face of popular
mobilization and fragmented political institutions.

Country performances confirm the encouraging trend in the Latin American business
environment. Twelve of the 20 countries (compared with nine in 2003) have stronger
environments entering the final quarter of 2004. Colombian and Guatemalan
environments have been upgraded from "problematic" to "mixed" because of significant
breakthroughs. Two environments Bolivia and the Dominican Republic -have been
downgraded to problematic.

The outlook for the next 12-15 months is for continued strengthening of Latin America's
business environments. Of the 20 countries, 13 are forecast to be more attractive within
the next year. External keys to Latin America's performance are: continuation of the
global-recovery; commodity (especially oil) prices; resumption of global and regional
trade talks and the U.S. presidential election. Within the domestic environment, key
determinants include: elections (in Chile and Honduras) and non-electoral politics in the
Andean Republics; trends in unemployment and crime; and breakthroughs on reform,
especially by the Brazilian government. Given this positive scenario, we would not
expect to see a clear break with the policies of the New Economic Model, but instead
revisions in the model to fit Latin America's evolving economic, social and political
environments.

2004 LA TIN AMERICAN BUSINESS ENVIRONMENT REPORT

I. INTRODUCTION

Thanks largely to the economic recovery that began in the middle of 2003 the

business environment for Latin America continues to grow more positive. It is not yet as

attractive as during the 1990s, nor is this positive trend uniform throughout the region.

Furthermore, political developments continue to raise doubts about the political

sustainability of the market-friendly economic reforms of the 1990s, while the collapse of

multilateral trade talks over the past year caused concern about the future of regional

integration in the Americas. Using the framework elaborated for systematically

analyzing the regional and national business environments, the 2004 report summarizes

developments over the past 12 months and assesses prospects for converting the current

recovery into sustained growth and integrated development. We have broadened the

policy environment to incorporate regulatory regimes (see Figure 1), and reconfigured

some of the social and political indicators.

Figure 1
Latin American Business Environment: A Model

External Environment

Economic Domestic Environment
Global -- -------
iFinancial
Policy
S Political --------------
Regulatory

Regional % Social

Following the
CARICOM
Introduction, Section II exic
Dominican
Republic
summarizes major Ga R i
Honduras
regional trends during Guate Nicara u .
El Salvado t. rinidad and
2003 and into much of Costa Rica Tobago

2004. Section III CACM Panam
olom
presents assessments of

the 20 largest markets
er
in Latin America,

grouped by geographic COMMUNIT
Bolivia
region and regional

trading bloc (see Map
MERCOSUR
and Table 1). Section Chi

IV concludes with the
ruguay
outlook for the rest of

2004 and 2005. There

are 12 tables presenting

regional averages and

country level data on

key economic, social and political indicators at the end of the report, along with a list of selected sources on

Latin American business news.

II. REGIONAL OVERVIEW

EXTERNAL ENVIRONMENT

Commodity markets and external capital flows have always been important

determinants of the Latin American business environment. The reforms of the New

Economic Model (NEM) were promoted in the 1990s to integrate the region even more

closely largely through non-traditional exports and greater foreign direct investment

(FDI) into the rapidly globalizing world economy. Although Mexico and Central

America have successfully diversified into manufactured exports, the economies of South

America remain tied to primary product exports. Both regions because of weak

domestic savings and investment are sensitive to shifts in international financial

markets affecting interest rates, country risk assessments and bond spreads.

Over the past 12 months, external trends have generally been favorable for Latin

America. High commodity prices and low interest rates constitute a positive external

shock conducive to renewed growth in the region.

Global Developments +1

The U.S recovery and China's economic boom are producing higher world
commodity prices and improved terms of trade for Latin America (Figure 2 and
Table 2). The U.S. has long been Latin America's most important market. By
contrast, China only recently emerged as a major destination for the region's
agricultural and mineral exports, most importantly from South America. The
downside of growing Sino-Latin linkages is cheap Chinese exports to Latin
America plus competition with Latin American producers for manufactured
export markets (which hurts Mexico and Central America most) and foreign
investment.

Global capital markets are positive. Low interest rates and renewed investor
interest in emerging markets make it easier and cheaper to issue corporate and
sovereign bonds. However, Latin America is the only region in the world where
FDI fell last year (Figure 3 and Table 3). Although they should pick up in 2004,

Symbols are used here to indicate overall trends over the past 12 months: t improvement; 4' decline; =
no significant change.

FDI flows will remain well below what they reached in the mid-1990s when
fueled by privatization and mergers and acquisitions.

Figure 2

Terms of Trade for Latin America and the Caribbean, 1994-2003
(Source: CEPAL 2004)

E

m m

m

E m

-

1+

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Figure 3

90,000
80,000
70,000

S60,000
0
m 50,000
0
S40,000
0
I 30,000
20,000
10,000
0

101
0100
&O 99
98
97
96
95
94

-

m m

Sm

+44

Net Foreign Direct Investment in Latin America and the Caribbean, 1994-2003
(Source: CEPAL 2004)

199 199 199 199 199 199 200 200 200 200

-

1Ht1

11111

-
-
-
-

1994 1995 1996 1997

1998 1999 2000

2001 2002 2003

ftC

1m

-
-
-

M M I 1

m m m

-Hft

WTO subsidies agreement and rulings may break impasse in global trade talks.
The WTO Doha round collapsed in August 2003 in Cancun when the G-7 nations
and Group of 20 developing nations were unable to resolve their differences
regarding agricultural subsidies and the so-called "Singapore issues." WTO
arbitration rulings against U.S. cotton subsidies and EU sugar subsidies put
pressure on the G-7 countries to reduce subsidies, and in early August the WTO
reached a framework agreement on eventually eliminating subsidies.

Regional Developments =

FTAA negotiations are at a standstill. The U.S. and Brazil reached a compromise
at the November 2003 FTAA ministerial in Miami to pursue negotiations for a
scaled back market access agreement, but have been unable to agree on a new
agenda. The next Trade Negotiating Committee meeting has been postponed
repeatedly. In the face of stalled FTAA negotiations, the Bush administration is
aggressively pursuing bilateral free trade agreements (with Chile, Central
America, three Andean countries and Panama) without assurance of congressional
approval. For its part, Brazil is pushing not only for a merger of MERCOSUR
and the Andean community into a South American free trade bloc but also a
formal agreement with the EU. The WTO agreement on subsidies may help
jump-start the FTAA negotiations.

In the shadow ofthe war in Iraq and November U.S. elections, U.S.-Latin
American relations continue to drift. Regardless of the outcome of the election,
it seems unlikely that Washington will give the priority to the region that George
Bush promised following his 2000 victory.

Governments and regional organizations in the hemisphere are giving greater
attention to how to harness remittances for development. According to an Inter-
American Development Bank study, Latin Americans working in the U.S. send
around $30 billion a year back to their home countries. Remittances are the first
or second source of foreign exchange earnings for many economies, but they are
not being as effectively utilized as they might be.

DOMESTIC ENVIRONMENT

Largely because of renewed economic growth, the Latin American domestic

environment is more attractive than it has been since 2000 when the region experienced a

brief but aborted recovery. However, questions persist about the sustainability of the

current economic recovery, deepening social pathologies, the frail nature of democratic

governance and the failure of governments to deepen policy and regulatory reform.

Economic and Financial Performance +

The good news on the economic front is twofold: Latin America is experiencing a

broad based economic recovery while at the same time maintaining macroeconomic

stability. Financial performance is also encouraging, although hindered by structural

problems.

Although lower than in the 1990s, and lower than in Asia or what is needed to
reduce poverty, growth has accelerated to its highest annual rate since 1997
(Figure 4). As Table 4 demonstrates, 19 of the 20 economies are predicted to
grow in 2004 with the highest rates in those countries recovering from deep
downturns (Venezuela, Argentina and Uruguay). The current upturn is export-
led, with domestic demand increasing.

Inflation is not problem. The regional rate, which declined in 2003, is expected
to fall again in 2004 (Figure 5). Only Venezuela and the Dominican Republic
have serious cost of living increases (Table 5).

Surging commodity prices are fueling export growth, especially for South
America, and generating a current account surplus in 2003 (Figure 6 and Table 6).
Although the economic recovery may lead to increased imports in 2004, strong
commodity prices should sustain healthy current accounts.

Financial markets are performing well on the debt side. In 2003 bond spreads
narrowed considerably. Latin American debt placement continues to be strong in
2004 with both governments and companies taking advantage of low interest rates
and spreads to refinance debt and raise new money. Latin American equity
markets turned in their best performance since 1991 in 2003. The Brazilian stock
market finished up 130% in dollar terms; the Chilean, 83% and the Mexican,
31%. Local equity markets have cooled off, and the region continues to suffer
from a corporate reluctance to finance through public stock offerings. Likewise
FDI is weak compared to past performance, although it should recover somewhat
in 2004.

While total external debt increased slightly, debt-to-exports ratio fell in 2003
(Figure 7, Tables 7 and 8). Argentina, which has yet to come to agreement on a
rescheduling with its bond holders, and the Dominican Republic, struggling to
avoid default and comply with terms of its IMF agreement, present the most
troubling scenarios.

Latin American currencies are stable, the Dominican peso being the most notable
exception (Table 9). Venezuela, favored by high oil prices and revenues, has
been able to maintain a fixed exchange rate, while all the other economies feature
the prescribed independent, manage floats or are dollarized. Honduras, Peru and
Uruguay signed IMF agreements in 2004.

Figure 4
Regional GDP Growth Rates for Latin America and the Caribbean, 1994-2004
(Source: CEPAL 2004)

Average Annual Inflation Rate for Latin America and the Caribbean, 1994-2004
(Source: CEPAL 2004)

186 103 '8 9 86 5.:
i i -- mm -

1:?2 85 -C
1

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 5

S4.0

(.
S3.0

, 2.0
mi

< 1.0

0.0

-1.0

4.5
3.7 3.7

2.2
1.7

iii-

0.0. I
0 1 M I

II

I7---I I I I I I -
1994 1995 1996 1997 1998 1999 2000 2001 2 2003 2004
_n

400

350-

300

C.)
U
250
o
cr-
0 200
o

| 150

100
100

3-40 C9

Cu

-

Figure 6

Exports and Imports of Goods and Services in Latin America
and the Caribbean, 2000-2003
(Source: CEPAL 2004)

IM

2000 2001

2002 2003

Figure 7

Gross Disbursed External Debt, 1994-2003
(Source: CEPAL 2004)

1994 1995

1996 1997 1998 1999 2000 2001 2002 2003

I Debt ($US billions) Debt as % of exports of coods and services I

440,000

420,000

400,000

380,000

360,000

340,000

320,000

300,000

280,000

* Exports
0 Imports

Social Welfare +

If sustained, the current recovery should eventually translate into more jobs, rising

incomes and poverty alleviation. It is, however, unlikely to reduce the region's deep

inequality and structural unemployment (Table 10). Regional per capital income will only

recover to its 1997 level by the end of 2004. These problems require a more frontal

assault about which there is much discussion in the region but little consensus on

concrete policy measures. There is, in contrast, an emerging consensus in civil society on

the need for serious action to combat the rising crime and violence affecting every

country in the region.

