Latin America: COVID-19 Threatens Promise of Digital Economy

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The service experience of “deliveries” is the lifeline for the restaurant sector (Archive).

Spanish – By Ernesto Moreno:

Latin America has been perceived as the eternal promise of development given the abundant natural resources, good climate, and a growing middle class. According to the World Bank standard for income categorization, the region has been part of the world’s middle-income statistics since the 1970s.

However, the acceleration of changes in the new economy, along with the digital transformation, Latin America is in danger of becoming even more distant and widening the poverty gap with the rest of the world as it faces a more competitive global environment.

If an investor in Latin America cannot open a business quickly, pay competitive taxes, have an infrastructure that allows him to produce efficiently, sell through digital channels, and compete with efficient delivery logistics, that investor will go to the part of the world where he can do so and still sell to the Latin American market.

The Latin American middle class, an opportunity in the development axis

Since the 1990s, several countries have entered the upper-middle-income range on the World Bank’s scale. By 2019, Brazil, Mexico, Colombia, Argentina, Peru, and Chile have a per capita GDP (measured PPP) of over 13,000 USD. At this income level, the region has an urbanization rate of over 80%, reflecting a Latin American population with a strong middle-class urban life, where basic needs are met, and consumption becomes aspirational.

The middle-class in Latin America has been growing rapidly, representing about 30% of the population today. This is similar to the level of China and much more significant than India’s 3%, according to the World Bank. Traditionally, Latin American families tend to undertake small businesses and developments, which are an opportunity if they have the conditions to integrate into the global market under competitive conditions. On the contrary, they can suffer losses if they don’t fit into the necessary competitive environment in the new digital economy. The regulatory and infrastructure framework is vital to be competitive.

COVID-19 and change in the consumption map

The quarantine imposed around the world, and particularly in Latin America, has led to profound changes in consumer behavior that require new ways of responding to the consumer market. In our opinion, four changes are affecting Latin American economies:

  • Less consumption in restaurants and more delivery services

Social distancing forced people to adjust living with an easily transmissible virus, and the relevant mortality rate completely changed social life and the use of restaurants as regular entertainment for some and as a way of life for others. The service experience of “deliveries” constitutes the salvation table for the restaurant sector. McDonald’s has been preparing for this by hiring drones for home delivery. How long would it take to be applicable in Latin America?

  • Greater security required in Public Health

After a pandemic where a large part of the population is at risk, it is essential to implement digital health management in disease diagnosis, care, and monitoring schemes to maintain the well-being of economies and avoid shocks as South Korea has done. Since President Moon Jae-in took office in 2017, public policies have focused on expanding its digital health industry with higher investment in the development of new technologies. For example, digital healthcare has been identified as a key growth sector with special emphasis on areas such as healthcare-related Big Data, Health IT (HIT), and artificial intelligence (AI). These advances in its public health policies made it easier for the country to face COVID-19 with a rapid flattening of cases and less economic havoc under the combination of exhaustive testing and digital contact tracking.

Is Latin America ready to deploy a digital health system, which facilitates the detection, prevention, management, and monitoring of diseases?

  • Shift of consumption to digital experiences

In this segment, there is not much to add to the obvious. Without digital channels, the cost of accessing products rises, which will tend to increase the price gap and lower purchasing power in Latin America compared to developed countries. If the digital shopping experience by Amazon, Walmart, Nike, and other brands cannot be extended in the region, both consumers and producers who sell on these networks will see lower efficiency and higher costs for the consumer with probably lower returns and capital accumulation for the producer-seller, defined as the typical poverty gap.

The developed world is moving towards the standardization of purchases from smartphones or devices. The consumer in developed countries will be enjoying massive e-commerce channels, automated services along the entire purchase chain, including customer service and delivery (drones on the way) with payment systems from electronic wallets, etc.

Latin America is discussing taxing large e-commerce companies and reporting service providers who benefit from customer and delivery management platforms such as UBER, Rappi, or Glovo as employees instead of independent contractors. The decision will not only restrict the growth of the services but also drive away new investments for the technological transformation of the region.

