Mission Possible

The Latin American Agribusiness Development Corporation

Robert Ross

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780765800350
• eBook ISBN: 9781351326506
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The Latin American Agribusiness Development Corporation (LAAD) was one of many initiatives taken at the height of the Cold War to alleviate poverty in countries threatened by communist insurgencies. Its mission was to promote rural development by funding local agribusiness enterprises to create new permanent jobs and new economic activity. In Mission Possible, Ross, president of LAAD from 1972 to 1998, gives a richly detailed insider's account of the company's first three decades.Originally capitalized with a little over $2 million, and beginning with the small economies of Central America, it gradually expanded into the Caribbean islands and South America and now is a factor in 25 countries. To date, LAAD has provided over $300 million to 700 projects, generating tens of thousands of new jobs and new annual exports of $500 million. Always profitable, it has paid a dividend for twenty years. Its capitalization has grown to over $30 million by reinvesting most of its earnings in Latin America. Since LAAD was committed exclusively to Latin America, it had to contend with an often unsettled political environment; it could not simply stand on the sidelines and wait for conditions to improve. Indeed in a broader sense LAAD's mission was to help improve those conditions.Mission Possible describes a small but significant chapter in a broader context of how the world's rich countries have tried to raise living standards among their poorer neighbors. Students of economic development and international business management will learn much from the story of how this unique experiment grew into a dynamic enterprise."[Ross] offers innumerable studies [in Mission Possible] of investment projects that stimulated the commercial production of agricultural produce in the region. He recounts the frustrating negotiations with uncomprehending central bankers and the difficulties of developing marketing and other infrastructural networks that are so important for assuring the success of any business, and is pleased with what he identifies as the two most significant changes that profoundly affected agriculture: the decline in the role of the state in Latin America and in protectionism in the industrialized world. ... He stresses the fundamental roles that innovative entrepreneurs can play, taking advantage of opportunities created by organizations like LAAD, and using market information to reduce uncertainty." -David Barkin, Latin American Research ReviewRobert L. Ross, a Harvard-educated development economist, has worked for forty years in Latin America. He taught economics at the Latin American Economic and Social Planning Institute in Santiago, Chile and worked on the first development plans in Haiti and Paraguay. He was president of the Latin American Agribusiness Development Corporation from 1972 until his retirement in 1998.

1

Poverty and the Cold War

At the time LAAD was created, the world was caught in the middle of the Cold War. The United States was fighting in Vietnam, the Prague Spring had polarized the two superpowers, and the East-West conflict over the loyalties of the Third World was in full swing. Latin America was prominently displayed on the battlefield screens of the cold warriors with Fidel Castro consolidated in Cuba and actively supporting guerilla and other leftist movements throughout the region.

The United States government was supporting reformist movements under the aegis of the Alliance for Progress. This policy initiative designed to help friendly Latin American countries introduce social reforms was intended to address such perceived problems as unfair land ownership, tax structures, and basic human needs. Many Latin American governments at the time were in the hands of dictators or the military, some reformist, some not A Socialist-Communist alliance had just taken power democratically in Chile. In this scenario, the United States had no secure allies. Everything appeared up for grabs.

Many policymakers in the United States attributed the social unrest in Latin America to the wide gap in income and wealth between the rich and poor. These policymakers were the authors of the Alliance for Progress, by then already ten years old. Many of their arguments had been drawn from the controversial Argentine economist Raul Prebisch, my former boss. A one-time president of the Argentine Central Bank, he became world famous after his appointment as executive secretary of the Latin American Economic Commission for Latin America (ECLA). Dr. Prebisch used his new visibility to develop his “structuralist” interpretation of Latin America’s comparatively low living standard and slow rate of growth. This structuralist approach evolved during the 1950s and took center stage among the development economists by the end of that decade.

Dr. Prebisch argued that Latin America depended too much on the export of a few commodities, whose prices were falling relative to the prices of imported industrial goods. His solution for that was to encourage national import substitution, particularly of industrial goods, and economic integration to promote regional import substitution in those industries with large economies of scale.