According to a 2004 World Bank study, Latin America is a region of high socio-
economic inequality, whether measured by income, wealth, access to services or
availability of opportunity. Brazil, Latin America's largest country, is one of the
most inequitable societies in the world. Even Uruguay, the region's least unequal
country, is more unequal than the most inequitable society in Eastern Europe.

Studies also confirm what residents and visitors know from first hand experience:
Latin America is succumbing to serious levels of crime and violence. Homicide,
kidnapping and armed robbery are growing deterrents to foreign investment.
Massive demonstrations in Argentina and Mexico suggest that crime is becoming
a major political issue, and governments must address it, or pay the price at the
polls.

Politics =

The political environment (Table 11) features contradictory trends. Democracy and

constitutional government are still the norm, but in some countries, democracy is

ineffective and precarious. Furthermore, public opinion surveys suggest that popular

support for democracy is thin.

*Elections held thus far (El Salvador, Guatemala, Panama and the Dominican
Republic) have produced presidential victories for centrist candidates, which
could be interpreted as an endorsement for continuation of the policies of the
NEM, at least in those countries. The current leader in the polls for Uruguay's
October election, on the other hand, is the candidate of a leftist coalition critical of
neo-liberal economics.

The Venezuelan recall referendum could have regional repercussions. It offers
hope to leftist parties and strengthens Hugo Chavez's standing as a regional leader
challenging the NEM.

A disturbing pattern of interrupted democracies has emerged. Presidents are
elected, but then forced in Ecuador, Argentina and, most recently, Bolivia -
from office before their terms end. Venezuela has had three unsuccessful but
unsettling coups d'etats, while Peru and Guatemala have put down threats to
constitutional rule. Indigenous challenges, sometime violent, to constitutional
order have become serious in the Andean region.

Corruption remains a serious problem for business throughout the region (Table
11). Only Chile has managed to achieve and maintain an environment relatively
free of corruption.

Policy/Regulatory Environment =

Latin American governments, with few exceptions, have effectively consolidated

orthodox macroeconomic management around the trinity of floating exchange rates,

strong fiscal anchors and inflation targeting. They have been less successful in deepening

market-opening structural reforms and institutional building in spite of widespread

recognition of the need to advance beyond the first generation of reforms associated with

the so-called Washington Consensus.

Figure 8
Fiscal Deficit/Surplus, 1994-2003 (% of GDP)
(Source: CEPAL 2004)

-3.5

-3.0

& -2.5

-2.0

-1.5
e-

-1.0

-0.5

0.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

14

-3.2
-2.9 3.0
-2.7
-2.4
-2.2

-1.8
1.6
-1.4
-1.1

* After five years of exceeding the recommended two-percent-of-GDP limit, fiscal
deficits are falling, although there is considerable cross national variability
(Figure 8 and Table 12).

* While there is no clear region wide movement to deepen structural reform, there
are some noteworthy country breakthroughs, especially on pension reform.

III. COUNTRY PROFILES

NAFTA REGION

This year marks the tenth anniversary of the North American Free Trade

Agreement. While analysts debate its impact on jobs, growth, investment and the relative

benefits for its three members, the agreement is a fact of life. It has significantly

institutionalized an increasingly integrated North American economy and transformed

U.S.-Mexican relations.

Currently, the most contentious trade dispute concerns U.S. and Mexican

sweetener markets. Mexico has taken steps to cut off the flow of U.S. high fructose corn

sweeteners, while U.S. sugar producers maneuver to protect domestic markets from

Mexican sugar imports. NAFTA calls for free trade in all sweeteners by 2008.

Immigration and remittances may be the most important components of the U.S.-

Mexican relationship from the Mexican perspective. In January 2004, President Bush

proposed a guest worker program that would legalize the status of Mexicans (and other

foreign workers) in the U.S. Although the ultimate fate of his proposal is in the hands of

Congress, the President's gesture is a significant step toward rebuilding bilateral

relations, which lost Washington's attention following the 9/11 attacks.

Mexico+ +': Renewed growth helping offset effects of weakening presidency.

Economy is recovering. After three years of virtually no growth, GDP should
increase by around 4% in 2004, while inflation is not a threat. Commercial banks,
increasingly foreign owned, are under pressure to increase private sector lending,
which is perceived to be an obstacle to greater growth.

Although FDI fell again in 2003, the externalfinancial position is healthy. High
oil prices have boosted terms of trade and helped offset the decline in
manufacturing exports from the border maquiladoras, which are now growing

2The symbols at the beginning of each country profile indicate the following trends: T business
environment improved, business environment deteriorated, = no significant change since 2003 report.

16

and adding jobs in the wake of the U.S. recovery. Mexico's external debt burden
is manageable, and its credit ratings high.

Violent crime, kidnapping andpolice corruption are disrupting the social
environment and provoking middle-class civil society protests.

President Fox is becoming a lame duck with little likelihood of recapturing his
political influence and national leadership. State and municipal elections
produced victories for the opposition PRI in PAN strongholds. Divisions within
each of the three major parties heighten the probability of growing political
stalemate as the 2006 presidential election approaches.

Macroeconomic policy is secure but structural change not likely in the
remaining two years of Fox administration. In August, Congress did approve
reforms to the debt-laden state pension system (earlier regulators gave private
pensions funds more leeway to invest in equities and foreign securities), but the
President has been ineffective in building support for meaningful tax reform and
opening of the energy sector to private participation. Without them, observers
fear declining oil production and power shortages.

CENTRAL AMERICA

The environment for business in Central America has strengthened over the past

year. Five of the environments are more attractive, and the sixth, Costa Rica, continues

to be fundamentally attractive, even though it did not improve over last year. In addition,

the region is in the final stages of formalizing an economic partnership with the U.S., its

most important market and source of investment capital. However, with the exception of

Costa Rica, these are poor countries with a history of political instability and deep social

problems. Current advances represent incremental progress, but could easily be reversed

with serious consequences for business and investment in the region.

The U.S. and five Central American nations concluded negotiations of a free trade

agreement in late 2003. Costa Rica pulled out at the last minute, but later re-joined the

agreement after additional negotiations on service industries and agriculture. Through

parallel negotiations, the Dominican Republic was incorporated into the agreement.

Although not a party to DR-CAFTA, Panama is negotiating an FTA with the U.S.

Central American leaders are counting on DR-CAFTA to spur higher growth

through increased trade and investment. It represents both a replacement for the one-way

market access provisions of the Caribbean Basin Initiative (and its successor) for Central

America and another important step in building an integrated North American economy.

It also comes as the Multi-Fiber Arrangement is about to expire, potentially subjecting

the increasingly linked U.S. and Central American apparel and textile industries to

greater international competition, especially from China. Finally, it would mean closer

integration among the five Central American members.

Failure to ratify the agreement would be a significant setback for Central

America, for U.S. policy in the region and for the FTAA process. The U.S. Congress will

not take it up until after the November 2004 election, the outcome of which may well

determine the fate of DR-CAFTA, since even though there is local opposition -

ratification is likely in Central America. Democrat candidate John Kerry and his

supporters call for revisiting the provisions regarding labor and the environment.

On the political front, three of the six Central American countries elected new

presidents in 2004. In each case, the winner was a pro-market candidate. These peaceful

transfers of power and moderate orientation of the new administrations underline the

process of democratic consolidation in the region. The election in Guatemala was

particularly important in this regard since the alleged corruption and links to organized

crime of the previous government threatened to destabilize the region. In contrast to

political progress, and a threat to it, is the surge in gang-related violence and criminality.

Governments are acting individually and in concert to confront the problem, thus far

without much success.

Costa Rica=: Most attractive environment in Central America largely unchanged.

Because the Central Bank tightened monetary policy to dampen inflationary
pressures generated by rising oil prices, economic growth will slow down in 2004
and 2005. Costa Rica had one of the highest growth rates in the region in 2003,
and one of the highest sustained rates over the previous decade.

Consistent with its export-led development strategy based on diversification into
non-traditional, high tech exports and increased FDI, the government actively
pursues global, regional, sub-regional and bilateral trade agreements. DR-
CAFTA is important to reviving exports and FDI, both of which have been flat
in recent years.

Since President Pacheco and the opposition-controlled National Assembly have
been at loggerheads for two years over a fiscal reform package that would
increase tax revenues, his government has proposed an austerity budget. This is
one result of the ongoing executive-legislative standoff which could complicate
ratification ofDR-CAFTA. The debate and need to extend the negotiations -
underlines ongoing opposition to further liberalization and privatization of the
economy.

El Salvador+: Election settles political and policy environment.

Economic growth is unsatisfactory. It has not exceeded 2.0% a year since 1999,
which means that per capital income has been stagnant for five years. Inflation is
expected to increase in 2004.
*
With an investment grade credit rating, the externalposition is satisfactory,
although FDI decreased and the foreign debt burden increased in 2003. El
Salvador probably has more riding on ratification and implementation of DR-
CAFTA than any of the other signatories. Remittances are crucial to the
country's finances

Gang-related violence continues to weaken the social environment. The new
administration of President Antonio Saca has sponsored a draconian anti- gang law
that has attracted the criticism of human rights organizations.

In the face of a credible challenge from the leftwing FMLN, the March
presidential election produced a clear victory for the governing ARENA party.
The means continuation of the market-friendly policies pursued by the last three
administrations, although the FMLN has a presence in Congress and in municipal
offices.

Guatemala+: Improved environment with election of new president.

Economic performance is acceptable if not dynamic. Low growth during the
past four years means stagnant per capital income for a country with one of the
lowest standards of living in the region.

Falling FDI andpersistent balance of trade and current accounts deficits
weaken the external position.

Although the election has reduced officially sanctioned organized crime, the
social environment suffers from widespread poverty and violent crime.
Guatemala has the worst Human Development Index rank in Latin America
(Table 10).

Conservative businessman Oscar Berger easily won the December 2003
presidential runoff. Former dictator Efrain Rios of the discredited FRG
governing party was eliminated in the first round. President Berger forged a
governabilityy" pact between his GANA party and two opposition parties (UNE
and PAN) for control of Congress, and he named independents and members of
the opposition to government posts.

The new administration has promised to pursue a formidable array of policy
initiatives: implementation of the 1996 peace accords; investigation and
prosecution of human rights violations and corruption; fiscal reform and
combating violence.

Hondurast: IMF agreement strengthens environment.

Economy performance is adequate. Inflation has been steadily declining, and
growth is up in 2003 and 2004, although still too low.

After committing to a package of austerity measures, the government finally came
to terms with the IMF on a three-year Poverty Reduction and Growth Facility
loan of $300 million. Honduras previously qualified for an IMF Heavily Indebt
Poor Countries (HIPC) facility that will enable it to lower its foreign debt. FDI
increased in 2003.

The tragic prison fire in May called attention to gang problem and inadequacy of
public resources for dealing with it.

Maneuvering for 2005 presidential election is increasingly dominating politics
and complicating task of President Maduro who must work through opposition-
controlled congress.

Nicaragua+: Weak environment continues to improve.

Although still not dynamic, economic performance has improved. Growth is up
and inflation down.

In an important breakthrough the IMF and World Bank awarded a $4.5 billion
debt reliefpackage. This not only allows Nicaragua, which has the highest debt
burden in Latin America (Table 8) to re-allocate resources from debt-servicing to
investment, but it also confers the IMF's seal of approval to the government's
economic policies, which lowers country risk for private investors. FDI increased
in 2003.

