Latin American Report

To What Extent Does Investment Equal Growth?

By Gustavo González

SANTIAGO, Aug 20 (IPS) - The widely held conviction that foreign investment is a motor of economic growth has only partially been borne out in the case of Latin America.

Michael Mortimer, with the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), pointed out that this decade direct foreign investment (DFI) in the region grew 13 times with respect to the 1970s, while gross domestic product (GDP) growth was 50 percent lower than during that period. The interesting thing, said Mortimer, the head of ECLAC's Investment and Business Strategies Unit, is that while in the 1970s, governments in the region followed policies ostensibly aimed at limiting the influence of foreign investment on local economies, the strategy today is to encourage the inflow of foreign capital.

In an article released by the Santiago-based ECLAC, Mortimer stated that Latin American governments should clearly define the priorities of their economic policies, as well as the role they expect DFI to play. From 1990 to 1998, DFI flows to the region experienced an unprecedented boom, from eight to 67.3 billion dollars. The record year in terms of inflow of capital - 85 billion dollars - was 1997, while ECLAC projects for this year a level similar to last year's - around 68 billion dollars - despite the stagnation of GDP growth caused by the international financial crisis.

Regional GDP is projected to shrink by 0.4 percent this year, with recession in Venezuela, Ecuador, Honduras, Argentina, Brazil, Colombia, Paraguay and Uruguay, according to a preliminary report released by ECLAC on Jul 30.

One of the reasons behind the divorce between DFI inflow and GDP performance, according to Mortimer's analysis, is that foreign investment has concentrated on purchasing assets rather than creating new sources of production. In the past three years, transfers of property have accounted for nearly two-thirds of total DFI flows, states Mortimer's article, based on 1998 statistics. Acquisitions of existing companies mainly took place this decade in the context of the privatisation of state assets. But since 1998, and especially in the first half of 1999, private sector firms have been increasingly purchased, chiefly in South America.

Through acquisitions of private and public enterprises, the participation of transnational corporations in the economy of Latin America has continued to grow. Transnational corporations' share of the sales of the 500 largest companies in the region rose from 29 to 33 percent from 1994 to 1997, and continued to expand in 1998 and this year, Mortimer pointed out.

By focusing on the purchase of already existing assets rather than the creation of new productive units, DFI has failed to contribute to the gross formation of fixed capital - and hence to GDP growth. And governments, pressured by strong external imbalances, have used DFI flows obtained through privatisations to cover part of the balance of payments gap.

But although investment has not bolstered the productive capacity of recipient countries, it has helped boost quality of services, which has in turn bolstered competitiveness, he added.

DFI's contribution to industrial development in Latin American countries has been modest, partly due to the fact that commodity-driven export models ''continue reproducing enclaves,'' he said. On the other hand, in the model based on the assembly of manufactured products for export, the original rules of access to the U.S. market virtually prohibit the use of physical inputs produced in the recipient country, Mortimer maintained.

The gap between expectations for investment and actual results should lead governments to clearly define their priorities, and the role they would like DFI to play. Thus, how well national policies and the interests of foreign investors jibe could at least be measured in a more transparent manner, he concluded.

[c] 1999, InterPress Third World News Agency (IPS)
All rights reserved