The Risk to Supply Chains in South America

First published: January 2023

Danny Ramon
Danny Ramon

Intelligence & Response Manager

South America is currently being presented with a new set of opportunities. The Covid-19 pandemic, Russia’s invasion of Ukraine, and other recent supply chain disruptions have highlighted the vulnerability of stretched just-in-time supply chains. Companies that want to reduce operational risks are therefore considering relocating or localizing their supply chains. With the priorities of supply chain planners shifting from efficiency to resilience, South America might be a good alternative for companies looking to strike a balance between these two values. The continent is blessed with an abundance of natural resources, the land is fertile and the demographics are favorable. Global challenges such as climate change and food insecurity could therefore also present an opportunity for South America. Much of the world’s fresh water, prime agricultural land, and raw materials necessary to produce renewable energy, such as lithium and copper, can be found in the region. Even the fast-diminishing Amazon rainforest could prove an economic asset, as Brazil’s new president plans to enact preservationist policies in return for economic favors from the West, including the ratification of the Mercosur- EU trade deal. Striking such trade deals might be easier than ever, now that left-leaning parties have gained power across the region following recent elections in Peru, Chile, Colombia and Brazil.

Although often compared to the so-called ‘pink tide’ of 20 years ago, this recent political shift seems mostly motivated by an anti-incumbent sentiment, caused by growing frustration amongst the region’s populations. Nevertheless, the newly elected left- wing leaders could use the opportunity of political alignment to further regional integration. This can already be observed in bilateral relationships with Venezuela, which is now being reapproached after having been economically isolated. One of the first things on the agenda of Colombia’s first left-wing president was to reopen the country’s border with Venezuela and resume air traffic between the two countries. Colombia’s foreign minister cited “regional integration” as one of his first priorities. At the geopolitical scale, China, the U.S. and the E.U. are all looking to increase their influence in the region, which is already attracting large infrastructure investments from China’s Belt and Road Initiative (BRI) and the Biden administration’s “Build Back Better World” partnerships (B3W). Although increasing volatility of the international system will likely cause barriers to trade, countries in South America have the opportunity to exploit great power competition and gain favors from all sides by preserving a sense of neutrality. Unfortunately, South America has not been able to capitalize on the opportunities of the past. A few decades ago, many countries in South America had a higher GDP per capita than the Asian countries that have since outperformed them, such as South Korea, Singapore, Taiwan and Hong Kong. The future seemed bright. Rising commodity prices generated healthy economic growth, politicians had the budgets to reduce poverty with generous social policies and the size of the middle classes grew. However, South America’s economic fortunes turned in the 2010s, when the long commodity boom came to an end. The region’s economies failed to integrate or become more efficient. Colombia, Argentina and Brazil remain among the world’s countries with the lowest ratios of trade to GDP. More recently, the Covid-19 pandemic has had a devastating effect, with economic output in South America dropping by 7% in 2020, a steeper decline than anywhere else in the world. The IMF now predicts South America will be the world’s worst-performing region in terms of economic growth in 2022.

Despite this, some companies will find a way to seize the opportunities that are present in South America. In order to do so, they will have to navigate the following challenges facing the region: poor infrastructure and logistics; corruption and organized crime; and political instability and civil unrest.

Infrastructure & logistics

Poor infrastructure is a problem that is holding back economies across South America. One look at the region’s geography reveals why this is not a complete surprise. Large swaths of the landscape consist of dense forests or inhospitable mountains, and the distances between the mineral-rich interior and the main ports are vast. Between the
Pacific and the Atlantic, there exists only one major highway, which runs from western Peru to eastern Brazil. From 
north to south, the Panamerican Highway connects multiple countries but is virtually impassable for cargo carriers because large sections remain unpaved, or are filled with potholes. Between Argentina and Chile, one of the world’s longest borders, only four crossings exist, including only one freight train link through the Socompa Pass. Trains are a rare sight across South America, with Argentina’s railway network often serving as a metaphor for the country’s economic deterioration. Despite all of this, trade within South America is still primarily conducted over land, rather than via sea or air.