Second, he argued that the state should play a leading role in developing critical or strategic industries and public utilities. He encouraged centralized economic planning to consolidate the state’s leading role in economic development. He backed exchange controls as a mechanism for channeling scarce hard currency to priority purposes. He urged tax reform to redistribute the tax burden to the wealthier taxpayers.

In agriculture, he argued that stagnating agricultural production was caused by extreme inequality in land ownership, which made it impossible for the poorest farmers to produce, because they lacked the land. He contrasted them with the wealthy “latifundistas” who already earned enough money to live and lacked the incentive to increase output on their extensive holdings.

These theories found fertile ground among the political left, because it gave them an intellectual argument to attack their traditional conservative enemies and to criticize the United States. The military and political nationalists were attracted to the leading role of the state, since they had already embarked on state capitalism in such countries as Argentina, Brazil, and Chile. In some countries, the military actually made common cause with leftists. Just about everyone at the time opposed the International Monetary Fund, whose mission was to encourage stable exchange rates as part of a world trading order. The IMF typically proposed fiscal austerity to restore investor confidence and to meet international obligations. Open verbal clashes between supporters and detractors of the IMF were as much a daily event back then as they are today, although the IMF’s detractors today are no longer just on the left.

Dr. Prebisch’s arguments were thoroughly debated in Washington. In a masterful move designed to take the moral high ground away from the Cuban approach to development, President John F. Kennedy announced the Alliance for Progress in 1961. This new policy committed the United States to promote economic and social reform throughout Latin America and to a major increase in foreign economic assistance for the region.

Generous aid programs directly from the U.S. Agency for International Development and indirectly through international development institutions funneled billions of dollars into the region.

Reformist arguments were the order of the day. Agrarian reform took center stage and was openly supported and even financed by AID. Meanwhile, agricultural production inside Latin America was stagnating, partially because of the political uncertainties surrounding agriculture and land ownership, and partly because reformist governments often controlled the prices of basic foods to keep the lid on popular discontent in urban areas.

The vast bulk of this financial assistance was channeled to the public sector. Some U.S. government officials considered the private sector in Latin America with some hostility, blaming it for benefiting the rich and for underwriting right-wing dictatorships. Consequently, the private sector received only a tiny percentage of the total funding channeled to the region.

It is clear that the primary motivation for this massive aid program to Latin America was intended to stem the spread of Communist influence and to strengthen the overall security position of the United States and its allies. Many years later, after the Berlin Wall was dismantled and the threat of Communism evaporated, U.S. aid to Latin America evaporated and aid flows from America’s allies soon followed suit.

American corporations active in Latin America generally supported these aid efforts at the time. Some put their own money and executive time into efforts designed to strengthen private enterprise in the region. The largest of these private initiatives was Adela. Another was the International Basic Economy Corporation funded by the Rockefeller family, which focused on capital markets, supermarkets, poultry, and low-cost housing. All of them were designed to bring to bear the creativity and risk taking of private enterprise to accelerate investment in productive assets in Latin America and hence reduce the incidence of poverty.

The motivation behind these initiatives was quite different from today’s investment funds specializing in Latin America. The motivation matched the concerns of the day. Although intended to be profitable, the earlier initiatives were more concerned with economic and social progress in Latin America. Their initial impetus was more political than financial. Poverty alleviation was the bottom line for these new private initiatives.

In contrast, today’s investment funds operate not in the Third World, but rather in “emerging markets.” The countries are the same; the times and themes are not.

Ten years elapsed between the time of President Kennedy’s speech on the Alliance for Progress and the formation of LAAD. During that period, vast amounts of resources had been transferred to Latin America, some of which produced long-term benefits. In the agricultural sector, the picture was less encouraging. Agrarian reforms were introduced in Chile, El Salvador and Peru. Bolivia was trying to consolidate its own agrarian reform carried out earlier. In all four countries, agricultural production stagnated as efficient farmers were chased off their land and replaced by poor and inefficient farmers. These new farmers were accustomed to produce for their own families and not for the market place. They were not bankable. They were illiterate and unable to learn new technologies. They received little technical and financial help from their political sponsors and productivity plummeted.