With former president Aleman removed from the scene, President Bolahos is
more firmly in control and the political environment more stable.
In order to qualify for HIPC debt relief, the government adopted an economic
reform package aimed at macroeconomic stabilization, more efficient delivery of
social services, strengthening rule of law and improved infrastructure
development.

Panamat: New administration opens possibility of changed environment.

Following a two-year slump, economic growth is up over 4.0% in 2004 for the
second year in a row.

The U.S. is negotiating a bilateral FTA with Panama. FDI jumped in 2003.

High unemployment (nearlyl5%) andpersistent poverty weaken the social
environment.

Martin Torrijos takes office with high expectations. He won the presidency in a
landslide victory, and his party (PRD) controls congress and a majority of
municipal governments. He will be challenged to balance disparate elements of
his party.

Issues facing the new government range from expansion of the Panama Canal to
overhauling the nearly bankrupt social security system. International investors
and Panamanians also expect it to take moves to combat corruption, which is
rampant. The outgoing administration left Panama in a weak fiscal situation.

CARIBBEAN

The most noteworthy development in the Caribbean region was the Haitian crisis and

subsequent disagreement between CARICOM and the U.S. over recognition and support

of the new government. Although there is no question that the disagreement strained

political relations with Washington, it did not significantly affect economic ties.

CARICOM is simultaneously conducting trade negotiations related to the WTO, FTAA

and the EU. Its principal objective is to secure special concessions for its members as

small, developing economies. An active 2004 hurricane season is likely to have

significant economic and social consequences for several of the Caribbean islands.

Dominican Republic+: New administration confronts ailing economy and weak
international financial position.

Economic performance continued to deteriorate. Following a decade of
sustained expansion, GPD will contract for a second consecutive year, while
inflation is forecast to again exceed 40% in 2004, the highest in Latin America.

External position is precarious. In late July, the country missed a payment on an
international bond, which puts it on the verge of defaulting on its foreign debt that
ballooned to over $5 billion under the Mejia administration. The IMF is pressing
the new administration to formulate with a coherent plan that will surely involve
austerity measures for dealing with the economic crisis and servicing the debt.
The Dominican peso lost over 75% of its value vis-a-vis the dollar over the past
12 months, and FDI dropped again. The only bright spot is successful conclusion
of negotiations with the U.S. to incorporate the Dominican Republic into CAFTA,
although this agreement must still receive U.S. congressional approval to take
effect.

Economic stagnation, high inflation, growing unemployment, increased poverty
and constant power blackouts have generated considerable social unrest and
protest over the past year.

After disruptive maneuvering by President Mejia to run for re-election, voters
delivered a decisive victory to former President Leonel Ferndndez (1996-2000)
in the May election. Congress, however, remains in the hands of the PRD
opposition until May 2006.

The policy challenge facing the new government is formidable: to satisfy IMF
and creditor concerns and, at the same time, address the social needs of
Dominicans, and to do it expeditiously. The most pressing issues are narrowing
the fiscal deficit, reaching agreement with the IMF on its pending review and
ameliorating the chronic energy crisis. To be successful, the new government
must have international understanding and support.

Jamaica+: Changes may help economy break out of low level equilibrium.

The economy continues to record modest growth, while inflation jumped to
double digits in 2003. Tourist earnings reached record levels in 2003.

Although the external debt burden is high, Jamaica has not had to resort to an
IMF loan since 1996. The Fund will conduct an intensive review in fall 2004.
FDI is flowing into the tourist development and the bauxite industry, which is
benefiting from rising global demand.

Gang-related violence with political roots is a structural feature of the social
environment.

Two majorparties are renewing leadership for next election, which must take
place no later than 2007.
Government has rebuilt the financial sector, which collapsed in the late 1990s,
but at considerable cost to the treasury and economic growth.

Trinidad & Tobago+: Most dynamic economy in the Caribbean aided by political
stability.

Economic performance is solid. Over the past decade, T&T has had the second
highest growth rate (5.1%) in Latin America.

Soaring demand for liquefied natural gas has boosted exports and FDI in the
industry.

T&T has not escaped the wave of violent crime and kidnapping.

Despite a razor thin parliamentary majority, Prime Minister Patrick Manning's
government has been able to achieve political tranquility to complement
economic strengths.

ANDEAN SOUTH AMERICA

Andean South America continues to present the most problematic of the five sub-

regional business environments in Latin America. However, booming global commodity

prices have helped revive growth in the region. More significantly, Andean countries that

were of most concern last year especially Colombia but also Venezuela are doing

better this year while Bolivia, Peru and, to a lesser extent, Ecuador, have deteriorated.

The most troubling development in the "southern crescent" of the Andes has been the

emergence of interrupted presidencies. Over the last five years, popular protests have

forced elected presidents in all three countries from office before their terms were over.

The most recent interruption occurred last October in Bolivia. Traditional institutions are

proving to be incapable of effectively incorporating the marginalized indigenous peoples

seeking a meaningful political voice, and political violence is on the rise.

On the integration front, the Andean Community and MERCOSUR took

additional steps toward creation of a South American FTA, while the U.S. is negotiating

an FTA with Colombia, Ecuador and Peru, which would deepen integration among the

three Andean partners as well as institutionalizing ties with their most important market.

Bolivia's revived campaign to reclaim sovereign access to the Pacific Ocean through

Chile has placed a strain on Andean relations.

Bolivia+: Referendum gives President breathing room but environment remains
unsettled.

Considering the turmoil of the past year, economic performance is acceptable,
driven by Bolivia's favorable terms of trade.

Domestic politics again complicate the external position. Political opposition
scuttled the recommended Chilean route for exporting natural gas to the U.S. and
Mexico, which puts this crucial project and the foreign investment and
increased export revenue it would bring in jeopardy. Furthermore, the July
referendum creates uncertainty regarding foreign participation in the potentially
rich energy sector. FDI fell by nearly 50% in 2003. Following its failure to
provide the ousted Sanchez de Losada government with timely financial
assistance, the international community created a "friends of Bolivia" group to
support the new government.

Mobilization of the two large indigenous communities and a growing geographic
schism between the eastern lowlands and western highlands added to the fact that
Bolivia is the poorest, least developed country in South America produces acute
social stress.

Violent confrontations between demonstrators and security forces led President
Sanchez de Losada to resign in October 2003. Successor, Vice President Carlos
Mesa, has proven to more effective in managing the volatile political mix that
brought the previous government down, but Bolivia's fractious parties and
obsolete government institution make it difficult for him to last out the term that
ends in 2007.

Policy environment is highly uncertain. The referendum repeals the 1996 law
that opened the gas sector to private participation. The Mesa government must

now draft and win congressional approval for a new energy policy package
that strengthens the government's role (reviving the ineffectual YPFB state oil
company) without scaring off desperately needed foreign investment. It must also
come up with a politically acceptable and economically feasible alternative to the
Chilean route for gas exports.

Colombiat: Advances in security promoting economic recovery.

Economy performance is encouraging. Following five years of stagnation, GDP
is in the second year of moderate expansion propelled by stronger exports,
internal demand and domestic investment, while inflation is acceptable by
Colombian standards.

External position is stronger. Terms of trade, exports and the peso are all up.
FDI fell in 2003, but will be higher in 2004 as increased security rebuilds investor
confidence in Colombia. Prospects for a U.S.-Colombia trade agreement a
reflection of Washington's strategic stake in Colombia also reassures investors.

Dangerous social environment is improving. Although still high, the number of
homicides, kidnapping and internal refugees continues to decline as does drug
trafficking.

Despite voter rejection in the October 2003 national referendum of a fiscal reform
package, President Uribe enjoys wide support and exercises strong leadership.
Colombia was on the verge of being a failed state in 2002. Now two years into
his term although not without setbacks the President's multi-front campaign
has yielded important advances in subduing the guerrillas and re-establishing the
authority of the state throughout the country.

The government must find a politically acceptable way to reduce thefiscal gap,
since the referendum closed off its preferred options. It has proposed a package
of reforms for the public pension system, but congressional approval seems
unlikely. According to the World Bank's Doing Business in 2005, Colombia did
the most of any Latin American country to improve its business and investment
climate.

Ecuador =: Fragmented society and weak political institutions undermine environment.

Macroeconomic indicators are positive but misleading. GDP growth and low
inflation are largely a function of high oil prices and dollarization respectively
rather than solid fundamentals, and the latter hurts non-oil exports.

External position is on balance negative. Thanks to high oil prices, exports and
FDI are up. Negotiations for an FTA with the U.S are also positive. However,
Ecuador's agreement with the IMF collapsed in March because of persistent non-
compliance, and the country faces growing likelihood of having to renegotiate its
foreign debt or enter into default for the second time since 1999.

President Gutidrrez holds on to power, but his political position is weak. With
his standing in public opinion polls as low as 15%, the President has sacrificed
ministers and policy initiatives to avoid defeat in the face of popular
demonstrations and the opposition-controlled congress.

Gutierrez, like his predecessors, has been unable to advance needed reforms, as
congressional defeat of his oil-sector privatization bill in June and collapse of the
IMF demonstrate.

Peru =: Discredited political class and unsettled politics detract from economic
performance.

Economy is growing at 4.0% while inflation is around 3. 0%, both notable
achievements. The Camisea natural gas operation, inaugurated in August, will
significantly lower business and residential energy costs on the coast as well as
generate a stream of natural gas exports over the 40-year life of the project.

External position is generally favorable. Exports are up; external debt isdown
slightly and the currency is stable. Peru became an associate member of
MERCOSUR and is currently negotiating an FTA with the U.S.

Mob lynching of a highland village mayor and endless protests mark the social
environment, and emphasize failure to integrate mobilizing indigenous peoples
into national life.

Hounded by scandals, cabinet turnover, demonstrations and political ineptitude,
President Toledo draws little support in opinion polls, and his party lost control
of Congress in July. While it now appears that Toledo will likely last out his
term, because of the low repute accorded all politicians, he will not be an effective
leader.

Fragile political standing limits the President's ability to articulate and deliver a
coherent policy agenda, although his macroeconomic policy has been steady and
effective.

Venezuela+: Strengthened president and recovering economy improve problematic
environment.

Economy is bouncing back. Surging oil revenues fuel massive increases in
government spending that in turn boosts consumer demand. GDP is forecast to
grow 12% in 2004 helping to compensate for the accumulated 20% two-year
contraction. Inflation will again be in the 20-23% range.

External position has improved. Following the referendum, Standard & Poor's -
citing increasing political stability, a large current account surplus, strong reserves
and lower external debt upgraded Venezuela's credit rating. Record high oil

prices are not only fueling the recovery but also major new FDI in the energy
sector. Unsettled U.S.-Venezuelan relations weaken the external position.

Large public spending programs are dealing with some of the more serious social
programs, at least in the short run.

Referendum was a victory for President Chavez but political environment
remains unsettled. Two questions must now be answered: How will the
President use the unprecedented power he has accumulated, and what will the
defeated opposition do now?
What is next for the Bolivarian revolution? How will the government balance
the rising expectations of its lower class supporters against those of foreign
investors and the private sector. Of immediate concern is the overvalued Bolivar
and tight exchange controls.

