Practical analysis for investment professionals
26 April 2017

Jorge Castañeda: Latin America at a Turning Point

The 2018 CFA Institute Latin America Investment Conference will be held in Rio de Janeiro on 1–2 March. This practitioner-oriented educational conference will focus on Latin American economies and capital markets, as well as global issues relevant to investors worldwide.

Latin America has achieved a pivotal milestone. That was the critical takeaway from Mexican politician, economist, and commentator Jorge Castañeda at the inaugural CFA Institute Latin America Investment Conference.

Historically, many countries in the region have suffered through coups, dictators, corruption, repression, and assorted power grabs. To be sure, some of that still goes on today. After decades of difficulty, however, democracy seems to have finally taken root.

If somebody wants power in a Latin American nation today, that person needs to win an election. Likewise, if the people want somebody out of power, then they need to vote that leader out. This approach has not been the norm in Latin America, where during the past 200 years, a continuous series of events has led to strife and civil war. Even places like Colombia, after generations of unending conflict, have achieved a lasting peace. This is a big deal.

From an economic perspective, Latin America can be broken down into two blocks: South America and the Caribbean Basin (composed of Mexico, Central America, and the Caribbean islands). The South American economies are heavily commodity oriented, selling iron ore, copper, oil, coffee, coal, and natural gas in global commodity markets. The markets buying these commodities are geographically diverse, which helps provide consistency in the supplying countries’ revenue streams.

In contrast, the Caribbean Basin countries are primarily either export manufacturers, such as Mexico, or tourism oriented, such as Belize, the Bahamas, and Aruba. These nations’ revenues tend to be tied to a smaller number of buyers, particularly the United States.

US president Donald Trump has spoken out against the North American Free Trade Agreement (NAFTA) ratified by Mexico, the United States, and Canada, suggesting that Mexico will pay a large price if the United States decides to pull out of or rearrange the treaty. Although his policy actions thus far suggest a softening of his stance on NAFTA, many political and business leaders in Mexico remain concerned.

According to Castañeda, the Mexican automotive industry now employs about 750,000 people (other data sources suggest it employs more than 875,000). In a country of more than 78 million workers, however, this industry makes up roughly 1% of the workforce. Moreover, the Mexican auto plants focus on assembly: Only 25% of the parts are made locally; 40% are imported from the United States, and the remainder are imported from elsewhere. So, whether or not NAFTA is reshaped, the effects may be less dramatic than some are expecting.

Castañeda noted that the average salary for an auto plant worker in Mexico is about $400 per month. In contrast, he cited the average salary of an auto plant worker in the US as $5,800 per month, which shows US labor as 14.5 times more expensive than Mexican labor. According to US News & World Report, GM pays its US workers an all-in cost of $58 per hour, while Mexico pays its average auto industry worker $8 per hour. This suggests that US auto labor is only 7.5 times more expensive. In either case, the disparity remains large.

Consequently, the economic pressures may prove too great to rearrange the affected industries in their entirety. In Castañeda’s view, if the US wants to back out of NAFTA, Mexico should let it. He suggests that it would take up to two years to battle through the legal issues and in the meantime, create a great deal of uncertainty that would cause manufacturers to move elsewhere. It’s not a welcome problem, of course, but should it happen, it is surmountable.

Latin America’s three greatest challenges remain violence, corruption, and the drug trade, according to Castañeda.

Violence has been a far more prevalent problem in Latin America than in developed countries. Castañeda stated that the United States is largely considered the most dangerous developed nation, yet it experiences only about five homicides per 100,000 citizens annually. In contrast, he commented, places such as Guatemala, El Salvador, and Honduras reach 70 to 100 homicides per 100,000 citizens annually. Brazil is safe in some areas and dangerous in others. Nationally, Castañeda indicated that Brazil averages about 23 homicides per 100,000 people annually.

Mexico’s figures have been equally volatile. In 2007, just after President Vicente Fox left office, Castañeda said the homicide rate was down to seven per 100,000 people annually. But since the Mexican government initiated its war on drugs, the annual rate has escalated to about 22 per 100,000 people. In reviewing the statistics cited by Castañeda, we found some discrepancies between his numbers and publicly available data sources on homicides by country (such as the United Nations Office on Drugs and Crime and the World Bank), but not enough to discredit his essential argument. In Castañeda’s opinion, nobody has found a good solution to the violence in Latin America. Education can help, but it takes many years to take root. Rule of law can help, but as the war on drugs made evident, efforts to establish rule of law both creates violence as well as reduces it. Proper policing may help, but it often requires financial resources that these countries lack.

With respect to corruption, the picture is a little more heartening. Brazil and Mexico both suffer from large-scale corruption in which politicians and the politically connected exploit the powers of government to enrich themselves. To put the extent of these countries’ corruption into perspective, Castañeda cited the recent corruption case of the president of Chile, who allegedly funneled $10 million to her son and daughter-in-law’s business. (It should be noted that after further research on this issue, it appears the case in Chile might be more nuanced than Castañeda’s statement indicates.) Nevertheless, Castañeda suggested this sort of corruption is small by comparison, saying “This is what the mayor of a mid-sized town in Mexico does for breakfast.” Things are changing, however. Brazil went after former President Luiz Inacio Lula da Silva and indicted him on corruption charges. All too often in the past, Latin American corruption went unanswered.

Castañeda also said that the illegal drug trade remains a major problem in the region. He indicated that although many Latin American political leaders have suggested legalizing drugs so that they may be regulated and taxed — thereby removing the life-blood of the cartels and alleviating violence — drugs remain unpopular with the people. Castañeda believes drugs will remain an intractable problem politically because the population insists drugs remain illegal. On the margin, however, things may be starting to change. The recent legalization of recreational marijuana in California is a major step and may influence the spread of such policies elsewhere.

Castañeda has been in and around Mexican politics for most of his life. When asked, he indicated that he would love to run for president in the next election as an independent candidate. Such a campaign would have to be heavily financed, however, because Mexico’s laws give party candidates huge subsidies and free TV advertising — heavily favoring the existing parties. And in his view, the private sector doesn’t want to put up the money.

If he can’t raise the large sum necessary for a successful campaign, then Castañeda will not run. Whatever he decides, his message was clear: Democracy is winning in Latin America, and it is a harbinger of profound changes for the future.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.


Key Takeaways

  1. Latin America can be divided into South American economies, which are heavily commodity oriented, and Caribbean Basin countries, which are primarily either export manufacturers or tourism oriented.
  2. South American economies sell to geographically diverse markets, providing consistency in their revenue streams, while Caribbean Basin countries have revenues tied to a smaller number of buyers, particularly the United States. This creates two subregions of the economy in Latin America, which move in very different directions depending on what the global economic cycle is.
  3. Democratic transfer of power without violence occurs regularly in Latin American governments, although violence linked to crime and the illegal drug trade remains a major problem in the region.


Jorge Casteñada

View the full transcript (PDF).

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About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

6 thoughts on “Jorge Castañeda: Latin America at a Turning Point”

  1. Clement Gavi says:


  2. Michael Czekaj, CFA says:

    Thanks Ron. Great review of an excellent presentation from Mr. Castañeda!

  3. balofin abimbola folarin says:

    Afternoon sir, will love to know your next annual conference thank you

  4. Ken Trider says:

    This was a great overview of a complex area, insightful and well presented. Worth listening too

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