Despite a respectable GDP growth rate of 5% for 2007 in Latin America,
many other emerging market countries have grown faster and modernized their
economies at a more impressive rate in recent decades, according to a new
report issued by Standard & Poor's.

Annual GDP growth for Latin America averaged 5.3% since 2004.

"On the whole, Latin America has been less successful than developing
Asian countries in entering global production chains to creating both a
dynamic export sector and a wider industrial base to support it," said S&P in
its report entitled Latin American Exports: Growing, But Not Dynamic,
published Monday.

S&P said the Latin American and Caribbean region has been losing ground
in world trade, with their share of world exports down to 4.6% in 1990-1999
from 9.7% in 1950-1959, and rebounded to only 5.4% in 2000-2003. S&P said
there has been a similar, declining trend in foreign direct investments over
the long term.

Quoting data from the United Nations Conference on Trade and Development
(UNCTAD), the Latin American and Caribbean region received only 10% of global
FDI during 2000-2005, compared with 11% in 1990-2000 and 13% in 1970-1980.

"Perhaps more telling, the region received only 35% of all FDI going to
developing countries in 2000-2005, falling from 51% in 1970-1980," S&P said.

"Moreover, the region has failed to make the best use of the FDI that it
does receive," S&P added. Much of the FDI in South America has gone into
producing natural resources or establishing a base for selling to the local or
regional markets, not into exporting globally or back to industrialized
countries. "Hence, (the region) has been less successful than many Asian
countries in entering global production chains," S&P said.

TOO DEPENDENT ON NATURAL RESOURCES, LACK OF DIRECTION

South America's dependence on the abundance of its natural resources
subjects much of the region to sharp changes in its terms of trade, S&P said.
Natural resources account for about half or more of total exports in
Argentina, Chile, Colombia, Ecuador, Peru, and Venezuela, and this dependence
typically create boom and bust cycles, in line with the swings in the
international commodity prices. And the current market turmoil in the US, and
Europe, could result in a period of slower global growth, thereby possibly
impacting the Latin American economies as well.

Several other factors explain the relatively poor performance of Latin
America in comparison with emerging countries in Asia over recent decades. S&P
said the Latin region's history of economic instability during the last three
decades of the 20th century "undoubtedly reduced the time horizon of both
local and foreign investors, deterring the type of long-term investment needed
to modernize industries." Frequent changes in rules and regulations, together
with macroeconomic volatility, typically lead firms to focus on short-term
goals or projects with a high return at the cost of riskier long-term
projects. Hence, the region continues to pay a cost for its past macroeconomic
crises, S&P said.

SLOW TO INCORPORATE NEW TECHNOLOGIES, KNOWLEDGE-SHARE

Because of past and present institutional weaknesses and a lack of
political consensus on the steps needed to advance the economy more rapidly,
most Latin American countries suffer from the delay in incorporating new
technology and to create dynamism that spills over into other sectors of the
economy, said S&P. Local firms often lack the efficiency, quality,
reliability, and technology to adequately serve multinationals.

These factors were largely due to the lack of skilled manpower and
technical and scientifically qualified personnel in the Latin American region.
S&P said the public sector, which has played an important role in promoting
education and training and in setting up systems of innovation in Asian
countries, was performing poorly in much of the Latin American region. S&P
said, quoting various sources, that Brazil and Mexico are the only two
countries within the group that increased the share of "knowledge-diffusing"
industries--the measure of knowledge-sharing among participants in a
particular industry. As a percentage of manufacturing output, the share of
knowledge-diffusing sectors in Brazil for the year 2000 was 31.4% and Mexico
at 34.7%, compared to 14.7% in Argentina, 12% in Chile and 28.3% in Latin
America as a whole.

The S&P report said that South Korea, at 63%, has devoted far more
resources to R&D and was able to raise labor productivity in
knowledge-diffusing sectors much faster than either Mexico or Brazil. South
Korea, said S&P, was able to make better use of the presence of such
manufacturing activity to create more prosperity in the economy.

MEXICO IS THE EXCEPTION

Despite these challenges, some countries in the region have progressed
much faster than the rest. The bulk of the change can be seen in Mexico,
with some improvement in Brazil, Argentina, Uruguay and Costa Rica.

Although much of South America still depends largely upon exports of
commodities or of industrial products that contain a significant input of such
resources, such as petrochemicals, steel and aluminum, almost 40% of Mexico's
exports consist of technologically sophisticated goods, such as machinery,
instruments and fine chemicals. Oil accounted for only 12% of total Mexican
exports from 2001 to 2006, compared with 85% for manufactured products.
The improvement in Argentina, meanwhile, was due to rising exports of
natural gas, at least until 2002. In Costa Rica, the two dynamic export
sectors are medications and parts and accessories for office equipment.

CHALLENGES AHEAD BUT LONG-TERM GROWTH POSITIVE

Looking ahead, with many Latin American countries already entering into
free-trade agreements, this augurs for long-term growth and policy stability
of the region, S&P said. However, S&P said trade liberalization may be
necessary but not always sufficient for achieving the type of export dynamism
seen in Asia.

A combination of factors--such as creating a cluster of globally
competitive electronic and heavy industries in large industrial bases like
Brazil or Mexico; developing clusters of export-oriented software firms in
smaller countries like Costa Rica or Uruguay; and investing in education and
knowledge-sharing to help develop more local production into global chains and
generate technical and scientific dynamism--must be looked at if Latin
America is to succeed in competing with the major Asian exporters like Korea,
Taiwan, Malaysia, and, subsequently, China, said S&P.

Standard & Poor's, like Platts, is part of the McGraw-Hill Companies.

--Angie Joe, angie_joe@platts.com
--Shahrin Yatim, shahrin@platts.com