Foreign Capital Is Key for Latin America

A week ago, the leaders of 34 Western Hemisphere nations, including President Bush, signed an agreement for a Free Trade Area of the Americas, amid shouts of protesters in Quebec City and questions from skeptical legislators back home in Washington; Brasilia, Brazil; and other capitals.

But the lowering of tariffs and other obstacles to international trade agreed upon in Quebec are almost a side issue to the far more important trend of foreign direct investment among countries in the hemisphere.

This year, more than $60 billion of investment from companies all over the world will flow into Latin America, setting up operations to produce and sell locally and export to global markets.

Those investments represent infusions of capital to countries that until the last decade have remained relatively poor and on the margins of the global economy.

Now the economies of Latin America are growing faster, investing in themselves and opening to trade and investments with other countries.

The trade agreement is meant to set up a framework of laws governing transfers of goods and money. That it should also include standards for labor and the environment, as Quebec protesters and some legislators contend, would seem logical in a world in which global standards are now a reality even for business accounting.

But to understand the new economies of the Americas, it’s best to start with foreign investment, which has changed the international economy from a two-way street into a multilevel highway interchange.

Investment by U.S. companies in Latin America and the Caribbean totals almost $250 billion--roughly comparable to U.S. exports to the region.

And U.S. companies are not the largest investors in many Latin countries today--companies based in Spain are. Only a generation ago, Spain itself was a poor corner of Europe. But it has prospered with foreign investment, and now Spain and Portugal are investing in countries their conquistadors and missionaries first encountered 500 years ago.

Flows of corporate investment have been crisscrossing the world for years--mostly among rich, industrially developed countries--and that has created a new international market.

For example, affiliates of U.S. companies had more than $2.5 trillion in sales of goods and services around the world last year, a sum much larger than the exports by which U.S. trade is conventionally measured, write Joseph Quinlan and Marc Chandler in Foreign Affairs magazine. Quinlan is senior global economist of Morgan Stanley Dean Witter and Chandler is chief currency strategist for Mellon Financial Corp.

The U.S. itself receives more foreign investment than any country--$300 billion last year from foreign companies buying American firms. Think such names as Britain’s BP, France’s Alcatel, Germany’s Siemens, Japan’s Toyota and hundreds of others.

Latin America, still a region of smaller, developing economies stretching from Mexico and the Caribbean to Argentina and Chile, now is getting in on the global game.

A.T. Kearney, a Chicago-based business consulting firm, reports that Brazil last year attracted $33.5 billion in new direct investment, 6% of the country’s gross domestic product. Spain’s Banco Santander paid $3.6 billion to buy Brazil’s state bank. Italy’s Fiat added $1.5 billion to its longtime car-making operations in Brazil.

Those are investments looking for expanding markets, not for cheap labor. Brazil, with 165 million people and annual output of goods and services totaling more than $600 billion--comparable to the GDP of China--represents huge opportunity.

BellSouth, the Atlanta-based U.S. telephone company, certainly thinks so. BellSouth has invested more than $3 billion in building a cellular telephone business in Brazil and now has 3.8 million customers there. The Atlanta company has 12 million cellular customers and almost $2 billion in revenue in all of Latin America and plans to sell shares in its Latin American operations in a separate stock issue when financial markets improve.

Bank of America has elevated the role of its Mexico City office as financial services business has grown in Latin America.

Questions arise: Why now for Latin America? Why didn’t it join the surge of recent decades that saw Asian countries become global powerhouses? What are the real prospects for Latin economies, which evidently remain vulnerable to financial troubles, such as those Argentina is experiencing now?

Latin America lagged because for decades its countries remained mostly closed to trade and investment. To protect home industries, countries kept out imports from the U.S. and other countries.

Asian economies practiced similar import-substitution policies, but they made sure to import advanced technology to help their companies turn out competitive goods. And then they pushed their firms to export.

Latin America didn’t do that. Brazil refrained from openly importing computers that its industries needed to become efficient. The result was weak, high-cost companies at home, unable to compete on world markets.

There was little buildup of capital or gains in productivity in such economies, which meant poor living conditions, as well as undereducation, for large sectors of their populations.

Now that is changing. Brazil is demanding open access to the U.S. and other markets for its agricultural produce and for its modern Embraer Aircraft planes. Its industries are selling to other countries in Latin America and are reinvesting to build up their operations.

Argentina’s YPF petroleum company similarly operates on a global scale.

Latin American countries now are investing 20% of their GDP in building infrastructure and capital in their economies, says professor Sebastian Edwards of UCLA’s Anderson School, who was World Bank economist for Latin America in the early ‘90s. “That’s still not equal to Asian countries, which invest 30% of GDP, but it’s a strong showing,” Edwards says.

Much remains to be done, says professor Abraham Lowenthal of USC, a leading scholar of the region and author of “Partners in Conflict: The United States and Latin America,” (Johns Hopkins University Press, 1990).

“I think the big issues are the age-old ones of equality, education--developing human capital--and opening up possibilities for their lower and middle classes,” Lowenthal says.

As they reform now, the prospect is that Latin economies will have help from foreign investment. Japan, South Korea and Taiwan are investing in Latin America because “they see growing economies, access to the U.S. market and an offset to China,” says Quinlan of Morgan Stanley.

More than a trade agreement, it looks like the Free Trade Area of the Americas will be the next focus of development in the global economy.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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Inter-American Investments

U.S. business investment in Latin America has grown markedly in recent years as Latin American countries have opened their economies to foreign companies. Movement toward a Free Trade Area of the Americas could enhance the investment trend. Shown are cumulative totals for U.S. investment in six of the largest recipient countries.

Mexico

Brazil*

Argentina

Chile

Venezuela

Colombia

* Decline in 1999 reflects devaluation of Brazilian currency.

Source: Commerce Department, Bureau of Economic Analysis