2009, A Crisis Year: Foreign Investment in Latin America

Since the early 1980s, foreign investment has become the main source of foreign capital for developing and least-developed countries. With the drastic reduction of bank loans, direct and portfolio investment are the most important alternatives to fund public and private needs of capital. Foreign investment is particularly important for least-developed countries and small developing countries. As a consequence, growth and development in many regions of the world depend on foreign capital, and any shortage could have detrimental consequences. Unfortunately, the economic crisis that started in 2008 seems to be contracting the total amount of FDI; particularly this seems to be the case in Latin America, as has been reflected in the latest report of the Economic Commission for Latin America and the Caribbean. This brief article aims to analyse this report and its implications for the region.

In 2008, foreign investment to developing countries – including Latin America – reached its historical peak (ECLAC, Foreign Direct Investment in Latin America and the Caribbean 2009, p. 23) (The impact of China on these figures should not be underestimated, because this country alone accounts for 15.7 % of world FDI; see UNCTAD, World Investment Report 2009, pp. 247-249). While developed countries suffered a huge contraction in investment, developing countries performed very well in 2008. This resilience, nevertheless, was connected to three main factors: business planning, commodity prices and growth. Since many of this projects were already in progress – growth in the region being relatively higher than in the OECD membership – they were finally executed rather than cancelled. In addition, many undertakings were linked to natural resources, a sector that was booming before the crisis due to the increasing demand and prices. In 2009, this positive scenario faced a challenge posed by the political decision of developed countries to attract and preserve capital, especially through incentive packages. This change of attitude was followed by direct consequences resulting from the slowdown of the world economy: economic uncertainty and recession in the OECD countries, a decrease in commodity prices, and less growth in Latin America and the Caribbean.

As a consequence, FDI inflows into the region fell to USD 76.68 billion, down 42% from the record high in 2008 (ECLAC, p. 7). While all sectors contracted, natural resource projects suffered the most, particularly because of the already mentioned decline in demand and price. Foreign investment directed to provide services remained the most important importing sector and manufacturing projects regained the second place. This decrease affected projects aimed to provide local markets with goods and services (market seeking / serving investments), and efficiency seeking investments, which goal is to perform one or more functions in the production process at a given location and re-export the goods to other production facilities or the final markets. It is worth to remark that both before and after the crisis, the region does not perform well in attracting capital-intense foreign projects. In spite of the number of manufacturing projects, most of them continue to target low or medium technology functions. Investment in research and development remains particularly low (ECLAC, p. 10). This dynamic shows that foreign capital to the region has two main objectives. First, substantial inflows are directed to the provision of goods and services to the local markets, but mostly using technology and marketing techniques developed in other jurisdictions. Second, an increasing amount of flows, particularly from the U.S., are exploiting location advantages – such as lower salaries – to perform labour intense functions in Mexico, Central America and the Caribbean.

In terms of recipient countries, Mexico was the most affected country with 51% decrease of inward FDI flows, followed by Argentina (50%), Brazil (42%), the Caribbean (42%), Colombia (32%), Central America (32%), Peru (31%) and Chile (31%) (ECLAC, pp. 7-8). The most affected country was Venezuela with negative inflows of 3.105 billion, but this figure is mostly a result of the nationalisation process rather than the economic crisis. As expected, the most important recipients in absolute terms are basically the biggest economies (in GDP terms): Brazil, Chile, Mexico, Colombia, Argentina, Peru, Dominican Republic, Panama, Costa Rica and Uruguay (ECLAC, p. 66). Nevertheless, this does not tell much about the importance of foreign investment for each economy. When analysing the relationship between GDP and total FDI inflows, the ranking of major recipients is leaded by Chile, followed by Panama, Dominican Republic, Costa Rica, Peru, Uruguay and Colombia (ECLAC, p. 33). The GDP / FDI coefficient indicates the high ability of these countries to attract FDI, beyond the size of the host economy, but also shows some potential dependency on foreign savings. Regarding outward FDI inflows by Latin American and Caribbean countries, the three main capital exporting countries are Brazil, Mexico and Chile. The majority of these projects are located within the region. In 2009, however, this ascendant tendency suffered a sharp reduction of 69% compared to 2008. The reason for this decline is attributable to a net disinvestment of Brazil of around USD 10 billion (in 2008 it had invested for USD 20 billion) (ECLAC, p. 10-11). Both capital importers and exporters in the region seem to confirm the investment development path hypothesis advanced by John Dunning and Rajneesh Narula. According to this argument, countries would only attract few foreign investments until they reach a certain level of development. Later on, when they achieve higher positions in the developing ladder, they will also become capital exporter countries.

