Can Latin America `Move From The Third World To The First'?

It's springtime in Buenos Aires, a season for housecleaning and yard sales. And this year, it's the biggest cleanup ever in the Argentine capital. The government is selling everything in sight. Huge billboards announce auctions of office buildings on the chic Calle Florida and waterfront acreage down by the docks. Army regiments are being booted out of Buenos Aires so that prime real estate can go on the block. Even the giraffes, ostriches, and a 48-year-old Indian elephant named Norma now have a private owner, after the city fathers sold the zoo.

The privatization process stretches far beyond the city. For the first time ever, the government is opening oil fields to private investors. Astra, a small oil company, has spent $60 million so far and plans to spend much more, from frozen Tierra del Fuego at the tip of South America to the deserts up north.

In Latin America, the question of privatization is no longer "if" but "when." What began six years ago as a debt-reduction experiment in Chile--later moving north to Mexico--is now a privatization fever gripping much of the continent. If a Latin government owns it, chances are it's for sale--from phone companies and airlines to docks and sewage-treatment plants. The cash infusion is ending the decade-old debt crisis in much of the region. "In a few months, it will be ancient history," boasts Domingo Cavallo, Argentina's economic minister.

As a result, investors are now flocking to Latin America, pouring money into a region that was virtually off-limits in the debt-depressed 1980s. And the deals are drawing back billions in flight capital. "The amount of money available in Latin America has been astounding," says Neil A. Allen, managing director of Bankers Trust Co.'s Latin America merchant banking group.

The change in the past three years amounts to nothing less than economic revolution. At the center of it is privatization. While communism collapsed noisily in Europe, Latin America's old orthodoxy, centering on state-run strategic industries, crumbled quietly. Now, the Latins, like the Eastern Europeans, are bowing to the private market and racing for investments to revive their bedraggled economies.

The change means megabusiness for First World bankers, who are introducing a continent to the financing and merger-and-acquisition tricks from up north--and collecting hefty commissions for the help. The open doors in Latin America also allow foreign companies back into the silver mines and oil fields that were nationalized over the past half-century. Foreign suppliers and consultants, too, will be making millions as new owners invest to retool hundreds of companies. Already, Latin countries are lifting imports to levels last seen in the 1970s boom. Recalling the dawn of the debt crisis, when credit to Latin America dried up, Thomas W. Keesee, director of First Boston International Ltd., says: "It's 1982 in reverse."

Beyond the immediate payoff, Latin American privatization counts strategically. As the world flirts with regional trading blocs, President Bush is pushing for a single market from Alaska to Argentine Antarctica. Through Latin privatization and investment openings, Bush's dream could come true. Indeed, Latin leaders, starting with Mexican President Carlos Salinas de Gortari, are hitching their countries to the U. S. economy, promising great rewards to their people. "We want to move from the Third World to the First," declares Salinas. Latins have echoed such hopes for hundreds of years. But now, more than ever, the hemisphere is moving in sync, and the success or failure ef Latin America's new privatizers will determine, in large part, whether it moves toward prosperity or poverty.

Of course, Latin America has promised to come of age before. From the first gold rush in the 16th century to the oil bonanza in the 1970s, great hopes have soared--and then crashed with a thud. This time, it's different, say leaders. Privatization isn't so much a panacea as a pillar of systematic economic reform. The test of the great state sell-off will come when the itinerant moneymen finally leave. If countries can develop stable economies, they'll pull through the transition without a fall. "We'll know if it all works by looking at the local capital markets," says Bankers Trust's Allen.

WRENCHING DISLOCATION. Privatization isn't storming ahead everywhere, however. In Brazil, political haggling and bureaucratic snafus have held up President Fernando Collor de Mello's ambitious campaign. And Peruvian President Alberto Fujimori is having trouble luring investors to a land wracked by cholera, guerrillas, and drug traffickers. Even where privatization is rolling, the process is bringing wrenching dislocation. In Argentina, the government announced the dismissal of 14,100 workers in September alone. The military, a traditional haven for jobless young men, is also cutting back. And with tariffs way down, imports are causing some private factories to close.

