#mitsloanstudytours

“One’s destination is never a place, but a new way of seeing things.” – Henry Miller

For me, the trip to Latin America was a great way to learn about the business environment in Peru and Chile. It was an interesting contrast to my previous experiences in developing countries, particularly the Middle East and Africa. There are common themes and challenges to doing business in emerging markets, although ultimately and somewhat paradoxically the most common theme of all is just how important deep knowledge of the local context and environment is to succeeding.

That said, the trip to Latin America was much more meaningful on a personal level. I do not know if I will ever have the opportunity to live or work in Peru or Chile, but this trip allowed me to reconnect with my deep and abiding love of travel itself, and recall why I fell in love with it in the first place. Over the last several years I have done a lot of business travel, which mostly meant long, sleepless nights on a computer next to a very comfortable looking bed that I did not use. 

The trip to Latin America was a refreshing opportunity to really and truly inhale the culture and environment of the places we were visiting. Yes, it was a busy schedule, and I was tired, but I felt like I really got a taste for Lima and Santiago and did not spend a lot of time preparing PowerPoint presentations. Instead, I spent a lot of time pondering where we were, reading about the history and economy of the countries, going on long exploratory runs in the early morning, and most of all, loving it.

One of the reasons I love travel is that it enables me to learn about other places, as well as take what I have learned and share it with those I love back home in the United States. I believe we Americans are often very misinformed about other cultures, and helping to “enlighten my own” is actually a cause I care deeply about.

That passion for sharing my travels and hopefully spreading my love of other cultures to others, is something else I rediscovered during this trip. It happened (like many good things) very serendipitously, when I was contacted by my 5-year-old nephew Jack for a project that he was doing. His Kindergarten class had recently read about “Flat Stanley”, a children’s book character who has something heavy fall upon him and “flatten” him. The upside to this unfortunate incident is that “Flat Stanley” is now able to fit in an envelope and get to a lot of places by way of mail. Jack’s Kindergarten class was using this as an opportunity to learn about geography – each student printed off and colored his/her own version of Flat Stanley, and then sent it in the mail to a relative or friend, asking that person to take some photos in the place they live and mail the Flat Stanley back. The class will be creating a pin map showing all the places their Flat Stanley went.

Needless to say, I took the Flat Stanley assignment very seriously, and had a ton of fun taking some photos and putting together a little children’s story of my own to send back to my nephew Jack. In doing so, I remembered just how much I love telling stories and helping others learn about other cultures. 

So to close out, here is the link to how I explained our trip to Jack and his classmates (with some preview pics below):

https://drive.google.com/file/d/0Byq_tYVD4fDxOGM4MFNEaWE4V0E/view?usp=sharing

Question: How have the two economies in Peru, the traditional and the modern, helped or hurt the development of the country?

Peru faces two economies, the traditional and the modern. Throughout our visit to Peruvian business, we could see how these two types of economies come into play.  They are important factors facing Peruvian businesses, but the impact that each has, the strength with which they influence the classes of the society, the drivers of the economies, has been rapidly evolving.  

The development of communications systems increased of speed and ease of communication and decreased of cost.  The more expansive communications systems brought to light some of the wealth disparities faced by the lower class Peruvians.  According to the Chief of Staff for the Finance Minister, the was previously an element of “economic psychology: you’re happier if you don’t know what you don’t have.”  The poor were staying poor, and now they knew it. Between the 1940’s and the 1980’s Lima’s population grew from one half of a million people to six million as people flocked to the city in search of a means of increasing their socio-economic status.  

Unfortunately, a military coup and terrorist activities left the country broke in the 1980’s.  Economically, the country faced unprecedented inflation and fluctuations in the value of their financial worth.  As the population was anticipating and working toward economic development, the country’s infrastructure was not prepared—limiting the daily electricity use and access to telephone communications.  Between the mid 1990’s and 2000, Fujimori was able to help the country level the economy and initiate growth.  