Politicians regarded agriculture as a social, and therefore political, problem. They concerned themselves with the visible inequalities in rural communities Taking from the rich and giving to the poor was the apparent solution. They concerned themselves little with production, and not at all about markets. They assumed that agriculture was a stagnant activity designed to produce basic necessities for the local market or to export traditional commodities to unreliable international markets. The new economic model even discouraged commodity exports, which were frequently taxed. In this way, governments taxed the wealthy and reduced their dependence on traditional exports at a time when government funds were being used to encourage import substitution industries with higher value added.

The political motivations were well intentioned, but the unintended result of these actions was to discourage investment in agriculture and production not only stagnated, but it actually fell in many countries.

By the time LAAD was proposed, a growing number of business executives and U.S. government officials were looking for new ways of energizing agriculture through private enterprise. The need was clearly felt, but concrete initiatives were still few and far between. The stage was set.

2

An Idea is Born

The company was incorporated in Panama on January 26, 1970. Panama was chosen because of its location inside Latin America and because its government does not tax income from business conducted outside of its borders. The company was named the Latin American Agribusiness Development Corporation. Neither this name, nor its acronym, LAAD, won any accolades on Madison Avenue. What the name lost in elegance, it gained in clarity of purpose.

Twelve corporations were named in the original registration. At $200,000 apiece, LAAD’s initial paid-in capital came to $2.4 million.

The Articles of Incorporation gave each shareholder the right to appoint one director to the board. Certain restrictions were added to those Articles, such as a right of first refusal on the sale of shares to new stockholders, designed to insure the philosophical integrity of the company over the long term. This restriction proved its value many years later when the right was exercised to prevent the sale of LAAD shares to corporations which did not share the developmental mission of the company.

The policy of equal ownership proved to be one of the glues that kept the shareholders together through good times and bad. No one was particularly unhappy during the bad times and no one benefited unduly in the good ones. It encouraged a sense of camaraderie among the directors which was critical to maintaining shareholder interest in an activity not directly related to their business.

Once the company was formed, the first board meetings discussed operating priorities. Although there was a philosophical accord among the shareholders, disagreements emerged in the board of directors over operations. Some directors felt that LAAD should primarily provide technical assistance, drawing on its shareholders for the necessary know-how. That view had some merit in light of LAAD’s limited financial resources, but the majority decided to provide financing to worthwhile agribusiness projects as the main thrust. This decision was important, because it would eventually allow LAAD to earn sufficient profits from operations to reinvest in future growth and to raise money from other lending institutions.

The company proceeded to open a tiny office in the back room of a New York City cosmetics firm on Fifth Avenue and set out to make its mark in the world. Fred Orth became the company’s first interim president. He was backed up by a retired Bank of America officer, August Maffrey, while the bank itself temporarily provided accounting and other support services.

Funding was the first order of business. The company’s $2.4 million of paid-in capital was woefully inadequate to accomplish its goals LAAD sought funding from the United States government in hopes of building a public-private partnership to fund agribusiness investments in rural Latin America. This concept was very much in the minds of the founders, because such a partnership gave greater credence to the developmental thrust of the company. The founders also thought this would benefit LAAD’s public image.

The company first approached the Overseas Private Investment Corporation (OPIC), a U.S. government-funded corporation providing political risk insurance and loans to support private American investment in the Third World. The logic of an OPIC-LAAD partnership was there, but OPIC required 95 percent beneficial American ownership of all its clients incorporated overseas. Since LAAD was incorporated in Panama and had one European shareholder (Adela), it did not qualify for OPIC funding.

LAAD also approached the International Finance Corporation (IFC). The IFC turned LAAD down because of its lack of experience. Also, IFC s lending rates were similar to those that LAAD expected to charge its clients in Latin America.

The critical breakthrough occurred when one of LAAD’s directors, Don Kirchhoff, president of the Standard Fruit and Steamship Company (now the Dole Food Company), put the company in touch with Thomas Mooney in Guatemala. Tom had recently left Adela as its regional investment officer for Central America and was trying to set up a private investment company for that region. He was credited with having successfully built a portfolio of joint ventures and loans while with Adela. He lacked the capital to launch his idea, but had made progress convincing the AID about the feasibility of his idea. AID had informally offered Tom a long term loan for use in Central America on condition that he raise risk capital from American corporations and banks.