BRAZIL AND THE SOUTHERN CONE

The business environment in Brazil and the Southern Cone region of South

America continues to strengthen, although the region's two dominant economies Brazil

and Argentina are moving along somewhat diverging paths. While the former

steadfastly pursues an orthodox policy agenda pleasing to the international financial

community, the latter has yet to resolve issues of importance to the IMF and foreign

investors. There is greater uncertainty surrounding the Argentine environment, and the

asymmetries periodically affect MERCOSUR relations.

The governments of Brazil and Argentina are working to strengthen MERCOSUR

as a political-economic alliance, expand it into a South American free trade agreement

and negotiate agreements outside of the region. Presidents Lula and Kirchner meet with

their MERCOSUR counterparts on a regular basis and relations within the bloc are

generally harmonious, with the exception of a flap over Argentine restrictions on

Brazilian appliance imports. On steps constructing a SAFTA, MERCOSUR and the

Andean Community reached an agreement to gradually reduce tariffs and other trade

barriers. Bolivia and Peru are now both associate members of MERCOSUR.

Preliminary talks have begun with Mexico on associating with MERCOSUR.
27

Negotiations to create a trade agreement with the EU motivated in part by the desire to

counter a U.S.-dominated FTAA foundered in July, putting the October deadline for

reaching final agreement in doubt. In the meantime, U.S.-Brazilian differences have

stalled the FTAA negotiations.

Brazil+ +: Lula stays the course and economy moves toward strong recovery.

After three years of little growth, GDP is growing faster than expected. It may
exceed 4.0% in 2004 as consumer spending and industrial output join export
expansion as growth factors. However, there is concern that rapid growth may
generate inflationary pressures and higher interest rates. Declining inflation
allowed the Central Bank to lower the benchmark interest rate to 16% from 20%,
over the last year, but the bank has taken a more cautious stance in the face of
inflation exceeding the targeted rate. Financial markets are performing better in
part due to regulatory reforms with the first successful IPOs in two years.

External position is strong. Strong export performance has generated record
trade and current account surpluses. Responding to these achievements and
prudent debt management, Moody's upgraded Brazil's sovereign rating to the
level of other rating services. Brazil has announced that it will not renew its IMF
agreement. The real has been stable over the last 12 months, and FDI is
beginning to pick up. In global trade politics, the government maintains its
activist posture as leader of the Group of 20. In June, the WTO issued a ruling
favoring Brazil's position in a dispute withthe U.S. on cotton subsidies.

Drug-related gangland violence in thefavelas of Rio along with Brazil's low
ranking on the 2004 UN Human Development Index point to serious social
problems. The economic recovery is beginning to translate into falling
unemployment.

In spite of scandals tainting close advisors, which early in 2004 appeared as
though they might weaken his government, Lula operates from a position of
political strength. His rating in public opinion polls has fallen from the
unsustainably high levels, but is still quite favorable. The President's PT party
has struck a series of alliances and should do well in the October municipal
elections, which will constitute the first referendum on his government.

The government is working with Congress to continue enacting meaningful
reforms. In 2003, these included the tax and social security reforms (Brazil's
Supreme Court STF upheld the government's tax on civil servant pensions).
Still awaiting action are bills dealing with bankruptcy, judicial and regulatory
reform. The government prevailed in pushing through a moderate increase in the
minimum wage.

Argentina =: Social unrest and unresolved debt restructuring threaten recovery.

Fueled by improving terms of trade for its agricultural commodities, surging
exports and growing consumer spending, the economy is experiencing rapid
growth and low inflation. Even with two years of high growth, the GDP is only
back to where it was before the crisis, and there are doubts about the sustainability
of the current rebound given Argentina's weak international position.

In spite of healthy trade and current accounts surpluses, the external position is
more precarious. The principal threat is the failure of the government to reach
agreement with bond holders on restructuring the $100 billion defaulted debt.
While sparring with its creditors, Argentina has also suspended negotiations with
the IMF with which it has had contentious relations in recent years on
finalizing terms of its current loan package. Until these issues are settled, FDI
will remain at a standstill, which does not bode well for future growth.

The social environment is a troubling mixture of violent crime, kidnapping and
police corruption with unemployment and poverty. Unemployment has dropped
but remains high by Argentine standards. The same is true for poverty. Blue
collar piqueteros tie up the streets of Buenos Aires to protest government
economic policies while white collar demonstrations demand that authorities
reign in crime and the street protests.

President Kirchner, who won only a weak plurality of the popular vote, has
pursued an increasingly populist political course to consolidate his position with
the public and gain control of the Peronist party. This requires constant balancing
of divergent domestic and international interests.

The Kirchner administration needs to move on difficult policy issues left over
from the 2002 crisis to build a foundation for long term economic and social
recovery. Argentina is in the midst of its worst energy shortage in 15 years due in
part to inadequate investment since 2002. The banking sector has not recovered
from pessification, and the government and provincial governors have no firm
fiscal plan.

Chile+: Accelerating growth enhances attractive environment.

Growth is up and inflation down. Soaring copper export revenues, low interest
rates and increasing consumer spending are moving the economy toward the
performance achieved in the 1990s.

Chile is again the international financial community's exemplary Latin
American economy. It maintains the coveted investment grade credit rating. The
U.S.-Chile FTA is now in operation, and the country continues to pursue open
regionalism, negotiating trade agreements throughout the world. Not even an
appreciating peso has hurt the export boom. The only cloud on the external front
is rising tensions with Bolivia over gaining sovereign access to the Pacific.

Although Chile has succeeded in reducing poverty over the last decade, recent
studies demonstrate that it continues to feature high income and wealth
inequality.

The ruling Concertaci6n government has regained some of the political and
policy ground it lost last year, although the opposition was able to defeat a bill
that would have instituted higher royalty taxes on mining companies. It is likely
that the government will revise and resubmit the measure since it enjoys wide
public support.

Paraguay =: Political developments cloud improving economy.

Although at a modest rate, the economy is growing. Lower inflation constitutes
another positive sign.

Reaching agreement on a two- year IMF stand-by loan was a step forward in
rebuilding confidence of the international community. Exports increased in 2003,
as did FDI, and there was a small current account surplus.

Following a promising start by President Duarte, the political environment has
turned more problematic. Most unsettling has been the return of exiled politician
Lino Oviedo to face charges that he attempted to overthrow the government and
masterminded the 1999 murder of the vice president. A former general with a
populist bent, Oviedo could emerge as a Chavez-like challenger to Duarte.

The government needs to deliver on its campaign promises to combat corruption
and implement the reforms thwarted under predecessors.

Uruguay+: Economic recovery building as country prepares for election.

Emerging from a four-year recession in 2003, economic growth is accelerating
and inflation declining. The Argentine and, to a lesser extent, Brazilian
recoveries are fueling the turnabout.

Although the foreign debt burden is high, the external position is stronger. The
country had a small current account surplus in 2003 (due to lower imports); the
peso held its value and Standard & Poor's raised Uruguay's currency ratings
because of the strengthening economy and improving fiscal picture. FDI should
increase in 2004.

If the candidate of the EP-FA alliance, Tabare Vasquez, wins he is leading in
the polls the October presidential election, Uruguay will break duopoly of the
traditional parties and inaugurate a left-leaning administration, joining
Argentina, Brazil and Chile.

*As president, Vasquez would likely move slower in opening the economy, and
might even reverse some of his predecessor's reforms. In a December 2003
referendum, voters overwhelmingly repealed the law privatizing the energy
sector.

IV CONCLUSION

REGIONAL OUTLOOK

The environment for business in Latin American is stronger entering the last

quarter of 2004 than it was a year earlier. In fact, almost across the region, conditions are

the most attractive they have been since 2000 environments in 12 of the 20 countries

covered in this report improved over the past year while only two deteriorated with the

remaining six environments unchanged and the business environment is likely to

become even more attractive over the next 15 months. However, the region still has not

regained the economic momentum achieved during the 1990s, and the political consensus

in favor of market-friendly policies of the NEM has frayed in recent years. The

conclusion assesses the outlook for the Latin American business environment through

2005 and suggests what will shape the course of events.

External Environment

Global =: The global environment continues to look positive for Latin America,
although there are potential threats that bear monitoring. Keys: U.S-led global
recovery; Chinese growth and exchange rate; end of Multi-Fiber Agreement;
implementation of WTO agreement on subsidies and resumption of Doha
round.

Regional?: Developments in the U.S. who wins in November and how
Congress votes on pending trade agreements will have a large impact on the
regional environment. Hugo Chavez and Lula may also choose to more actively
shape regional developments. Finally, experts are predicting a return of the El
Nino weather phenomenon that periodically affects Latin America. Keys:
Outcome of U.S. elections; resumption ofFTAA talks.

Domestic Environment

Economic and Financial Performance =: Latin America will grow in 2005,
probably at less than the surprisingly robust 4.5% forecast for 2004. Growth will
likely be more uniform across the region as the Venezuela, Argentina and
Uruguay slow down while Brazil, Mexico and the Dominican Republic
accelerate. Local financial markets should be favorable. Keys: Oilprices.

Social Welfaret: Unemployment will begin to decline throughout the region, as
the current recovery gains strength, providing some short term improvement in
social welfare. Civil society will continue mobilizing against crime and violence.
Keys: Falling unemployment; upturn in per capital income.

Politics =: There are only two presidential elections scheduled for 2005, and the
outcome of neither is likely to have region-wide significance. In the seven
countries with elections in 2006, campaign politics will take center stage as the
year progresses. More significant than elections are what happens in Bolivia and
Ecuador where the incumbent presidents are vulnerable to the same combination
of forces that brought down their predecessors, and whether President Chavez
decides to actively export his Bolivarian revolution or not. Keys: Elections in
Chile and Honduras; politics in the Andean crescent and Venezuela.

Policy/Regulatory Environment =: The recovery should reinforce the regional
commitment to orthodox macroeconomic management based on floating
exchange rates, strong fiscal anchors and inflation targeting. However, the fate of
structural reform is less assured. Because of widespread popular opposition,
privatization is off the policy agendas of most governments. Social security and
labor market reform is feasible, although not easy to accomplish. Key: Progress
on reform in Brazil.

Paradigm Shift?

Latin America has a history of changing economic models (see figure below).3

These paradigm shifts create significantly different business environments. Between

1914 and 1945, governments gradually abandoned policies promoting open markets and

trade-driven growth in favor of import substitution industrialization, which resulted in the

inward-looking-development/closed-markets approach that predominated for the next 35

years. Then in the mid-1980s in response to the Latin American debt crisis, there was a

transition back to the export-led growth model promoted by international financial

institutions and implemented through the policy reforms of the NEM.

Latin America's current economic recovery may blunt opposition to the NEM

over the next 15 months, but it is unlikely to disappear. Studies, surveys and popular

protests make it clear that a growing segment of the Latin American public is

3 Adapted from Victor Bulmer-Thomas, The Economic History of Latin America Since Independence (New
York: Cambridge University Press, 1994).

disillusioned with the failure of the NEM to perform as promised: reducing volatility and

sustaining high rates of growth that translate into more jobs and less poverty. In this

climate, governments not only encounter difficulty in passing specific reform initiatives -

which means that either they do not propose them or quickly back down but in some

countries the NEM reform agenda threatens democratic governance itself.

Paradigm Shifts

Export-led Growth Transition Inward-looking Development
1820-1850
Dates (internal consolidation)

1850-1914

1914-1945
(external shocks 1945-1973

1973-1990
external shock,
1990-?? debt crisis)
1990-?? ??