Sea links are minimal due to substandard port infrastructure. The lack of upgrades, such as additional cranes to unload containers, is causing South American ports to be slow and therefore, expensive. Besides, many berths are still too small for the larger ships that have been able to pass through the Panama Canal since its expansion in 2016. Air links are not much better, with many logistical hubs around airports lacking safe warehousing and cold storage facilities.

This results in countries such as Colombia and Brazil having among the highest shipping costs and travel times in the world, though other parts of the region do slightly better, such as Chile. However, on average, transporting cargo in South America costs twice as much time and money as it does in higher-income OECD countries. Although the region as a whole spends less than 3% of GDP on infrastructure, it is unlikely that these investments will increase in the short
term due to the region’s poor economic outlook.

South America’s infrastructure problems are exacerbated by other logistical issues. Because the transport of goods relies on a few key highways, any form of traffic disruption is incredibly impactful.

Protests often involve roadblocks that quickly lead to countrywide shortages of fuel, food, and other essential goods, forcing governments to make quick concessions. In the last few years, this scenario has repeatedly played out in Peru, Ecuador, Chile, Argentina and Brazil. South America’s heavy reliance on highway connections is not only exploited by powerful trucker unions, but also by criminal groups and even small indigenous communities looking to make an impact. The
Mapuche, a collection of indigenous groups in southern
Chile, are a great example of both. The armed Mapuche rebel groups have successfully disrupted commercial
activity by blocking highways and subsequently
ambushing truck drivers or security forces. In response, the targeted Chilean truck drivers have resorted to
highway blockades of their own to demand government
action against rising insecurity.

Another issue complicating logistics is extreme weather, which is expected to increasingly affect the region. Hurricanes and heavy rainfall frequently cause landslides and flooding due to hilly terrain and a lack of urban planning, of which South America’s remote villages and irregular neighborhoods, such as
Brazil’s favelas, are prime examples. At the same time,
increasingly long-lasting droughts are causing issues such as the malfunctioning of Brazil’s electricity grid,
which largely relies on hydropower, and the halting
of cargo flowing through the Parana river, which can no longer support large cargo ships due to its shallow
depth for most of the year. Some problems are cultural
in nature too. Anyone who has attempted to do business in South America has experienced maddening
bureaucracy, informality, or both. On the one hand,
there are extensive sanitary and health checks, customs paperwork, and other certifications and inspections,
whilst on the other hand, the right connection or a
phone call to the right authority can speed up these processes significantly.

Corruption & Organized Crime

One reason for the lack of infrastructure development in South America is corruption. In 2016, the region’s largest construction conglomerate, Grupo Odebrecht, paid USD 2.6 billion in fines over its involvement in a corruption scandal that spanned 10 countries, including Brazil, Argentina, Colombia, Ecuador, Peru and Venezuela. Besides the fact that the major infrastructure projects the company had planned never materialized, the scandal generated a perception of uncertainty on the part of international investors. The high levels of
corruption in South America became painfully obvious during the Covid-19 pandemic, which saw high-ranking
officials and their cronies being secretly vaccinated ahead of healthcare workers in multiple countries. This was
also the case in Argentina, where the state has been accused of handing out direct contracts, without bidding,
to a handful of companies that provided medical and personal protective equipment. In many South American countries, corruption has become so pervasive that it is widely accepted as an inconvenient part of everyday
life. This can negatively impact every aspect of a supply chain, from acquiring the permits to build a new
manufacturing site, to a truck driver being arbitrarily arrested at a police checkpoint for failing to pay a bribe. Efforts to increase transparency by enacting anti-corruption legislation have generally been slow or ineffective. According to Transparency International, Guyana and Paraguay are the only countries in the region that have made real institutional improvements to address corruption in the last 10 years.