Peru’s growth rate has been strong in the new millennium, a result of the harmonization of the traditional and the modern economies. The market is consolidating and the super-cycle of the commodities produced in Peru (gold, copper, zinc) has benefitted the entire economy over the last decade as the wealth trickles down through the socioeconomic classes.  The development of the middle class, timed with the increasing value of gold when the global economic crisis occurred, helped to give Peru an additional boost towards becoming an even more developed nation. As Peru’s wealth increased, the middle class experienced tremendous growth as well.  As was evident from our company visits, capitalizing on the purchasing power of a much larger portion of the population has created a seemingly virtuous cycle of economic development in Peru.  

On a particular Saturday in March this year, I walked across the MIT campus and came across two regional business conferences taking place concurrently at different locations – the MIT Asia Business Conference and the MIT Latin American Conference.  Given that the target demographic of both conferences were Sloan MBA students and that they were both competing for audiences from what is a limited pool, I recall thinking that the organizers should have either bundled tickets or partnered so as to allow guests to attend both conferences. Having completed The Impact of Business on Urban Development in Latin America Study Tour, I now realize now that allowing such a cross pollination of the conferences would not only have improved attendance, but more importantly, have allowed participants to appreciate just how great the synergies are between the two regions and how much opportunity there is for both to expand business relationships, trade, and foreign investment.

Growing up in Asia, Latin America was never really on the radar from a business perspective. That is because before the 1990s, there was little trade between the regions due to trade barriers, communication difficulties (language), geographical remoteness (it takes a day to fly between the regions), poor transport connections, and few cultural, diplomatic and business ties. However, Asia has now overtaken the European Union to become Latin America’s second biggest trading partner after the United States. This growth can be attributed to: (i) falling trade barriers; (ii) strong demand for Latin American commodities and food from China and other Asian economies; (iii) Latin America’s significant and expanding regional market for Asian industrial goods and FDI; (iv) advances in communication technology as well as better logistics; and (v) the spread of free trade agreements (FTAs) across the Pacific.

Whilst in Lima, it was a pleasant surprise to find ourselves in two of Lima’s landmark buildings whilst meeting with companies. At first glance, Lima is not the most attractive place - it inhabits a desert between the Pacific and the Andes. Much of the colonial core did not survive a huge 1746 earthquake that triggered a tsunami. The Spanish rebuilt and reinforced, and the majority of historical gems date from the latter half of the 18th century onwards. A far more original period in Lima’s architectural development came after 1968, when the left-wing military dictatorship adopted brutalism as a means to instill monumentality in its institutions. Migration ballooned during civil unrest in the 1980s and 1990s, as millions fled the violence in the Andes. Yet since the millennium boom, it is ocean-front condominiums and sprouting bank towers that have been changing the landscape. Sadly, most lack imagination. However, the aforementioned two buildings are exceptions.

1. Torre Interbank

When visiting Interbank, we found ourselves at the top floor conference room of this building inaugurated in 2001. With 19 storeys of convex glass-and-steel, reinforced by a titanium mesh, this building mimics the bend in the motorway and is backed by a heliport. It is shaped like a sail blowing Interbank into the future and sits on a stone wall that imitates Inca masonry. 

2. The Westin Hotel & Convention Center

While the Bachelet administration was not directly discussed during our plethora of meetings in Chile, the shadow of socialism and redistribution as a response to growing inequality in the country is a theme that was clearly articulated by MIT alums on the final day of our visit. 

The Chilean economic miracle, a combination of the commodity supercycle, capital friendly policy, small government and strong institutions forged a shining light of a nation in South America. Chile tripled real income levels over a three decade period starting in the 1980s, dragging swathes of its population out of poverty and into the middle class. GDP per capita on a PPP basis is $22,353, placing the country atop its South American peers and on a level akin to Southern and Eastern Europe.

