Foreign Investment in Latin America: A Second Look

by T. Christopher Canavan, Consultant; World Bank,

Serial Information: Worldwide Projects, 1993, Vol. 1, Issue 2, Pg. 12-14

Document Type: Feature article

Abstract: It has become common to hear that Latin America has emerged from the lost decade of the 1980s, a period when virtually every country in the region suffered from high debt, high inflation and low growth. For many observers, the most convincing evidence of recovery is the renewal of foreign investment on a scale not seen for the late 1970s. After a decade in which capital fled the region, net inflows reached almost $60 billion in 1992. This may be a mixed blessing, however. While foreign money implicitly rewards economic stability and market-oriented policies, it is also disproportionately devoted to only three countries, Mexico, Argentina and Brazil. In addition, massive inflows can complicate and perhaps even undermine macroeconomic management, particularly in Argentina, Chile and Mexico. Without long-term exchange-rate stability, foreign currency feeds inflation and exchange-rate overvaluation and creates current-account deficits. Relatively little foreign money is being used to build long-term productive capacity. Some countries, such as Chile, have gone to the extent of raising mild barriers to foreign investment. Higher domestic savings rates would let countries fund more investment without economic strains and balance-of-payments problems. The prospects for sustainable growth in Argentina, Brazil, Chile, Mexico, Peru and Venezuela are assessed.

Subject Headings: Assets | Developing countries | Economic factors | Investments | Latin America |

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