What has helped save the NEM thus far is the absence of credible alternatives.

President Chavez of Venezuela promotes his Bolivarian revolution as an alternative to

"neoliberalism," but so far there have been no takers. In late 2003, Presidents Lula and

Kirchner advanced the "Consensus of Buenos Aires" as a successor to the Washington

consensus, but it too has gone nowhere. To the contrary, the policy agenda that Lula

embraces in Brazil conforms closely to the NEM. There is then no evidence to suggest

that Latin America is in the midst of again changing paradigms, although the NEM is

being re-aligned to correspond to political realities in the region.

Country Outlooks

To further assess the outlook for the next 15 months, we divide the 20 countries

into three categories attractive, problematic and mixed corresponding to the

established character of their business environments. Significant developments can lead

to national environments being reclassified. This year, four of the 20 countries are in

different categories than in 2003: Guatemala and Colombia both improved from

problematic to mixed; Bolivia fell from mixed to problematic while the Dominican

Republic suffered an even bigger drop, from attractive to problematic.

Within each of the three categories, we indicate the likelihood that the national

business environment will get better, get worse or stay the same through 2005 and

suggest key events to monitor in each country. This year, 12 of the 20 environments are

expected to improve compared to nine in 2003.

Attractive Environments

Although not without problems, the business environments in these four countries

are fundamentally sounder and offer an attractive risk-reward profile. The combination

of factors that make the environment attractive differs somewhat from country to country,

as does the outlook of each for 2005. Mexico's fundamental strength comes from

NAFTA and the steps taken to harmonize macroeconomic policies with those of the U.S.

Politics cloud the short run outlook. Costa Rica has strong social and political

institutions, but has been slower to open sectors of its economy. Trinidad & Tobago has

a rich resource endowment and a strong tradition of parliamentary democracy. Chile is

the Latin American country that has gone the farthest in opening its economy, been the

most consistent in managing it and features strong political institutions.

Mexico =: The U.S. recovery has begun to lift the Mexican economy, which
promises to grow again in 2005. To remain its competitiveness Mexico needs to
improve its infrastructure, strengthen education and open the energy sector, but
the Fox administration is no longer capable of pushing through the needed
reforms. Instead their prospects await the next government. In the meantime, the
next two years will feature pre-election maneuvering among and within the three
major parties. Keys: U.S. recovery; oil prices; ability of Fox to remain relevant.

Costa Rica =: Costa Rica has an educated population, strong democratic political
institutions and rule of law tradition. Furthermore, it has successfully diversified
into high tech export clusters. While political opposition to opening sectors of the
economy to greater private participation remains strong, the Pacheco government
did sign CAFTA. Keys: Ratification ofCAFTA; oil prices; executive-legislative
relations.

Trinidad & Tobago+: There is no reason to believe that T&T will not continue
to prosper given its resource endowment and the current political alignment if
oil prices do not collapse. Keys: Global energy markets.

Chile+: Chile is moving toward sustaining the high growth rates that made it
Latin America's most attractive environment in the 1990's. Keys: Presidential
election; copper prices.

Problematic Environments

Uncertainty and unresolved issues make the business environments of the five

countries in the problematic category fundamentally unattractive. In the Dominican

Republic uncertainty surrounds the ability of the new government to move on several

fronts simultaneously. Bolivia's new president faces a precarious political situation

because of a deeply divided nation. Uncertainty in Venezuela, following the referendum,

concerns both how the president and opposition will now address their deep differences

and which policy agenda the government will pursue. The economic and political

progress made in 2003 in Argentina is now threatened by unresolved social and financial

crises. Similarly the promises of the new administration in Paraguay to clean up

corruption and adopt stalled reforms are less likely to be fulfilled because of the country's
36

dysfunctional politics. There are opportunities in all five with the environments in four

expected to improve but their overall environments are so flawed that investing in them

continues to require rigorous due diligence, hedging and a high tolerance for risk.

Dominican Republic+: Over the past two years, events have transformed the
Dominican Republic from one of the most attractive environments in Latin
America to one burdened with serious problems. Because the election produced a
new administration with a clear mandate, macroeconomic indicators (inflation,
exchange rate, interest rates, current account surplus) improved even before
President-elect Fernandez took office. A year from now the environment should
be stronger, but President and his team have to sustain action on many fronts to
return the country to its status as a leading Latin American market. Keys:
Negotiations with the IMF; tax reform to close deficit; ability of Ferndndez to
inspire international and domestic confidence.

Bolivia?: The next 12 months will be crucial for Bolivia. The Mesa government
must reconstruct the country's energy policy, maintain macroeconomic stability,
address deep social problems and survive in the face of a well organized and
unpredictable opposition. Keys: New hydrocarbons legislation; Eva Morales;
friends of Bolivia.

Venezuela+: The recall referendum has shifted the political situation in President
Chavez's favor. Now Venezuelans and investors will be watching to see what he
does with his power, but the environment should continue to improve, largely
because of the country's oil reserves and proximity to the U.S. market. Keys: Oil
prices; relations with Washington; genuine political reconciliation.

Argentina+: The Argentine recovery is at a turning point. If the government
does not reach agreement with its bond holders and the IMF, the recovery will be
difficult to sustain. Agreement with the IMF will require hard policy decisions.
Keys: Debt restructuring negotiations; relations with the IMF; piquetero
movement.

Paraguay =: The jury is still out on the Duarte government, which has promised
to make significant changes, although his standing in the public opinion polls one
year after assuming office is falling. Given Paraguay's weak institutions and
deeply imbedded corruption, improvements in the environment are difficult to
accomplish. Keys: Compliance with IMF agreement; Oviedo challenge.

Mixed Environments

The business environments in the remaining 11 countries have a mixture of

attractive and problematic characteristics. It is worth noting, however, that the short-term

outlook for these countries is positive. In only one (Ecuador) is the environment
37

expected to deteriorated, while three will stay the same and seven will become more

attractive. Of particular note among the environments expected to strengthen is Brazil. A

sustained economic recovery will spill over into the rest of the region directly through

increased trade and indirectly through the lessons to be learned from the Lula

government's policy choices.

El Salvador+: The new administration will have a honeymoon, but it must
deliver results in the form of higher rates of growth and investment from the deep
structural reforms enacted by ARENA governments. It must also show progress
in reducing gang crime. Finally, failure of CAFTA would be a serious setback.
Keys: Ratification of CAFTA; accelerated growth; gang violence.

Guatemala+: Expectations of both Guatemalan civil society and the international
community are high for the new government, but the challenges facing it are
daunting. Any progress it makes in fulfilling its campaign commitments and
popular expectations during the first year will not go unnoticed. Keys: Steps
toward reducing crime, violence and corruption; effectiveness of governability
pact.

Honduras =: Because of its investment in maquiladora industries and heavy
remittance flow, Honduras has stabilized its environment, but it has not been able
to sustain dynamic growth. It should increasingly benefit from the U.S. recovery,
but election politics are likely to intrude on policy-making. Keys: CAFTA
ratification; presidential election.

Nicaragua =: With an IMF agreement and debt relief, Nicaragua has a more
attractive business environment. Now it needs to generate the growth needed to
reduce poverty. Key: Increased growth and sustained FDI.

Panama+: The question surrounding the Torrijos administration is: Will it use its
widespread popular support and legislative majority to effect serious change in
Panama? This would mean breaking with the old guard of his party in favor of
the younger activists who also helped win the presidency. It would also entail
serious attention to Panama's endemic corruption. Keys: Torrijosfirst months in
office; U.S. ratification of FTA.

Jamaica+: In recent years, Jamaica has taken steps (most importantly reforming
and rebuilding the financial sector) that could pay off with improved economic
performance, if hurricane recovery does not prove too costly. Keys: Favorable
IMF review; renewed bank lending; increased FDI and tourist arrivals.

Colombiat: Thanks largely to the effectiveness of President Uribe, the business
environment is less problematic, which prompts an upgrade. The question now is
whether he can sustain his security efforts, deal with fiscal deficit and pursue re-

election (which requires a constitutional change) in the remaining two years of his
term. Any significant military setback would undermine the environment. Keys:
Re-election politics; continued progress against guerrillas.

* Ecuador+: President Gutierrez may make it through his term now at the mid-
point but to do so he seems willing to sacrifice cabinet members and important
policy initiatives. Keys: Oil price; new IMF agreement, debt management.

* Peru =: It now appears that President Toledo will make it through his term
despite his weak political standing and ineffectual leadership. His removal or
resignation would generate uncertainty and weaken the business environment.
Then there is apprehension of the 2006 election, for which current front runners
are disgraced former presidents Alan Garcia and Alberto Fujimori. The good
news is that Peru's dysfunctional politics seem to be increasingly extraneous to
economic performance. Keys: Fate of Toledo government in run-up to 2006
presidential election.

* Brazil+: The business environment continues to grow more attractive. The Lula
government moved beyond the honeymoon period to demonstrate staying power,
political agility and genuine competence in governing the country. And now its
macroeconomic and financial policies are paying off with a recovery that is
gaining strength. Keys: October municipal elections; sustained growth.

* Uruguay+: In spite of the likely victory of the leftist candidate in the presidential
election, the environment should continue to strengthen To enhance Uruguay's
standing as a financial center, as he promises, Tabare Vasquez cannot abandon the
principal tenets of established policy. Keys: Presidential election; policies of new
administration

TABLES

Table 1 MAJOR SUBREGIONAL TRADE AGREEMENTS

Table 2 TERMS OF TRADE, 1994-2003

Table 3 NET FOREIGN DIRECT INVESTMENT, 1994-2003

Table 4 GDP GROWTH RATES, 1994-2004

Table 5 ANNUAL INFLATION RATES, 1994-2004

Table 6 EXPORTS, IMPORTS AND CURRENT ACCOUNT
BALANCE, 2000-2003

Table 7 GROSS DISBURSED EXTERNAL DEBT, 1994-2003

Table 8 DEBT/EXPORT RATIO, 1994-2003

Table 9 EXCHANGE RATES AND IMF AGREEMENTS, 2004

Table 10 SOCIAL ENVIRONMENT, 2004

Table 11 POLITICAL ENVIRONMENT, 2004

Table 12 FISCAL DEFICIT/SURPLUS, 1994-2003

Table 1
MAJOR SUBREGIONAL TRADE AGREEMENTS

ANDEAN
COMMUNITY

MERCOSUR

CARICOM

I. Type of Agreement IFree Trade Area Customs Union Customs Union Customs Union Customs Union

II. Entry into Force 1994 1961 1969 1995 1973
III. Agreement Objectives 1. Eliminate tariff 1.Create economic union 1. Create customs union 1. Liberalize trade 1. Stimulate/promote
barriers on most goods 2. Implement a GET: 2. Implement a GET: 2. Implement a CET: economic integration
2. Liberalize market common exteral tariff common exteral tariff common exteral tariff 2. Implement a GET:
access in several sectors 3. Reduce intraregional 3. Eliminate intraregional 3. Adopt a sectoral common exteral tariff
3. Facilitate movement tariffs trade barriers approach
of business and people 4. Become a common
market by 2005

IV.Member Countries United States Costa Rica Bolivia Argentina Haiti
Mexico El Salvador Colombia Brazil Jamaica
Canada Guatemala Ecuador Paraguay Trinidad & Tobago
Honduras Peru Uruguay 12 Other Members
Nicaragua Venezuela (Bolivia)* FTA w/ Dom. Rep.
(Chile)*

V. Total Population (2002) 427.1 million 34.6 million 116.9 million 223.4 million 14.7 million

VI. Total GDP (2002) I $11.7 trillion $65.0 billion $263.8 billion $572.0 billion $33.5 billion

VII. Regional Trade (2002)1
Exports within own region $566.7 billion (57.3%) $2.9 billion (23.2%) $5.9 billion (12.2%) $9.5 billion (11.3%) NA
Exports to Latin America $128.6 billion (13.0%) $3.7 billion (29.6%) $11.3 billion (23.4%) $21.7 billion (25.7%) NA
Exports to World $988.6 billion (100%) $12.5 billion (100%) $48.3 billion (100%) $84.3 billion (100%) NA

VIII. 2002 Subregional United States (41.3%) Guatemala (34.2%)1 Colombia (42.8%) Argentina (55.9%) N/A
Trade Leading Exporters2 Canada (35.4%) El Salvador (25.1%)'1 Venezuela (22.6%) Brazil (32.4%) N/A
*:associate member
Source: UNDP, Human Development Report 2004.
(1) IADB. Integration and Trade in the Americas: A Preliminary Estimate of 2002 Trade;
(2) World Trade Organization. International Trade Statistics 2003 (www.wto.org).
* Data for Guatemala and El Salvador are 2002 estimates from SIECA (Secretaria de Integracion Economica Centroamericana ).