Latin privatizers hope new investments, however, will lead to new jobs. The entire region requires massive investments in roads, rails, phone lines, and electric plants to bring it up to date--all of which should employ many. Yet even if job creation is slow, it's clear that inflation is a bigger political threat in Latin democracies than unemployment. A successful war against inflation helped President Carlos Saul Menem's Peronists win a decisive election in Argentina last month, even in the midst of massive layoffs.

So Argentina is racing ahead. Menem has already sold the telephone company and the flagship Aerolineas Argentinas. Much more is ahead. By the end of 1992, vows Cavallo, the government will be out of all productive enterprise.

Venezuelan President Carlos Andres Perez, who nationalized the oil industry in the 1970s, is now on the privatization bandwagon. He unloaded state airline VIASA last August, and the phone company CANTV is on the block. Two giants, Petroleos de Venezuela and steel and aluminum empire Corporacion Venezolana de Guayana, remain under state control. For now, Perez will open doors for private investors only at the fringes of the businesses. For other funds, Caracas is floating bonds in international capital markets. It's the same strategy Salinas is following with Petroleos Mexicanos.

While most of the attention is focused on Latin America's big four--Brazil, Mexico, Argentina, and Venezuela--plenty of other countries are selling companies, too, hoping not to miss the last train out of the Third World. Colombia is auctioning a big piece of the coal business and opening up the phones to private competitors. Panama is selling a wide assortment, from Air Panama International to a fruit juice business. Paraguay is unloading a steel mill, a cement plant, and a liquor distillery. Even beleaguered Peru, to the dismay of environmentalists, is opening up virgin areas of the Amazon for private oil exploration.

FLYING BLIND. Still, success can be dangerous, say some critics of privatization. Eager for high prices and quick deals--and entranced by their new place in the market after decades of pariah status--governments at times are shortsighted. In some cases, the new owners aren't good operators. Aviacion Mexicana, for example, has floundered since its privatization in 1989. Its new owners included no airline operators. In other cases, juicy monopolies are transferred from state to private hands without tough government regulation. Especially with utilities, "if we don't get lower rates and better service, the privatization won't make any difference," says Francisco Macri, chairman of Socma, an Argentine auto and construction group.

Nevertheless, the money is pouring in. And from Mexico City to Buenos Aires, people are in a hurry. With global alliances taking shape, Latin leaders regard the 1990s as the make-it-or-break-it decade, one last chance to pull themselves out of poverty. "Either we turn ourselves into a developed nation this decade, or we will be facing a wall," says Roberto Lima Netto, who as president of Brazil's Companhia Siderurgica Nacional is preparing the steel company for privatization. Now more than ever, Latins see there's no future in isolation. Governments are ditching statism for the markets, flinging open doors to investors from the north. Moving fast now, Latins are hoping to get on track for the long hard climb toward development.

GOING PRIVATE: LATIN AMERICA AIRLINES

Sold: Aviacion Mexicana, AeroMexico, and Brazil's VASP, all sold to locals. Argentina and Venezuela sold flagships to Iberia. Still ahead: Air Panama, Lloyd Aereo Boliviano, TAN of Honduras, Paraguay's LAP, Uruguay's PLUNA

BANKING

Sold: Mexico's No. 1 Banamex for $3.2 billion. Still ahead: No. 2 Bancomer and insurer Aseguradora Mexicana. Colombia and Venezuela are selling banks, too

ENERGY

Still ahead: Argentine oil fields and gas and electric companies. A trimmed-down Yacimientos Petroliferos Fiscales will sell stock next year. Venezuela seeks joint ventures in exploration and production with foreign partners. Refineries are for sale in Argentina and Brazil

METALS

Sold: Mexico's copper giants Cananea and Mexicana de Cobre. Still ahead: Brazil's steelmaker Usiminas, scheduled for Oct. 28. Also, Argentina and Mexico are looking to sell steel mills

PUBLIC WORKS

Sold: Argentine highways and the Buenos Aires zoo. Some Mexican ports and roadways are now in private hands

TELECOMMUNICATIONS

Sold: Chile, Argentina, Dominican Republic, and Mexico sold phone systems. The $4 billion Telmex deal was the region's biggest yet, with France Telecom and Southwestern Bell as minority partners. Still ahead: Venezuela's CANTV, coming up this fall, Uruguay's Antel next year

DATA: BW, BANKERS TRUST CO.