The 2009 report by ECLAC is optimistic about the positive effect of FDI inflows on the recipient economies in the region. It does mention, however, that there is a stronger impact of FDI as a source of financing than as a transmitter of knowledge and technology. In this regard, the report concludes that FDI should be treated as part of a more “comprehensive development strategy” (ECLAC, p. 58). Positive externalities are not an automatic consequence of FDI; they depend on both the right public policy and a strong domestic private sector. For Latin America the remaining challenge is to attract more high value FDI that is related to more capital intense functions in the production process. This relates not only to research and development, but also to headquarter activities such as finance and marketing.

As the report puts it clear in the end, FDI continues to be the main source of capital for developing countries and any decline is therefore bad news (ECLAC, p. 64). The slowdown of the world economy makes efficient seeking investment less attractive, while market seeking and serving projects will be on hold until the region goes back to a growth path. As a final remark, it is necessary to remember that if developed countries actively seek to attract capital, this could further reduce the amount of investment in developing countries (UNCTAD, Assessing the impact of the current financial and economic crisis on global FDI flows, pp. 47-50). In fact, whenever developed countries required capital, the rest of the world suffered a consequent scarcity in their financing expectations (the post-war period and the 1980s are two examples). Presently, the world economy has changed and many emerging economies are also capital exporters, such as Brazil, Mexico and Chile. Yet, it is not clear whether they could take the lead as main investors in the region in case of a slowdown of extra-regional FDI. For the less developed economies in the region, this is a crucial question.

Nicolás Marcelo Perrone is a PhD Candidate at the London School of Economics and researcher at the Centre for Interdisciplinary Studies on Industrial and Economic Law in Buenos Aires.

Liberal Interventionism R.I.P.

While conducting fieldwork in Washington DC this summer, I was struck by the many complaints about President Obama’s lack of interest in pursuing liberal values abroad. “Those working in the ‘democracy sector’, haven’t seen many resources coming their way from this administration”, one critic told me in private. Others quibbled about Obama’s deafening silence on international human rights issues. Let alone the tsunami of TV commentators debating whether the President was keener on allegedly importing European-style big-government socialism rather than promoting, at home and abroad, America’s entrepreneurial spirit and free-market ethos.

Wondering whether these narrow policy complains reflected broader shifts in American strategic thinking, I turned to Obama’s newly released (May 2010) National Security Strategy (NSS) in search for clues. And I found them. Indeed, what I found was that America’s liberal interventionist grand strategic approach, which had come to define much of its foreign policy thinking and practice since the end of the Cold War, had all but faded. Roughly speaking, liberal interventionism is the belief that the active promotion of liberal values worldwide - such as free markets, human rights and democracy - are instrumental to maintaining international peace and stability and a vital U.S. security interest. Its advocates have generally proposed that the U.S. use its power to pursue and protect these values through direct intervention - even military if necessary - in the domestic affairs of foreign countries.

Take human rights and democracy promotion for example. At a close look of Obama’s NSS, riddled it is with the language of engagement, building cooperation and investing at home to renew American leadership, while impulses of intervening on humanitarian grounds or to spread liberty internationally seem to have gone. Compare Obama’s NSS, for example, with Bush’s 2002 NSS and Clinton’s 1998 NSS. One has to go to page 36, to have a hint of what Obama’s strategy to uphold “universal values” would be:

“The United States supports those who seek to exercise universal rights around the world. We promote our values above all by living them at home...America will not impose any system of government on another country…More than any other action that we have taken, the power of America’s example has helped spread freedom and democracy abroad.” (p.36)

Contrast this ‘exemplarist’ stance with Bush’s highly interventionist freedom agenda, which took center stage in his NSS. Indeed the document opened with the following lines:

“The United States possesses unprecedented - and unequaled - strength and influence in the world. Sustained by faith in the principles of liberty, and the value of a free society, this position comes with unparalleled responsibilities, obligations, and opportunity. The great strength of this nation must be used to promote a balance of power that favors freedom.” (p.1)

The 2002 NSS’ first key strategic objective was to “champion aspirations for human dignity” (i.e. democratic institutions and human rights). This logic then became a central ideological component in pursuing strategies of democracy promotion in the Middle East, build support in the run up to the war in Iraq as well as driving state-building activities in both Iraq and Afghanistan.