  • Efficient mobility on par with the new economy.

The mobilization of the population is probably the most substantial change we will see in the coming months in developed countries. From micro-mobility driven by electric bicycles, scooters, and new autonomous transport (without drivers) that will be transforming the map of cities in developed countries in the coming years. In Latin America, certain measures have timidly begun in this direction, such as a bicycle-sharing service in Buenos Aires, which is free of charge, but which precisely affects the service as a means of transportation, while in Mexico City, we are beginning to see scooters waiting for users on street corners.

The initiatives in mobility will imply in the global ambit of a small need for parking lots yielding these spaces for recreation, green areas, or new buildings, which will also have repercussions in lower pollution derived from the use of fossil fuels.

The state of California, the sixth-largest economy in the world, has just banned the use of fossil fuel cars from 2035. Cities with autonomous and electric transportation systems will have an enormous advantage in promoting the development of their economy with a population more focused on producing and leaving behind the central problems of the past. They will have improved logistics and lower costs as well as less concern about having their own means of transportation.

Is Latin America prepared to support 5G or higher connectivity in its cities with security for autonomous devices? Do society and governments understand the business models where platforms exist that allow the entrepreneur to develop, instead of seeking to turn the entrepreneur into an employee?

Some numbers to illustrate the starting point of the digital transformation

The deterioration in global commodity prices is substantially dampening Latin America’s revenues, as is the purchasing power of its currencies. This erodes the region’s income and ability to make investments to drive the digital transformation.

Despite the region’s financial disadvantage, there is still a high penetration of mobile phones and the internet that provides a basis for digital change. For example, internet penetration is 57% in Latin America. This figure is much higher than in Southeast Asia, South Asia, or Africa. About 70% of the population has mobile subscription services. Mobile internet penetration is over 51% and is expected to grow at a compound annual rate of 6.2%.

In the case of smartphones, penetration reaches 55% and is expected to grow to over 70% by the end of 2020, all according to data from Accenture’s Digital Survey 2018.

The alarming delay of new investments in technology start-ups in the region

Latin America needs more enterprises like Rappi, Loggi, Glovo, and Mercado Libre that could achieve exponential growth in the region, taking advantage of the technology and the existing demand for convenience and personalized services. However, Latin America has historically lacked venture capital funds, both regionally and globally.

According to a report by CB-Insight, a company specializing in venture development and measurement and venture capital worldwide, the total venture capital money invested in the entire region was only 500 million USD by 2017. That is equivalent to the amount of money a Chinese technology company would raise in a single round.

According to a report by CB-Insight, a company specializing in venture development and measurement and venture capital worldwide, the total venture capital money invested in the entire region was only 500 million USD by 2017. That is equivalent to the amount of money a Chinese technology company would raise in a single round.

How are investments in Latin America?

In Latin America, we have two unicorns (companies valued over a billion dollars): Rappi in Colombia and Nubank in Brazil. Since 2009, we have invested more than 12 billion USD in 1,800 agreements for new technology companies in Latin America. Last year marked a record year for the region with technology companies raising a record of more than five billion in more than 360 agreements, according to CB-insight data.

Apart from Rappi, Nubank, and UALA in Argentina, the region does not surpass technological startups with more than 100 million USD in private equity financing rounds, which shows the dearth of financial depth and capital attraction in Latin America.

Ernesto Moreno is an economist from UCAB (Venezuela) with a Master’s degree from NYU. He has more than 10 years as a registered investment advisor in the US and an entrepreneur at FINTECH in the US and the UK. He has also been a professor of Entrepreneurship and Fundamentals of Finance in Venezuela.

This post was originally posted on PanAm Post – View Original Article

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About the Author

Have lived and invested in Venezuela full time for the last eight years and visited for each of twelve years prior to that. Studied and closely followed developments in Venezuela since 1996.