It’s been a rough few years for the political class in Latin America. To be sure, politicians are mistrusted all over the world, according to a GfK poll, but no region is more skeptical than Latin America when it comes to trusting their political leaders. This is a problem for foreign investors.
In the past, large capital investors who built infrastructure, dug mines, or drilled for oil relied upon national governments, if not the presidency, to lay the groundwork for their investments and smooth any problems that emerged. Partnering with powerful national governments ensured a viable project and predictable time table.
Those days are over.
Since Latin American countries shed their colonial roots and became independent countries, powerful centralized governments have lorded over the provincial regions of their countries. With few exceptions, the political capital of a Latin American country is also its commercial and cultural capital. But such concentration of wealth and power has bred centuries of animosity in the provincias.
In Guadalajara, Mexico, proud tapatíos drive with bumper stickers that read “Haz patria, mata a un Chilango”, roughly translated means “Be a patriot by killing someone from Mexico City”. Though shocking to the foreign ear, Mexicans, who are known for their dark humor, just shrug it off with a smile … but the sentiment of provincial anger is real.
National governments in Latin America long relied upon carrot and stick to govern their countries. Centralized tax systems provided the carrot whereby fiscal transfers to states and provinces came with the price of acquiescence. When that proved insufficient, the army or federal police provided the ugly end of the stick, a centrally controlled corrupt judiciary the other end. Voters put up with it all so long as prosperity flowed and their neighborhoods were safe.
The Decentralization of Power
However, recent trends have upended centuries of centralized control. The collapse of metal prices in 2013 and energy prices in late 2014 blew a giant hole in the fiscal ledgers of many Latin American governments who relied, one way or another, on taxing natural resources to fund their governments.
The end of the commodity super cycle came as a cold shower to Latin governments who on average had expanded their national budgets by over 15% per year (in USD) from 2003-2013. Some estimate that more money was stolen from Latin American government coffers in that decade than any 10-year period in the past. When the money train ended, the first to feel the pinch were the provinces when transfer payments slowed to a trickle, including royalties earned from mines and oil fields in their jurisdictions.
But national governments have survived boom-bust cycles before. This time around, however, their malfeasance was too frequently recorded and published. The downturn coincided with the dawn of a new era of high tech-driven transparency in Latin America. Today, 200 million smartphones are brandished by citizens across the region and any untoward act or conversation is easily recorded and posted on social media, which enjoys a massive user base in the region.
Embarrassing moments have tarnished the reputations of dozens of high-profile national figures, ranging from Peru’s PPK and Brazil’s Michel Temer to Colombia’s Santos and Mexico’s Peña Nieto. Approval ratings for politicians plummeted in Latin America from 2015-2018 as they failed to deliver economically and were caught time and again in acts of corruption.
Last but not least, crime across many parts of Latin America has worsened. The reasons are several fold but begin with the newly gun-shy nature of leaders whose strong policing actions in the past sloppily killed many innocent people and those acts were caught on film and circulated via social media.
After the catastrophic disappearance of 43 students in Guerrero, Mexico, the Peña Nieto administration was loath to unleash its federal policing and army assets to police Guerrero’s organized crime gangs, helping make it one of the most dangerous states in Mexico.
Another terrible source of crime in many countries is drug consumption. For decades, Latin America has produced and exported illicit drugs but only in recent years have criminal groups developed local markets for consumption. The territorial disputes over distribution rights has led to tens of thousands of murders from Sinaloa to San Salvador to São Paulo, exhausting policing and judicial resources in the process.
Today, in Latin America, national governments are increasingly unpopular and powerless, not exactly the optimal business partner for investors whose ambitions including reshaping and often disrupting local economies with their large-scale projects. Local communities have lost their fear of protest and today over 150 mining, energy and infrastructure projects across Latin America are halted or threatened by local opposition. With billions of dollars of investment stalled, companies are beginning to change their tactics of engagement with local actors and communities.
Winning the Hearts and Minds of Consumers and Local Stakeholders
The Fruta del Norte project in Ecuador — a huge gold mining operation that faced massive local opposition and at one point, national opposition — was gradually rescued by excellent CSR tactics. Kinross started with these tactics, which were later continued by Lundin (the two mining companies that have managed the site). These tactics took the time to survey the fears and aspirations of the local community.
In spite of pressure on the local community from other national groups to oppose the mine, the community eventually sided with the mine’s operators after negotiating a larger share of the mine’s procurement and seeing that their grievances were being heard and integrated into changed operational procedures at the mine. The mine focused its corporate relations efforts locally, instead of wining and dining national politicians. That’s because they understood in this new transparent age that politicians will follow the voters — not the other way around.
In Mexico, Uber’s unmatched success naturally met resistance from traditional cab companies as their fleet grew in less than five years from 20 cars to 500,000 nationwide. As the traditional taxi business was threatened, including the overpriced airport taxi monopoly that still operates in many state-owned airports, political allies in the Mexican congress threatened to ban app-based ride services like Uber.
But Uber fought back with massive social media campaigns and the offer to new drivers to ride for one day for free, thereby expanding their following even further. Journalists began to write about how as many as 20,000 pirate taxi drivers are allowed to operate thanks to the protection of corrupt politicians.
Meanwhile, tax revenues from Uber drivers have brought millions to local, state and national governments — in contrast with traditional cab drivers and companies, which have always under-reported their cash earnings for tax purposes. Instead of trying to lobby through government, Uber took its fight to the people, especially customers in Mexico City who have long risked their safety by riding traditional cabs.
If the government — which has let down Mexicans on safety and security — was to take away Uber, one of the few safe means of transportation, then they would write their own death sentence next time at the polls. The politicians backed off.
Both cases provide great examples of how high-profile companies need to win the hearts and minds of local stakeholders and customers — not just powerful politicians and business leaders — if their investments are to succeed in Latin America. Doing so may require new alliances (local actors, not national governments), new methods (social media instead of traditional media) and new experts (local CSR experts instead of national PR/advertising agencies).
John Price for Americas Market Intelligence