NAFTA

CACM

Table 2
TERMS OF TRADE, 1994-2003
(1995=100, except where indicated)

2000 2001

2002

2003

103.3 100.0 102.8 104.0 100.4 102.3 107.4 107.3 107.9 108.9

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica*
Trinidad & Tobago*

100.0
100.0
100.0
100.0
100.0
100.0

100.0
83.4
98.9

100.0
100.0
100.0
100.0
100.0

BRAZIL AND SOUTHERN CONE
Argentina 105.6 100.0
Brazil 91.5 100.0
Chile 84.1 100.0
Paraguay 105.1 100.0
Uruguay 94.7 100.0

LATIN AMERICA AND
CARIBBEAN

98.9

94.9
93.6
87.7
92.8
88.1
101.3

97.7
89.4
88.3

111.7
103.7
109.6
96.5
115.6

108.5
98.0
80.7
100.0
96.7

100.6
94.1
94.8
115.4
83.9
103.4

103.9
91.8
94.3
118.0
87.4
103.3

102.8
86.9
87.2
110.2
81.1
105.9

95.8
82.7
84.7
103.8
77.3
99.8

94.5
80.2
82.9
101.6
70.9
100.3

93.0
79.5
82.1
98.5
69.8
99.3

90.1
78.5
80.6
95.7
67.4
97.3

102.0 103.1 104.0 102.0 103.6 103.0 102.5

90.0....

93.9
81.0
89.9
92.1
95.5
110.1

95.6
78.4
88.2

102.5
104.9
108.9
95.7
100.0

100.8 102.8

109.9
95.8
99.6
89.7
79.9

103.9
103.8
73.3
92.4
103.1

97.2

109.8
102.6
106.2
83.3
107.0

98.5
93.6
73.5
87.7
94.9

97.5

112.0
115.8
123.8
80.9
157.4

108.8
90.9
73.6
84.2
86.2

110.5
109.2
114.2
77.5
131.8

108.2
90.7
68.5
84.2
87.1

110.0
107.2
117.2
79.8
140.4

107.1
87.9
68.5
84.1
86.7

103.4 100.4 99.4

115.4
109.3
121.1
81.6
153.7

116.3
88.4
70.2
83.3
87.7

100.7

1994

1995

1996

1997

1998

1999

115.6
104.4
111.9
103.2
110.8

108.9
103.8
83.0
99.9
96.4

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2003.
* Source:lnter-American Development Bank, Facing Up to Inequality in Latin America, 1998 (Index 1980=100)
Year 2003 are preliminary CEPAL estimates

Table 3
NET FOREIGN DIRECT INVESTMENT, 1994-2003
(Millions of US dollars)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
NAFTA REGION
Mexico 10,973 9,526 9,185 12,830 11,602 12,476 16,405 26,537 14,435 11,000

CENTRAL AMERICA
Costa Rica 292 331 421 404 608 614 400 445 628 466
El Salvador 0 38 -7 59 1,103 162 178 260 234 139
Guatemala 65 75 77 84 673 155 230 456 110 104
Honduras 42 50 91 128 99 237 282 195 143 216
Nicaragua 40 75 97 173 184 300 267 150 204 241
Panama 411 223 416 1,299 1,203 864 700 405 78 576

CARIBBEAN
Dominican Republic 207 414 97 421 700 1,338 953 1,079 961 700
Jamaica ** ** *** ** *** *** ***
Trinidad and Tobago

ANDEAN SOUTH AMERICA
Bolivia 147 393 474 731 952 983 723 660 654 357
Colombia 1,298 712 2,784 4,753 2,033 1,336 1,973 2,493 1,171 991
Ecuador 576 452 500 724 870 648 720 1,330 1,275 1,637
Peru 3,108 2,550 3,487 2,056 1,580 1,811 662 1,070 2,391 958
Venezuela 455 894 1,676 5,036 3,942 2,018 4,180 3,479 -241 2,100

BRAZIL AND SOUTHERN CONE
Argentina 2,622 4,112 5,349 5,508 4,966 22,630 10,654 3,304 1,741 1,103
Brazil 2,035 3,475 11,667 18,608 26,002 26,888 30,497 24,715 14,084 7,137
Chile 1,672 2,205 3,681 3,809 3,144 6,203 -348 3,045 1,139 1,164
Paraguay 138 98 144 230 336 89 98 77 -26 14
Uruguay 155 157 137 113 155 235 274 319 181 131

LATIN AMERICA AND
CARIBBEAN 24.231 25.789 40.279 56.969 60.163 79.018 68.862 70.022 39.169 29.041

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2003
Preliminary estimates for Year 2003 from CEPAL.

Table 4
GDP GROWTH RATES,
(% Change)

1994-2004

Average
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1994-2003

4.4 -6.2 5.4

6.8 5.0

3.7 6.7 -0.3 0.8

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

4.9
6.1
4.0
-1.3
3.3
2.9

8.0
3.4
3.9
-1.5
7.4
3.5

4.0 5.0 7.2 8.2 7.4
1.0 0.7 -0.1 -1.8 -0.8
3.6 4.0 4.4 4.0 5.3

7.8 7.3
0.6 1.0
7.8 9.2

3.0 4.3 -0.4 5.4
1.8 0.9 1.0 0.4
4.3 3.0 5.5 5.1

ANDEAN SOUTH AMERICA
Bolivia 4.7 4.7
Colombia 6.1 5.2
Ecuador 4.3 2.3
Peru 12.8 8.6
Venezuela -2.3 4.0

BRAZIL AND SOUTHERN CONE
Argentina 5.8
Brazil 5.9
Chile 5.7
Paraguay 3.1
Uruguay 7.3

-2.8
4.2
10.6
4.7
-1.4

LATIN AMERICA AND
CARIBBEAN

1.1 3.7

5.1 2.2

0.5 3.7

0.4 -0.6

SOURCE: CEPAL, Proyecciones latinoamericanas 2002, 2003, and 2004.
Preliminary estimates for 2004 from CEP.AL (August 2004)

NAFTA REGION

Mexico

2004

1.3 2.8

4.5
1.9
2.3
2.5
-0.4

5.5
2.5
6.9
1.1
5.0

5.0
0.8
1.0
-0.5
0.7

3.8
0.1
3.3
-0.6
4.4

0.3
-3.8
-7.9
0.9
-5.8

-3.4
1.0
-0.7
-0.1
-3.4

2.3
2.4
0.9
2.7
3.8

-0.8
3.9
4.5
-0.6
-1.9

3.3
2.3
1.9
4.3
-0.7

1.6
1.4
5.5
0.2
3.5

-4.4
1.3
3.5
2.4
-3.6

3.3
3.7
5.5
4.2
12.0

2.7
1.6
3.8
4.9
-9.0

-10.8
1.5
2.0
-2.5
-12.0

2.5
3.7
2.7
4.0
-9.4

8.7
-0.2
3.3
2.6
2.5

1.7 2.3

ANNUAL

1995 1996

Table 5
INFLATION RATES,
(% change in CPI)

1997 1998

1999

1994-2004

2000 2001

2002 2003 2004

NAFTA REGION

Mexico

7.1 52.0

CENTRAL AMERICA
Costa Rica 19.9
El Salvador 8.9
Guatemala 11.6
Honduras 28.9
Nicaragua 12.4
Panama 1.4

CARIBBEAN
Dominican Republic 14.3
Jamaica 33.2
Trinidad & Tobago 3.7

ANDEAN SOUTH AMERICA
Bolivia 8.5
Colombia 22.6
Ecuador 25.3
Peru 15.4
Venezuela 70.8

BRAZIL AND SOUTHERN CONE
Argentina 3.9
Brazil 916.5
Chile 8.9
Paraguay 18.3
Uruguay 44.1

LATIN AMERICA AND
CARIRREIAN

34n Q

22.6
11.4
8.6
26.8
11.1
0.8

9.2
21.7
5.3

12.6
19.5
22.8
10.2
56.6

1.6
22.4
8.2
10.5
35.4

5R q

27.7

13.9
7.4
10.9
25.3
12.1
2.3

4.0
21.5
3.3

7.9
21.6
25.5
11.8
103.2

0.1
9.6
6.6
8.2
24.3

186

15.7

11.2
1.9
7.1
12.8
7.2
-0.5

8.4
9.1
3.6

6.7
17.7
30.7
6.5
37.6

0.3
5.2
6.0
6.2
15.2

in1

12.4
4.2
7.5
15.7
18.5
1.4

7.8
8.1
5.6

4.4
16.7
43.4
6.0
29.9

0.7
1.7
4.7
14.6
8.6

12.3

10.1
-1.0
4.9
10.9
7.2
1.5

5.1
6.3
3.4

3.1
9.2
60.7
3.7
20.0

-1.8
8.9
2.3
5.4
4.2

4.4 5.7

10.2
4.3
5.1
10.1
9.9
0.7

9.0
7.7
5.6

3.4
8.8
91.0
3.7
13.4

-0.7
6.0
4.5
8.6
5.1

11.0
1.4
8.9
8.8
4.7
0.0

4.4
8.7
3.2

0.9
7.6
22.4
-0.1
12.3

-1.5
7.7
2.6
8.4
3.6

9.7
2.8
6.3
8.1
4.0
1.9

10.5
7.3
4.3

2.5
7.0
9.4
1.5
31.2

41.0
12.5
2.8
14.6
25.9

4.0 4.0-5.0

9.9
2.5
5.9
6.8
6.6
1.5

42.7
12.0
3.8

3.9
6.5
6.1
2.5
27.1

3.7
9.3
1.1
9.3
10.2

9.0-10.0
4.5-6.0
6.0-7.0
7.0-8.0
7.5-8.5
1.0-2.0

40-50

3.0-4.0
7.5-8.5
5.0-6.0
2.5-3.5
25-30

5.0-7.0
6.0-7.0
1.5-2.5
4.0-5.0
9.5-10.5

8 R 75

SOURCE: CEPAL, Proyecciones de America Latina y el Caribe, 2004.
Preliminary estimates for Year 2003 and 2004 from CEPAL.