One of the main drivers of corruption in South America is organized crime and the large profits it generates. Although there are a vast number of illegal activities,
such as illegal mining, extortion, fraud and human
trafficking, nothing generates as much money as drug trafficking, with the cocaine trade being the main
force behind corruption at the highest levels. The
profits generated by cocaine have led to the rapid growth of illegal armed groups, from the former paramilitary group Gulf Clan (AGC) in Colombia, to the First Command of the Capital (PCC), Brazil’s largest criminal organization. Even the old communist guerilla groups, such as the National Liberation Army (ELN) in Colombia, or the Militarized Communist Party of Peru (MPCP), lost most of their ideological goals when they discovered the riches that could be obtained through the trafficking of cocaine, which has now become their main focus. Whilst the cultivation of coca is concentrated in Bolivia, Colombia and Peru, the processed drug travels to each country in the region. Even countries that are not located between the
producers and the large cocaine markets of the United
States and Europe, are still heavily impacted. Take Argentina for example, where trucks driving from the
northern provinces of Jujuy and Misiones encounter
checkpoint after checkpoint with police searching for drugs. Each time, this comes with the risk of cargo being compromised or even stolen. Any South American supply chain can therefore be affected by drug trafficking, which can lead to employees being extorted,
a company’s transportation network being hijacked, or
accidental involvement in money laundering schemes. The impacts can range from shipments being mired in
red tape, to lasting reputational damage, to the safety
of company staff being compromised.

Insecurity in South America is being fueled by organized crime like no other region in the world. Whilst a lack of economic opportunities is causing high incident levels of petty crime in the cities, most of South America’s urban centers are actually a lot safer than they are commonly perceived to be. In the last 20
years, most of the region’s capitals have significantly
reduced violent crime. In São Paulo, homicide rates have dropped by 90% due to the city’s police reform
and strict firearms controls, making it about as safe as
Boston. In fact, most of South America’s major cities are significantly safer than cities in the United States.
Take Miami for example, which now has a significantly
higher homicide rate than both Buenos Aires and Santiago, which is one of the reasons why these capitals
are attracting more and more foreign investments.

Of course, this does not mean that travelers should not have their guard up. Foreigners can easily become the target of a scam or robbery, especially when they display signs of wealth or lack situational awareness. Once outside of the
cities and even on the outskirts, the security landscape changes drastically for the worse. Criminal groups control
vast areas that are too remote for security forces to reach effectively. Since so much of South America’s territory is geographically isolated, there are many areas where criminal groups can operate with near impunity. The key transportation routes and logistical hubs that connect these remote areas to the rest of the world are often contested by multiple criminal groups. Cities that have high-volume ports can become incredibly violent. Since 2020, the port of Buenaventura in Colombia has been the battleground of a turf war between ‘Los Shotas’ and ‘Los Espartanos’, although the two gangs have since declared a ceasefire. More recently, Ecuador’s capital Guayaquil has erupted with extreme violence as local gangs fight over the right to supply cartels in Mexico and the Albanian mafia in Europe on behalf of Colombian traffickers. Bodies now hang from Guayaquil’s lamp posts and bridges at a frequency that is reminiscent of
the most violent periods in the Mexican drug war. Meanwhile, record drug seizures are being reported in the port of
Santos, near São Paulo, where the lack of a high homicide rate suggests the PCC remains firmly in control of the port it
uses to export cocaine to the Italian ‘Ndrangheta and elsewhere.

Besides drug trafficking, cargo theft has become one of the principal revenue streams of South American organized crime groups. Take the PCC for example, which has been involved in violent robberies on companies transporting
valuable goods in Paraguay, Bolivia and Brazil. In 2017, up to 60 heavily armed PCC gunmen robbed the transportation
company Prosegur in Ciudad del Este, Paraguay. The suspects were able to escape after they exploded 16 vehicle
bombs across the city. In similar robberies, the group has used civilians as human shields by ordering them to stand
in the middle of the street, or by tying them to the roofs of escape vehicles. What sets South American criminal
groups like the PCC apart from others is their capacity and willingness to use extreme violence, and their control over
territory, which allows them to hide from authorities and stash their stolen goods.

