Multilatinas herald a new age of Latin American integration

Two centuries ago, Simón Bolivar, one of the Latin American founding fathers, dreamt about a unified continent, a kind of United States of South America (the term Latin America was not used at the time). While this dream has never come to reality, recent activity across the region suggests it may be within reach.

There have been of course several attempts to integrate Latin economies, starting with Mr Bolivar’s own efforts. However, there is something substantially different about the more recent attempts at achieving such integration, free as they are from being driven by a political body, be it either a political leader, such as an inspired president, or a multilateral organisation.

Previous attempts at integration have floundered because of a weak economic base, leaving individual countries reliant on trade from outside Latin America. How much copper can Chile sell to Peru? Not much. As intra-Latin American trade has been weak, so too have been efforts towards economic integration.

Multilatina influence

So what makes this time so different? The reason is the recent appearance of the so-called 'multilatinas'. These are firms that have structured their growth strategies on the basis of regional expansion. By doing this they are gaining a critical comparative advantage. Despite the recent improvements across many Latin American countries, a multilatina is typically a company that has succeeded in an environment of resource-rich economies, bureaucratic inefficiencies, social and political tensions and instability. Consequently, they can deal with such hostile trading environments much better than their counterparts in the US and western Europe.

The term multilatinas has come into wider use recently in order to describe large corporations such as Techint in Argentina, LAN or Cencosud in Chile, TAM and Itaú in Brazil, Sura and Bancolombia in Colombia or America Móvil from Mexico, among many other large Latin firms. However, this hides a whole universe of smaller corporations that work to the same principles as multilatinas: transferring their savoir faire into neighbouring countries.

Therefore, this time integration really is a distinct possibility as it has already started through uncoordinated private sector initiatives. This does not, however, mean that other forms of Latin American coordination are now obsolete.

Role for the financial sector

Even though the public sector or politicians have not led this wave of integration, their concurrence to the improvement of the institutional framework in which this integration process evolves will become increasingly critical. The areas in which public policies will have to be designed and implemented are vast. One particular area is the financial sector.

Financial sector firms have joined the integration process only recently. The first to do so was Banco Itaú of Brazil. More recently, the Colombian Sura group acquired ING businesses in Latin America while Bancolombia has made acquisitions of smaller banks in Central America. Some Chilean brokers have been opening brokerage houses in Peru and Colombia, and another recent initiative has been the creation of MILA, the Integrated Latin American Market of Chile, Colombia and Peru.

The integration of the financial sector poses challenges. As Latin America's history shows, a poorly regulated financial sector can be a source of macroeconomic instability, a fact which the most advanced markets in the world are now discovering.

As economies become more financially integrated, the convergence of regulatory standards will become increasingly necessary and, needless to say, it must be done in such a way that sees standards increase. Therefore, improving the environment for regulatory discussion among Latin American countries will become critical for this integration process to succeed. Poor coordination among governments would kill any integration process.

Finish the job

Latin America has undertaken huge improvements in the past few decades. As much of the world teeters on the brink of a double-dip recession, and financial uncertainties remain high in Europe particularly, Latin America must persist in its ambitious integration process.

Latin America has a lot to gain from this process, at a time when the world economy is becoming riskier and investors are looking for new investment opportunities. If Latin America manages to develop a sound integration process, with the solid base of the multilatinas, it can become a source of growth for the region's economies, its citizens and its businesses.

Guillermo Larrain is chairman of the Centre for Regulation and Macrofinancial Stability in the department of economics at the University of Chile; chairman of ChileCapital Consultores; and an external advisor to BRAiN, Brasil Investimentos e Negocios.