1994

CA IBA 25 18 103 .....

R5Q 12

Table 6

EXPORTS, IMPORTS (GOODS & SERVICES) AND CURRENT ACCOUNT BALANCE, 2000-2003
(Millions of US dollars)

2000

2001

2002

2003

IExports Imports C/Account Exports Imports C/Account Exports Imports C/Account Exports Imports C/Account

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica 7,748
El Salvador 3,662
Guatemala 3,860
Honduras 2,464
Nicaragua 956
Panama 7,820
CARIBBEAN
Dominican Republic 8,964
Jamaica **
Trinidad & Tobago **
ANDEAN SOUTH AMERICA
Bolivia 1,470
Colombia 15,668
Ecuador 5,987
Peru 8,614
Venezuela 34,394

180,167 190,494 -18,160

7,295
5,636
5,568
3,318
1,991
8,099

10,852
**
**

2,078
14,399
5,012
9,723
19,868

BRAZIL AND SOUTHERN CONE
Argentina 31,092 32,822
Brazil 64,469 72,774
Chile 22,971 21,702
Paraguay 2,926 3,335
Uruguay 3,659 4,193
LATIN AMERICAN AND
CARIBBEAN 407,395 420,493

-707
-431
-1,049
-258
-917
-716

-1,026
**
**

-447
424
916
-1,568
13,112

-8,864
-24,669
-1,073
-192
-567

171,103 190,494

6,820
3,587
3,905
2,436
947
7,997

8,387
**
**

1,521
14,952
5,693
8,517
27,648

30,846
67,545
22,571
2,431
3,276

7,295
5,636
5,568
3,336
1,996
8,122

10,852
**
**

2,079
14,410
4,927
9,723
21,300

32,822
72,443
21,817
3,286
4,193

-46,262 390,624 421,647

-18,103 173,454 184,614

-737
-190
-1,253
-293
-932
-174

-741
**
**

-274
-1,251
-550
-1,184
2,062

-4,429
-23,213
-1,192
-275
-545

7,123
3,799
3,769
2,458
916
7,567

8,238
**
**

1,545
14,160
6,173
9,192
27,716

28,643
69,968
22,300
2,425
2,698

6,911
5,795
6,070
3,511
1,973
7,794

10,063
**
**

1,980
15,873
6,613
9,618
23,346

27,360
72,653
21,435
2,888
3,723

-53,3681392,563 413,523

-14,046

-946
-384
-1,193
-243
-883
-92

-875
**
**

-335
-1,639
-1,178
-1,206
7,423

9,590
-7,695
-553
92
251

-13,962

177,937 185,419

8,040
4,057
3,963
2,601
936
7,275

9,060
**
**

1,793
15,052
7,012
10,238
26,533

32,770
82,654
25,186
2,663
2,937

7,707
5,898
6,622
3,492
1,974
7,625

10,166
**
**

2,048
15,392
7,742
9,932
17,474

13,010
61,863
20,744
2,507
2,526

421,159 383,373

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2003
CEPAL, Balance Preliminar de las Economias de America Latina y el Caribe, 2002
Preliminary estimates for Year 2003 from CEPAL.

-8,400

-990
-617
-1,109
-454
-804
-130

850
**
**

-47
-1,677
-508
-1,245
9,844

8,994
2,713
-487
59
32

5,969

Table 7

GROSS DISBURSED EXTERNAL DEBT, 1994-2003
(Millions of US dollars)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
NAFTA REGION
Mexico 139,800 157,200 149,028 160,258 166,381 148,652 144,534 138,736 137,363 138,082

CENTRAL AMERICA
Costa Rica 4,133 2,859 2,830 2,988 3,171 3,266 3,334 3,338 3,654 4,492
El Salvador 2,056 2,517 2,689 2,632 2,789 2,831 3,148 3,987 4,550 4,550
Guatemala 2,895 3,026 3,197 3,618 3,831 3,929 4,100 4,290 4,665 4,665
Honduras 4,040 4,121 4,073 4,404 4,729 4,706 4,808 4,964 4,973 4,973
Nicaragua 11,695 6,094 6,001 6,287 6,549 6,660 6,374 6,363 6,449 6,449
Panama 5,505 5,070 5,051 5,180 5,412 5,604 6,263 6,349 6,492 6,400

CARIBBEAN
Dominican Republic 3,946 3,807 3,572 3,537 3,636 3,682 4,177 4,459 5,047 5,047
Jamaica 3,652 3,232 3,278 3,306 3,024 3,375 4,146 4,348 4,400 4,400
Trinidad & Tobago 2,064 1,876 1,565 1,471 1,585 1,680 1,638 1,614 1,650 1,650

ANDEAN SOUTH AMERICA
Bolivia 3,777 4,366 4,234 4,655 4,574 4,461 4,412 4,300 4,727 4,507
Colombia 21,855 31,116 34,409 36,681 36,733 36,131 39,039 37,340 37,261 37,261
Ecuador 14,589 14,586 15,099 16,400 16,282 13,564 14,411 16,288 16,457 16,457
Peru 30,191 33,805 28,642 29,477 28,704 28,150 27,195 27,840 28,714 28,484
Venezuela 40,998 34,117 33,710 31,457 33,723 32,786 32,437 32,290 32,000 33,000
BRAZIL AND SOUTHERN CONE
Argentina 85,656 110,613 125,052 141,929 145,289 146,575 140,273 134,200 140,400 140,400
Brazil 148,295 186,561 208,375 259,496 241,468 236,156 226,067 227,689 235,000 235,000
Chile 21,768 26,272 29,034 32,591 34,758 37,177 38,538 40,956 42,436 42,436
Paraguay 1,271 1,801 1,927 2,133 2,697 2,819 2,652 2,700 2,791 2,690
Uruguay 4,251 5,387 5,459 6,036 5,618 6,116 5,855 8,328 8,626 8,593

LATIN AMERICA AND
CARIBBEAN 564,399 651,342 679,910 768,349 764,389 741,702 726,732 723,689 741,193 743,073
SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe, 2003
CEPAL, Balance Preliminar de las Economfas de America Latina y el Caribe, 2002
Year 2003 are preliminary CEPAL estimates

Table 8

DEBT/EXPORT RATIO, 1994-2003

(as a percentage of exports of goods and services)

1994

NAFTA REGION
Mexico
CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

196.3

124.6
125.4
128.8
300.6
2522.1
73.9

CARIBBEAN
Dominican Republic 75.3
Jamaica 120.6
Trinidad & Tobago 98.1

ANDEAN SOUTH AMERICA
Bolivia 356.9
Colombia 205.6
Ecuador 317.1
Peru 533.4
Venezuela 231.9

BRAZIL AND SOUTHERN CONE

Argentina
Brazil
Chile
Paraguay
Uruguay

LATIN AMERICA AND
CARIBBEAN

442.3
313.3
150.7
33.6
152.7

248.9

2002

2003

79.2

1995

176.0

64.2
123.4
107.2
252.1
995.6
66.6

66.4
101.7
68.1

353.9
253.1
280.7
503.2
164.4

444.3
354.4
135.7
37.5
153.6

238.6

1996

139.8

58.6
122.1
114.3
212.0
931.4
68.1

57.7
97.3
66.6

322.5
261.5
268.5
391.8
133.3

441.9
396.9
143.8
43.8
141.9

225.1

1997

131.9

55.9
90.4
113.4
201.7
788.5
61.7

50.1
96.4
52.3

329.2
258.0
270.7
351.5
124.9

460.3
438.5
149.8
53.6
143.1

229.6

1998

129.0

46.1
91.5
109.9
193.1
788.6
65.8

48.6
97.7
50.2

337.5
273.5
325.8
381.2
176.3

468.0
409.0
171.4
64.6
135.4

228.6

1999

100.4

39.7
89.2
112.9
210.2
794.3
78.5

46.1
87.0
50.4

340.4
258.5
258.6
365.3
146.9

528.2
427.8
176.8
97.6
172.2

211.4

2000

80.2

43.0
86.0
106.2
192.6
668.4
80.0

46.6
94.1
37.7

300.1
249.2
244.0
315.7
93.4

451.1
350.0
165.5
90.7
160.0

173.7

2001

81.1

48.9
111.2
109.9
203.8
672.2
79.4

53.2
123.6
36.3

282.8
249.7
286.1
326.9
116.8

435.1
337.1
181.5
111.1
254.2

180.6

51.3
119.8
123.8
202.4
704.3
85.8

61.3
138.7
39.4

305.9
263.1
266.6
312.4
115.5

490.2
335.9
190.3
115.1
319.8

184.1

55.9
112.2
117.7
191.2
688.8
88.0

55.7

251.4
247.6
234.7
278.2
124.4

428.4
284.3
168.5
101.0
292.6

172.1

SOURCE: CEPAL, Anuario Estadistico de America Latina y el Caribe 2002 and 2003
Year 2003 are preliminary CEPAL estimates
* Gross disbursed external debt includes the public-and-private sector external debt. Also includes International Monetary Funds loans.

Table 9

EXCHANGE RATES AND IMF AGREEMENTS, 2004

EXCHANGE RATE
January 2, 2004 August 27,2004

% change

Current Exchange Rate Regime

IMF Agreements (Dates)

NAFTA REGION
Mexico peso

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

col6n
col6nlU.S. dollar
quetzal
lempira
c6rdoba oro
balboalU.S. dollar

CARIBBEAN
Dominican Republic peso
Jamaica Jamaican dollar
Trinidad & Tobago Trin. dollar

ANDEAN SOUTH AMERICA
Bolivia boliviano
Colombia peso
Ecuador sucrelU.S. dollar
Peru nuevo sol
Venezuela bolivar

BRAZIL AND SOUTHERN CONE
Argentina peso
Brazil real
Chile peso
Paraguay guarani
Uruguay peso

11.17

418.74
8.75
8.03
17.97
15.75
1.00

35.00
60.61
6.27

7.86
2779.08
1.00
3.48
1600

2.95
3.03
713
6100
29.80

11.34

443.83
8.75
7.90
18.47
16.15
1.00

39.66
61.80
6.27

7.97
2568.67
1.00
3.36
1918

3.02
2.97
700
5883
28.68

-1.52% Independent Float

-5.99%
0.00%
1.62%
-2.78%
-2.54%
0.00%

-13.31%
-1.96%
0.00%

-1.40%
7.57%
0.00%
3.45%
-19.85%

-2.37%
1.98%
1.82%
3.56%
3.76%

Managed Float
Dollarized
Dollarizing
Managed Float
Managed Float
Dollarized

Managed Float
Independent Float
Independent Float

Managed Float
Independent Float
Dollarized
Independent Float
Managed and Licensed

Independent Float
Independent Float
Independent Float
Independent Float
Managed Float

nla
nla

PRGF1 (2/04-2/07)*
PRGF1 (12102-12/05)
nla

Stand-by (8/03-8/05)
nla
nla

Stand-by (4103-12/04)
Stand-by (1/03-1/05)
nla
Stand-by (6/04-8/06)
nla

Stand-by (9/03-9/06)
Stand-by (9/02-3/05)
nla
Stand-by (12103-3/05)
Stand-by (4102-3/05)

SOURCES: Latin American Weekly Report, 31 August 2004; IMF Homepage ; Central Banks for Jamaica and Trinidad & Tobago
Key for IMF Agreements
1: PRGF = Poverty Reduction and Growth Facility
2: HIPC = Debt-service relief initiative for Heavily Indebted Poor Countries (IMF and World Bank's joint program)
*Honduras is also receiving HIPC assistance (6/00 Floating).