Cargo theft requires knowing where and when goods are going to be, making it a criminal practice that heavily relies on insider participation. Unfortunately, extensive background checks do not always prevent this, since
insider involvement can be forced with a threat of violence. Either through “plata o plomo” (silver or lead), criminals
frequently convince carrier, storage and customs personnel to share information about shipments or to participate in
heists. This allows criminal groups to identify high-value cargo, such as electronics, pharmaceuticals, or cash-in-transit.
Other frequently stolen goods are less expensive but easier to sell on the black market, such as food, alcohol and
tobacco. The most common targets of cargo theft are trucks. In recent years, South America has had the highest rate
of truck hijackings in the world, with Brazil topping the list of high-risk countries, which also includes Argentina, Chile,
Peru and Venezuela. Because South America’s shipping costs are usually higher than elsewhere in the world, having
goods stolen is even more impactful.

Political Instability & Civil Unrest

In recent years, living conditions in most South American countries have remained stagnant or even deteriorated. High levels of inequality, high debt loads, and repeated currency devaluations have put multiple countries in a precarious economic position. Across the region, young people who are better educated than their parents have become frustrated by the lack of opportunities. Whilst record numbers choose to migrate, others have chosen to protest. Recent nationwide protest movements in Chile (2019), Colombia (2021), Peru and Ecuador (2022) were sparked by raises in taxes, fuel prices, or something as simple as subway fares. However, at the heart of these protests were deeply rooted issues, causing them to last for weeks or even months. There exists a wide sense of
inequality, a lack of access to public services, and
there is a deep-rooted mistrust of institutions and politicians, who are widely perceived to be self- serving and corrupt.

Generally speaking, the political landscape in South America has become more fragmented, with weakening political parties that are drifting to the extremes of the political spectrum. Although recent elections presented a clear choice between right and left, the polarizing narratives on social media would often reduce the opposition to being purely “fascist” or “communist”, sentiments which were increasingly observed in Peru, Chile, Colombia and Brazil. Because the incumbents were overthrown in all of these elections, they acted as a pressure- release valve by generating new hope for positive change. But because these newly elected leaders all lack legislative majorities and are facing unfavorable economic conditions, they will struggle to keep their lofty campaign promises in the years ahead, which will likely cause frustrations to build once again.

The current ills of the region’s politics are perfectly displayed in Peru. The country hashad five presidents in a little over two years, many of whom have been accused or convicted of corruption. The most recent president accused of corruption, Pedro Castillo, got through more than 50 ministers, three cabinets, and two impeachment attempts before lawmakers finally succeeded to oust him in December 2022. In response, Castillo announced a curfew and attempted to dissolve Congress without the constitutional authority or the political support to succeed. The attempted self-coup lasted less than two hours, with Castillo being arrested just before he could seek asylum at the Mexican Embassy in Lima. Peru has since descended into chaos, with Castillo’s supporters blocking roads and targeting airports. For now, Peru’s democratic institutions have been able to stand firm, just like the ones in Brazil and those challenged elsewhere in South America. However, their erosion is continuing and political instability is causing a lack of predictability for investors.

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Although each country faces a unique set of challenges, there also exists some overlap between the nations of South America. The region’s infrastructure links are vulnerable and few, organized crime is powerful and fuels corruption,
and economic challenges are causing political instability and frustration across societies. Unfortunately, a country
like Uruguay, which enjoys political stability, steady economic growth, and a relatively high level of economic equality,
remains one of the few exceptions. Supply chain planners and logistics managers should therefore aim to identify
low-risk areas for their operations and create contingency plans for when situations change. They will need a steady stream of actionable intelligence to take the preventative actions needed to avoid threats, ranging from crime and civil unrest to extreme weather events. If they are effective, South America represents a wealth of opportunity.