While Chile has undertaken a world class approach to managing its natural resource revenues, it faces a stark future of muted growth and economic uncertainty.  The moderation of the Chinese infrastructure development spree and a projected end to nearly two decades of rapid resource consumption has signalled an end to the two decade long commodity supercycle. The rise of China, like the rise of the United States before it is a one of window of unprecedented consumption and growth that is unlikely to repeat itself until India develops in the coming decades. China’s voracious appetite for copper, used primarily in wiring and electronics, while ever present, is unlikely to hit the highs of the 2000s. This means, that despite good organization and planning, Chile is unlikely to enjoy the bumper wealth it has enjoyed riding this rise and is set for several lean years.

In is in this context that Michelle Bachelet’s callous decision to raise taxes with a primary goal of funding the country’s failing public school system. These taxes, leveled against foreign investors and Chile’s middle class are ill timed against the backdrop of the projected sustained economic difficulties. Taking aside the long term implications of this anti foreigner and anti free market stance, this wrong footed policy may not be able to generate the needed tax dollars required. Moreover, Bachelet’s decision to overhaul Chile’s voucher system that allows lower income students to attend better private schools in favor of redistributed resources towards mass enrollment of the Chile’s poor into unionized state funded schools. As Chile’s education minister Nicolás Eyzaguirre surmised, “What we have now is one competitor . . . with skates going at a high speed and the other barefoot.” “The barefoot one is public education. I have been asked why not provide better training and more food to the one going barefoot? First, I have to take away the skates of the other.”

One of the common themes from our recent study tour through Peru and Chile was the attitude many business leaders (and representatives) showed toward the digital revolution. This triggered me to think about how quickly i adopted the digital world and the massive impact it has had on companies who have failed to keep up with the tide. My initial hypothesis is that this complacency about the digital revolution is a little short sighted and might sting some of these organisations in the not too distant future. 

My Story

In 2005 I was using a flip phone with the bare basic features (as measured in todays world), and at the time thought i was the “bees knees”. Within the next decade, my dependence on electronic devices, the cloud and other digital solutions has been tremendous. I have often reflected and been amazed at how life functioned perfectly without the instant gratification the digital revolution now provides society. 

High Smartphone Penetration

One of the biggest drivers for the digital revolution is the smartphone. As the penetration of smartphones increases in the region, and low cost competitors (not Apple) continue to bring these handsets into the hands of the middle and lower classes (ie: the B,C,D,E groups of the socioeconomic pyramid), i expect that demand for digital solutions and eCommerce will explode. 

Investment in Retail

Falabella continues to invest heavily in retail space citing the cultural aspects of shopping in malls for many Latin Americans as a big driver for this demand. The company has seen tremendous growth over the past decade and is continuing to expand aggressively throughout the region. When we spoke with the company representative in Chile, she noted that she didn’t see the digital economy as a threat to their business model due to the poor performances of the local mail systems (often taking up to a month to deliver a letter). 

Granted that when i was exposed to the digital economy i was in Australia (a place where the postal service operates highly efficiently). Even though this was the case, i often found that many of the parcels i have been ordering online had been delivered by 3rd party couriers (rather than the government owned and operated postal service). Coupled with high smartphone penetration (noted above), a third party courier platform could completely disrupt the traditional means of shopping in Chile and Peru and significantly drive down the returns large retail organisations (such as Falabella) see in their operations. 

The presence of Chabunco airbase’s reinforced hangers and patrol sorties as we touched down in Punta Arenas for the final leg of our Andean adventure was one of the first things that caught my eye. The barren expanse of Chile’s southern coast belies an area of geopolitical significance that Santiago is intent on securing.

Punta Arenas, with its modern airport infrastructure and municipality size, is the gateway to the Antarctic Peninsula. While protected by the Antarctic Treaty System, the Antarctic Peninsula is a contested stretch of land that Argentina, the United Kingdom and Chile all lay claim to. Control of the peninsula allows the incumbent power to control valuable sea lanes, monetize tourism flows and to have a precedent claim to hidden resources in the event of a change in international law. 

Even in this stark and remote area of pristine beauty, politics and power carve out a prominent and ever present overwatch that underpins our continued ability to enjoy the wonders of this mystical land of giants.