Currency

POPULATION
(Millions)
2002

AVG. POP.
GROWTH

2002-
2002-15

SOCIAL
ILLITERATE
POP.

2002
2002

Table 10

ENVIRONMENT 2004

GDP PER CAPITAL
GROWTH
(PPP $U.S.)* %
2002 1990-2002

INCOME
INEQUALITY
CtTN indreY**

HDI I
(World rank)***
2002

POPULATIONN
[N POVERTY

(Yearl %

UNEMPLOYMENT
RATE

2003
2003

NAFTA REGION
Mexico
CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama
CARIBBEAN

102.0

4.1
6.4
12.0
6.8
5.3
3.1

4.2
20.3
30.1
20.0
23.3
7.7

15.6
12.4
1.5

13.3
7.9
9.0
15.0
6.9

3.0
13.6
4.3
8.4
2.3

Dominican Republic 8.6
Jamaica 2.6
Trinidad and Tobago 1.3
ANDEAN SOUTH AMERICA
Bolivia 8.6
Colombia 43.5
Ecuador 12.8
Peru 26.8
Venezuela 25.2
BRAZIL AND SOUTHERN CONE
Argentina 38.0
Brazil 176.3
Chile 15.6
Paraguay 5.7
Uruauav 3.4

$8,970

$8,840
$4,890
$4,080
$2,600
$2,470
$6,170

$6,640
$3,980
$9,430

$2,460
$6,370
$3,580
$5,010
$5,380

$10,880
$7,770
$9,820
$4,610
$7,830

54.6

46.5
53.2
48.3
55.0
55.1
56.4

47.4
37.9
40.3

44.7
57.6
43.7
49.8
49.1

52.2
59.1
57.1
56.8
44.6

53 (2002) 39.4%

45
103
121
115
118
61

98
79
54

114
73
100
85
68

34
72
43
89
46

(2002) 20.3%
(2001) 48.9%
(2002) 59.9%
(2002) 77.3%
(2001) 69.4%
(2002) 25.3%

(2002) 44.9%
(1998) 15.9%
(1997) 22.0%

(2002) 62.4%
(2002) 50.6%
(2002) 49.0%
(2001) 54.8%
(2002) 48.6%

(2002) 41.5%
(2001) 37.5%
(2000) 20.6%
(2001) 61.0%
(2002) 15.4%

6.7
6.2
3.4
7.7
(2002) 12.9
15.6

16.4
14.7
10.6

(2002) 8.7
16.9
9.8
9.3
18.2

15.6
12.4
8.5
(2002) 14.7
16.8

SOURCES: UNDP, Human Development Report 2004; Population in poverty and unemployment rates are from CEPAL, 2003.
* GDP per capital (Purchasing Power Parity in $U.S.). 1 PPP dollar has the same purchasing power in the domestic economy as 1 U.S. dollar has in the U.S. economy
* The Gini index measures inequality over the entire distribution of income or consumption. A value of 0 represents perfect equality, and a value of 100 perfect inequality
*** The Human Development Index (HDI) measures a country's achievements in three aspects of human development: longevity (life expectancy at birth), knowledge
(combination of literacy rate and enrollment ratio), and a decent standard of living (GDP per capital PPP in $U.S.).

__ __ __ ____ I____ __ ~_

Table 11
POLITICAL ENVIRONMENT, 2004
Level of Democratic Consolidation1 Cur
Election Inaugurating Political Civil Corruption Perception4 Current
Civilian Rule Rights2 Liberties3 I Index Rank President /PM

NAFTA REGION
Mexico

CENTRAL AMERICA
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama

CARIBBEAN
Dominican Republic
Jamaica
Trinidad & Tobago

ANDEAN SOUTH AMERICA
Bolivia
Colombia
Ecuador
Peru
Venezuela

rent Political Environment

Term Control of Legislature

Fox 2000-2006

1920

1949
1984
1985*
1982
1984
1994

1963
1962
1962

1980*
1958
1978*
1980*
1958*

BRAZIL AND SOUTHERN CONE
Argentina 1983*
Brazil 1989
Chile 1989
Paraguay 1993
Uruguay 1985

2
3
4
3
3
2

2
3
3

3
4
3
3
4 A

4.3
3.74
2.4 V
2.3 f
2.6 A
3.4 A

3.3
3.8
4.6

2.3 A
3.7 4
2.2
3.7 V
2.4

2.5
3.9 V
7.4 V
1.6 V
5.5 4

Pacheco
Saca
Berger
Maduro
Bolanos
Torrijos

Fernandez
Patterson
Manning

Mesa
Uribe
Gutierrez
Toledo
Chavez

Kirchner
Lula da Silva
Lagos
Duarte
Batlle

2002-2006
2004-2009
2004-2008
2001-2005
2001-2006
2004-2009

2004-2008
2002-2007
2002-2007

2003-2007
2002-2006
2002-2006
2001-2006
2000-2006

2003-2007
2002-2006
2000-2005
2003-2008
1999-2004

Opposition

Opposition
Govt. Coalition
Govt. Coalition
Opposition
Nominal
Government

Opposition
Government
Government

Govt. Coalition
Government
Opposition
Opposition
Government

Opposition
Govt. Coalition
2 Houses Split
Govt. Coalition
Govt. Coalition

1: As measured in Freedom in the World 2003: The Annual Survey of Political Rights and Civil Liberties. (www.freedomhouse.org/ratings) *Interrupted democracies
2 Freedom House definition: Those rights that enable people to participate freely in the political process. On this scale 1 represents the most free and 7 the least free.
3 Freedom House definition: Freedoms to develop views, institutions and personal autonomy apart from the state. On this scale 1 represents the most free and 7 the least free.
4: As measured by Transparency International, 2003 Corruption Perceptions Index (www.transparency.org). Focuses on corruption in the public sector and defines corruption
as the abuse of public office for private gain. The country ranks measure the corruption level in 99 countries as perceived by business people, risk analysts, investigative
journalists and the general public. The scores used range from 10 (country perceived as virtually corruption-free), down to close to 0 (country perceived as almost totally corrupt).
VAUp or down indicate, respectively, an improvement or a worsening of the political environment from 2002.

Table 12

FISCAL DEFICIT/SURPLUS, 1994-2003
(% of GDP)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
NAFTA REGION
Mexico 0.0 -0.6 -0.2 -1.1 -1.4 -1.5 -1.3 -0.7 -1.8 -0.6

CENTRAL AMERICA
Costa Rica -5.4 -3.5 -4.0 -2.9 -2.5 -2.2 -3.0 -2.9 -4.3 -2.8
El Salvador -0.7 -0.6 -1.8 -1.1 -2.0 -2.1 -2.3 -3.6 -3.1 -2.1
Guatemala -1.4 -0.5 0.0 -0.8 -2.2 -2.8 -1.8 -1.9 -1.0 -1.6
Honduras -5.5 -3.1 -3.5 -2.8 -1.2 -4.3 -5.8 -6.0 -5.2 -5.4
Nicaragua -3.2 -0.3 -0.9 -0.8 -1.2 -3.8 -5.0 -8.7 -4.1 -2.3
Panama -0.7 0.8 0.2 -0.4 -4.9 -2.4 -1.3 -2.0 -2.4 -2.6

CARIBBEAN
Dominican Republic -0.6 1.1 0.0 0.9 0.6 -3.2 -2.1 -1.9 -2.2 -0.4
Jamaica ** ** ** ** *
Trinidad and Tobago ** ** ** **

ANDEAN SOUTH AMERICA
Bolivia -2.6 -1.3 -1.7 -3.6 -4.1 -3.8 -3.9 -7.4 -9.2 -6.6
Colombia -1.2 -2.1 -3.3 -3.5 -4.7 -5.3 -6.4 -5.3 -4.9 -4.7
Ecuador -0.1 -1.4 -2.4 -1.2 -4.1 -2.9 0.1 -0.7 -0.8 -0.9
Peru -3.2 -3.4 -1.5 -0.8 -1.1 -3.2 -2.8 -2.8 -2.2 -1.9
Venezuela -7.3 -4.3 0.6 1.9 -3.8 -1.6 -1.6 -4.2 -3.3 -3.0

BRAZIL AND SOUTHERN CONE
Argentina -0.9 -1.9 -2.8 -1.4 -1.8 -3.0 -2.1 -3.8 -0.3 -0.2
Brazil -0.6 -5.0 -3.7 -3.0 -4.0 -3.3 -1.2 -1.3 -0.3 -1.1
Chile 1.6 2.4 2.1 1.8 0.4 -1.4 0.1 -0.3 -0.8 -0.8
Paraguay 2.4 0.0 0.0 1.4 0.0 -2.8 -4.5 -1.1 -3.1 -0.8
Uruguay -2.6 -1.5 -1.4 -1.4 -0.9 -4.0 -4.1 -4.3 -4.6 -3.6

LATIN AMERICA AND
CARIBBEAN -1.8 -1.6 -1.4 -1.1 -2.2 -2.9 -2.7 -3.2 -3.0 -2.4
SOURCE: CEPAL, Balance Preliminar de las Economias de America Latina y el Caribe, 2002 and 2003
Preliminary estimates for Year 2003 from CEPAL.

SELECTED SOURCES ON LATIN AMERICAN BUSINESS

Print
Latin American Weekly Report (London)
LatinFinance
Latin Trade
Wall Street Journal

On-line
Brazil Focus: Weekl Report
fleischer(,aol. com. br
Clarin (Buenos Aires)
www.clarin.com
El Mercurio (Santiago)
http://www.emol.com/
El Nuevo Herald (Miami)
www.elherald.com
La Republica (Lima)
www.larepublica.com.pe/
Latin America Advisor: The Interactive Forum for the Region's Leaders
Subscriptions available to mailto:freetrial(Zthedialogue.org
Listin Dario. com.do
www.listin.com. do
Miami Herald
www.herald.com
New York Times
www.nytimes.com
O Estado de Sao Paulo
www.estado.com.br
The Tico Times On-Line (San Jose)
www.ticotimes.com

Primary Data Sources

United Nations Development Programme (UNDP), Human Development Report 2004 (New
York: United Nations, 2004).

Comision Economica para America Latina y el Caribe (CEPAL), Anuario E, iI, \,, !i.' de America
Latina y el Caribe 2003 (New York: United Nations, 2004).

CEPAL, Proyecciones latinoamericanas 2004 (New York: United Nations, 2004).

CEPAL, Balance Preliminar de las Economias de America Latina y el Caribe 2003 (New York:
United Nations, 2003).

Latin American Business Environment Program
Center for Latin American Studies
University of Florida
PO Box 115530
University of Florida
Gainesville, FL 32611-5530 USA

Tel: (352) 392-0375 x808
Fax: (352) 392-7682
www.lata m.ufl.edu/labep.html