So too there are few echoes in Obama’s strategy of anything like the Clinton era concept of “democratic enlargement”. Nor are there many openings for possible humanitarian interventions, which instead peppered the 1990s decade.  Clinton’s 1998 NSS also articulated a more explicit activist approach to “promoting democracy and human rights”, than Obama’s current one, explicitly indicating it as the third core objective of its national security strategy.

“We must sustain our efforts to press for political liberalization and respect for basic human rights worldwide, including in countries that continue to defy democratic advances.” (p.34)

On the economic front, as well, the self-confidence in the necessity of advancing a liberal economic order internationally has evaporated from the 2010 document. Out of the post-Cold War era administrations, Clinton’s was the one which most vigorously articulated a foreign policy vision around the universal expansion of markets. Indeed he appeared at times to elevate economic interests at the same level of more traditional national security concerns. Globalization was the word of the day, while key American priorities were to extend open markets and free trade worldwide alongside building and beefing-up international liberal economic arrangements such as NAFTA, APEC and the WTO. During the 1990s, The Bretton Woods organizations were also given a freer hand in their lending and in advocating for a markedly neoliberal approach to poverty reduction and economic growth.

Similarly bullish was Bush’s NSS about the need to intervene internationally to advance neoliberal economic policies. A stated objective in the 2002 NSS was to “ignite a new era of global economic growth through free markets and free trade”. The 2002 NSS also tied economic liberty to the President’s freedom agenda:

“A strong world economy enhances our national security by advancing prosperity and freedom in the rest of the world. Economic growth supported by free trade and free markets… reinforces the habits of liberty. We will promote economic growth and economic freedom beyond America’s shores.” (p.17)

Then contrast this cavalier attitude of previous decades towards liberal economic prescriptions with Obama’s call for more state-led fiscal stimulus during the latest G20 meeting in Canada. In parallel the 2010 NSS has few words to spare for the universal application of liberal economic principles. It instead concentrates primarily on the notion of rebuilding the domestic foundations for American ‘prosperity’, by:

“Strengthening education and human capital, enhancing science, technology and innovation, achieving a balanced and sustainable growth” (p.2).

I’ll leave it to more rigorous academic analysis than this simple blog post to try and explain why such a shift away from liberal interventionism has happened. One can simply speculate that both international structural and domestic forces are at play here. The slow end of unipolarity with the rise of regional powers along with the soft balancing of an international public opinion which has repercussions on how far national governments can support a highly interventionist American foreign policy, may be at work here. Also domestic forces within the US, such as the high economic, military and human costs of repeated and protracted foreign adventures, could have dampened passions for more of the same.  Furthermore, particular policies have been delegitimized given their partial or complete failures. For example, the realization that protecting human rights abroad through military means is hopeless when there is no functioning state, as in the case of Haiti and Somalia. Similarly, the realization has taken hold democracy isn’t built in a day, as neoconservatives hoped for in Iraq and Afghanistan, and requires a more sustained commitment than interventionists might have previously assumed. Likewise, the 2007-2008 financial cataclysm appears to have deflated enthusiasms for neoliberal economic recipes. Given this scenario, liberal interventionism, which has defined much of American foreign policy strategy for the past two decades, has now been put to rest. 

Gregorio Bettiza is a PhD candidate in International Relations and IDEAS Centre Stonex Scholar at the London School of Economics and Political Science.  He serves as Programme Assistant on the LSE IDEAS Transatlantic Programme.

Fire Under the Ashes: A Year After Iran’s Troubled Elections

By Adel Al Toraifi

As some analysts expected, the anniversary of the Iranian elections passed with neither huge protests in the streets nor any prominent events taking place. Except for some student arrests and an individual attack against the former presidential candidate Mehdi Karroubi, the Iranian regime proved that it is the master of the situation. This reality was made clear when leaders of the opposing green movement backed down from organizing protests days before the anniversary and instead apologized out of fear of security measures taken by the Iranian regime. Perceived as a serious weakness by their supporters, members of the opposition have decreased in number.

