- Capitalism and Alternatives -

Does Investment Equal Growth?

QUOTE:

"...foreign investment has concentrated on purchasing
assets rather than creating new sources of production."

"Acquisitions of existing companies mainly took place
this decade in the context of the privatisation of state
assets."

Date: Mon, 23 Aug 1999 00:20:17 +1200
From: rich@pencil.math.missouri.edu (Rich Winkel) (by way of stu
)
Subject: ECONOMY-LATAM: To What Extent Does Investment Equal
Growth?

** Written 8:38 PM Aug 20, 1999 by newsdesk in cdp:ips.english
**
Copyright 1999 InterPress Service, all rights reserved.
Worldwide distribution via the APC networks.

*** 20-Aug-99 ***

Title: ECONOMY-LATAM: 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.
(END/IPS/tra-so/ggr/ag/sw/99)

Origin: Montevideo/ECONOMY-LATAM/
----

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