Tom met with LAAD’s recently appointed president, James Halom, a former executive from the W.R Grace & Company. Both men recognized the logic of merging their two undertakings and agreed to make a joint presentation to AID for funding. Tom knew AID’s many requirements, having previously worked for AID in Central America. One of his better known achievements while at AID was setting up a network of locally owned private development finance companies throughout Central America backed by long term concessional loans from AID.

The two men set out to negotiate a $6 million loan from AID through its regional office for Central America—ROCAP. Both sides agreed on concessional terms to help LAAD build its equity base. These terms provided for a twenty-year repayment period, including five years of grace on principal, at an interest rate of 3 percent. Similar terms to these had already been extended to other Central American development finance companies. AID’s motivation was institution building in support of LAAD, on the one hand, as well as seeking more efficient ways of channeling needed funding into private enterprise in Central America. LAAD’s emphasis on agribusiness development was particularly attractive to AID, because no other AID borrower had offered to focus on this high risk sector. The timing was right for both AID and LAAD.

One stumbling block in the negotiations was how to guarantee the loan. AID had requested a corporate guarantee from LAAD’s shareholders, but they were not willing to increase their exposure in LAAD at that time. The negotiators agreed that LAAD would capitalize a Central American subsidiary, LAAD de Centroamerica S.A. with $2 million, which provided a strong equity base to service the AID loan. In addition, AID placed tight restrictions on the type of projects to be financed; prohibited the use of AID funds for projects in which any of LAAD’s shareholders had a financial interest; placed a 9 percent ceiling on the interest rate LAAD could charge its clients, and controlled the subsidiary’s ability to pay dividends to LAAD, as well as LAAD’s ability to pay dividends to its shareholders.

Although the terms of the loan were agreed upon in Central America, there remained some opposition to the proposal in AID Washington. Some AID staff members objected to providing concessional funding to a company owned by large multinational corporations. The senior man in AID for Latin American development at the time was Frank Kimball. He had known Tom Mooney for some years and had confidence in his ability to perform. Mr. Kimball was instrumental in persuading his colleagues, but there was a lot of good faith and personal reputations on the table when the actual loan agreement was signed in the summer of 1971.

It was the signing of the loan agreement between LAAD and AID that truly launched the company. A financial institution with only $2.4 million in resources would quickly consume this capital in operating expenses. It is questionable whether LAAD would have survived without AID’s financial support at this critical juncture. AID provided both the tenor, the leverage and an interest rate, which made it possible for LAAD to operate profitably. The public-private partnership outlined in LAAD’s original concept paper was now a reality.

At the time, it was not possible for LAAD to borrow money from the international capital markets given the high anticipated risk associated with Latin America and the company’s lack of operating experience. LAAD had no choice but to seek an alliance with the public sector.

As attractive as AID’s terms were to LAAD, that was still no guarantee of success. There are many examples of private development companies that had received similar terms from AID and then failed. The underlying risk of investing in Latin America is evidenced by the number of bankruptcies in the financial arena. The challenge remained daunting, but LAAD now had the kind of resources it needed to prove the feasibility of its concept.

LAAD’s relationship with AID was precisely what the founding shareholders had intended—LAAD working in harmony with the public sector in pursuit of common goals. In this case, the partnership was to continue for many years. The original AID loan was for $6 million, but the company signed five subsequent agreements for a total of nearly $50 million for use in both Central America and the Caribbean. We will pick up the AID story later.

By the end of 1971, LAAD had satisfied AID’s conditions prior to disbursement and was ready to do business. All beginnings are difficult, and LAAD’s was no exception. Tom Mooney was LAAD’s greatest ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Contents
• Foreword
• Preface
• Introduction
• 1. Poverty and the Cold War
• 2. An Idea is Born
• 3. The Players
• 4. The Game Begins
• 5. From Childhood to Adolescence
• 6. The Real World
• 7. A New Lease on Life
• 8. The Bottom Line: Development
• 9. The Bottom Line: Profitability and Risk
• 10. Development, Politics, and the Human Factor
• Appendix A: LAAD’s Directors by Shareholder
• Appendix B: Geographic Distribution of Projects
• Appendix C: Economic Distribution of Projects
• Appendix D: Financial Indicators, 1970-98
• Index