Economy & Trade, Headlines, Latin America & the Caribbean

FINANCE-LATAM: Investment Boom Highly Concentrated in 1997

Estrella Gutierrez

CARACAS, Oct 28 1998 (IPS) - Capital flows into Latin America and the Caribbean set a new record of 73 billion dollars last year, nearly three times the total posted in 1995, says a new report released Wednesday in Venezuela.

In its annual report on ‘External Financing and Foreign Debt’ in the region, the Latin American Economic System (SELA) – which groups 28 countries – says the investment boom was especially valuable since direct investment accounted for 44 billion dollars of the total.

But the other face of the phenomenon was the high degree of concentration, particularly of direct investment. Brazil and Mexico accounted for 60 percent of total direct investment, while Mexico, Argentina and Venezuela together accounted for a full 80 percent.

The report describes two clearly differentiated phases in 1997: an initial period of “extraordinary growth,” followed by contraction since October, when the fallout of the Asian financial crisis began to be felt in the region.

Investment flows remained slow this year, “and the final consequences are unpredictable,” SELA adds.

The report released by the Caracas-based regional body says the most positive aspect of last year’s investment boom was the change in the characteristics of capital flows, with a sharp drop in short-term flows and a rise in longer term investments.

Illustrating that phenomenon, the report points out that direct investment totalled only 11.3 billion dollars in 1993, compared to last year’s 44 billion.

Direct investment was drawn by the region’s high levels of economic growth, improved telecommunications and transport services, the growing momentum of integration, privatisations and acquisitions of companies in the region by transnational corporations.

Last year was positive in terms of direct, medium-term investment for the developing South in general, according to the World Bank, which put the global total at 120 billion dollars, five times the 1990 level.

China alone drew almost as much direct investment – 37 billion dollars – as Latin America as a whole. The flow was not checked by the high level of intervention in the economy by the government in Beijing.

SELA explains that until the Asian crisis broke out, a new phenomenon had been taking shape in 1997 – a shift of masses of investors seeking to accumulate wealth toward a new centre of capitalist growth, the developing world, in the face of signs that industrialised countries were suffering from “economic arteriosclerosis.”

But the Asian crisis spawned worries about investment in middle- income – including several Latin American – countries, which are the most exposed to contagion to external crises, while at the same time constituting a catalyst for problems that spread throughout the globalised financial sector.

SELA adds that it is not yet clear whether the flow of capital to emerging countries or caution regarding a higher-risk, high return market in the wake of the Asian crisis will win out in the medium-term.

The report also underlines that the unstable behaviour and wild swings of capital in the recurrent financial crises has generated a debate, whose outcome is still uncertain, on the need for some kind of controls on investment – especially speculative investment.

In the framework of that debate, the proposal by 1981 Nobel Economy laureate James Tobin – who as early as 1972 suggested a tax on trading involving currency exchange operations – has reemerged, SELA points out.

But the Organisation of Economic Cooperation and Development (OECD) – which groups 26 industrial economies including Mexico -is negotiating a Multilateral Accord on Investment.

The OECD initiative worries Latin American countries because it runs counter to proposals like Tobin’s, which are aimed at defending countries that are receptors of investment against sharp swings in capital flows. The OECD is expected to eventually attempt to impose its internal accord on the World Trade Organisation.

The initiative aims at establishing a controversial provision for investors to resort to international arbitrage in conflicts over capital, the decision of which would be binding on receptor countries.

The region’s foreign debt, meanwhile, stood at 644 billion dollars by the close of 1997, three times the 1980 level and nine times higher than in 1975.

The debt is also highly concentrated, with seven countries – Brazil, Mexico, Argentina, Venezuela, Colombia, Peru and Chile – accounting for 90 percent of the total.

Debt servicing absorbed 42.5 billion dollars in 1997, far higher than the interest paid from 1980 to 1994, which ranged between 24 and 28 billion dollars.

 
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