Some attribute reasons for the green movement's retreat to the success of the Iranian authorities backed particularly by the revolutionary guard and the Basij militia in the forced reelection of President Mahmoud Ahmadinejad. Also, a series of trials, sentences and executions against supporters of the opposition under the noses of its leaders—Rafsanjani, Mousavi, Khatami, and Karroubi—proved that opposition to the existing regime is still weak and ineffective in changing the situation in the Iranian political arena. In this context, the political analyst Reza Esfandiari commented in the Telegraph (12 June), "Despite the claims of a rigged poll, all of the available evidence indicates to [the election] being authentic and that a majority of Iranians support the current government.” He went on to say that "The failure of the Green (reformist) movement one year on is largely down to the fact that it could not draw among ordinary Iranians outside of the political elite and cosmopolitan social base."

However, others see that the apparent calm conceals much anger and internal congestion, or as The New York Times called it in a 12 June report, “fire under the ashes." The report indicates that the Supreme leader Ayatollah Khamenei and President Ahmadinejad may appear victorious at this stage, but many people in Iran today feel that—despite the apparent retreat of the green movement—underground opposition not directly associated with the movement is growing, and it is distinguishing itself from both the existing political regime and its opponents. If this is true, then the conservative and reformist parties have lost their chance to challenge the serious imbalance of power in the Iranian political system. In effect, the revolution that represented the people has become a regime that forcefully controls a youth nation that was born after the revolution.

While the neo-conservatives in Iran enjoy their victory over the internal opposition, Iran has become internationally isolated similar to the post-revolution years; the major countries passed a fourth package of sanctions with the concurrence of Iran's friends: Russia and China. Though the Iranian government appears negligent to these strategic losses, the country—according to some observers—may face major economic challenges domestically.

During 2007 and 2008, Iran gained significant income from its oil returns, and the peak of the oil prices ($150) helped the central government cover its gross expenditures in projects supporting the poor who, in fact, form the public base of President Ahmadinejad. However, Iran is facing an economic blockade that may harm its foreign trade. In 2008, Tehran's trade with its five biggest Asian trading partners reached about one billion dollars. The majority of Iran's exports go to countries such as the United Arab Emirates, Iraq and Afghanistan, but the value of this trade is likely to decrease to 2001 rates, less than $500 million, if these sanctions are implemented more strictly than before.

In his important book Forces of Fortune (2009), Vali Nasr argues, "The great battle for Iran's soul –and the future of the whole region – will be fought not over religion or sects, but over the freedom of trade and capitalism." Thus, the economic sanctions imposed on Iran will have significant consequences. Iran's gross domestic product, now, is similar to that of Massachusetts. Experts argue that Iran’s economic status prevents Iran from being a major player regionally, let alone confronting countries such as the United States or the European Union.

The neo-conservatives in Iran argue that acquiring nuclear technology – not necessarily possessing a nuclear weapons arsenal – is essentially a response to the foreign threats they face, and that the western countries, especially those in the region, will have to correct their stances and acknowledge Iran's status as a major country. It is true that reaching a nuclear capability may change the balance of power in the region. Nevertheless, it will change nothing in the balance of the internal dispute. Ray Takeyh (Guardians of the Revolution, 2009) points out that the extreme rightist policies of the Mullahs in coalition with the guards [Iranian Revolutionary Guard Corps] may have ensured their success in the regional conflict with the international community, but the domestic challenges might be the greatest threat to their existence in power. Eventually, failing to solve domestic problems was the main reason behind the fall of countries such as the Soviet Union.

The neo-conservatives may have succeeded in this round, but as a Persian proverb states, "Forgiveness hides a pleasure not found in revenge." It is a lesson they don’t realize clearly; Iran will never be as it was before, as anger and revenge are still burning under the ashes.

Adel Al Toraifi is a political analyst and researcher, based in London. His area of specialty is Saudi foreign policy and Iranian politics. Al Toraifi is a PhD candidate in the International Relations Department at LSE.

Shifting Sands is the blog of the Middle East International Affairs Programme at LSE IDEAS, analysing current events in the Middle East and contributing to the ongoing deliberations over policy prescriptions.

Amber Holewinski, Editor