The Washington Consensus Didn’t Make Brazil and LatAm Wealthier

    São Paulo skyline

    São Paulo skyline A comprehensive review of the impact of foreign investment liberalization in Latin America shows that, with some exceptions, foreign investment has fallen far short of stimulating broad-based economic growth and environmental protection in the region, according to a report by the Working Group on Development and Environment in the Americas.

    The report recommends that national and regional policies aimed at improving national firms' capabilities should be implemented and that "policy space" for such policies should be accommodated in bilateral, regional, and global trade and investment treaties.

    Development and environmental economists from the United States, Mexico, Brazil, Argentina, Chile, and Costa Rica wrote the report, "Foreign Investment and Sustainable Development: Lessons from the Americas," (1) based on original research from throughout the region.

    The Working Group analyzed case studies on Argentina, Brazil, Bolivia, Chile, Costa Rica, Ecuador, Mexico, Uruguay, and Venezuela to examine how foreign investment during the reform period has affected economic growth, environmental policy and performance, and the countries' political economies.

    Beginning in the early 1990s, nations in the Americas began to liberalize their regimes for foreign investment. Pursued unilaterally or through regional and bilateral trade and/or investment agreements, a typical set of reforms included the elimination of performance requirements such as requirements to source from domestic firms or to export a certain percentage of production, restrictions on the ability to exclude certain sectors from foreign direct investment (FDI) and to "screen" foreign investment for development goals, restrictions on the ability to require joint ventures or research and development facilities, and so forth.

    Moreover, the reforms alter the nature of settling disputes over foreign investment. Whereas trade agreements have traditionally relied on states to settle disputes among themselves in international fora, newer trade and investor agreements have "investor-state" dispute systems where foreign firms can directly sue a national or local government without host government oversight.

    These policies were advocated by the U.S. government, the World Bank, and the International Monetary Fund and endorsed enthusiastically by many governments across the Americas. They have become enshrined in the 1994 North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico.

    NAFTA became the template for subsequent regional and bilateral accords, including the U.S.-Chile Free Trade Agreement, the U.S.-Dominican Republic-Central America Free Trade Agreement (CAFTA), the U.S.-Peru Free Trade Agreement, and countless numbers of Bilateral Investment Treaties (BITS).

    Investment liberalization has been part of a larger effort broadly referred to as the Washington Consensus. The broader reforms include a package of economic policies that promote economic development by opening national economies to global market forces.

    Over the last 20 years, governments throughout Latin America have reduced tariffs and subsidies, eliminated barriers to foreign investment, imposed fiscal discipline by reducing government spending, and have generally reduced the role of the state in all aspects of the economy.

    The promise, among others, of following these policies is that FDI by multinational corporations will flow to developing countries and be a source of dynamic growth. Beyond boosting income and employment, the hope was that manufacturing FDI would bring knowledge spillovers that would build the skill and technological capacities of local firms, catalyzing broad-based economic growth; and environmental spillovers that would mitigate the domestic ecological impacts of industrial transformation.

    These policies and agreements have raised concerns, not least of all because they have shown poor results. Economic growth in per capita terms in the region was slower than in the last decades of the import substitution period – less than 2% over the period of the reforms dating from 1990. A major finding in this report is that slow growth is in part explained by the fact that FDI failed to lead to more total investment into Latin American economies.

    Among the main findings in the report are:

    1. FDI was concentrated in a small handful of countries in the region. Brazil, Mexico, Argentina, Chile, and Venezuela received more than 80% of all the FDI in the region;

    2. Foreign firms located in Mexico and the Caribbean tended to serve as export platforms to the United States, whereas those located in South America tended to sell to domestic markets in that region;

    3. FDI was attracted by traditional determinants, not necessarily whether a nation had a regional or bilateral trade and/or investment treaty or if it could serve as a pollution haven for foreign firms;

    4. When FDI did come, foreign firms tended to have higher levels of productivity and higher wages and generally increased trade in the region; yet

    5. FDI fell far short of generating "spillovers" and backward linkages that could help countries develop, and in many cases wiped out locally competing firms thereby "crowding out" domestic investment;

    6. The environmental performance of foreign firms was mixed, sometimes leading to upgrading of environmental performance, and in others performing the same or worse than domestic counterparts.

    Working Group studies documented and analyzed the track record in specific countries and sectors as well:

    * In Brazil, Argentina, Mexico – the three countries that have received the lion's share of FDI in the region – and Costa Rica, it found that:

    – Foreign firms have higher wages, productivity, and trade vis a vis domestic firms;

    – However, linkages with national firms and the domestic economy in general are weak, specially in Mexico and Costa Rica;

    – Although foreign firms may bring the technologies generated in their headquarters, they do not contribute to an increase in R&D expenditures in the host economies.

    * In Brazil, Mexico, Chile, and Argentina

    – Virtually all foreign firms transferred environmental management systems to host countries; however

    – It is not clear that such firms were actually in compliance with host country laws and in Brazil there is little indication that foreign firms were more likely to be in compliance than domestic firms were;

    – There is little evidence that foreign firms are greening their supply chains (given that so many supply chains were wiped out by FDI);

    – In some instances, such as the forestry sector in Chile, foreign firms that exported through fair-trade certification schemes were "upgrading" to higher levels of environmental standards;

    – In others, such as in Mexico's electronics sector, foreign firms were not exporting to meet strong standards in Europe given that their chief export market, the United States, does not have such standards.

    * In Venezuela, Bolivia, Ecuador, and Uruguay

    – A Uruguayan BIT constrained the set of policies available to solve a conflict over foreign investment and transboundary environmental problems with Argentina;

    – BITs in Bolivia, Ecuador, and Venezuela were refused by governments that were able to renegotiate the terms of contracts with foreign hydrocarbon firms.

    New Directions

    The Working Group found, in agreement with the broader literature on the subject, that investment regime liberalization-led FDI has had at best a limited success in Latin American countries.

    Hence, it comes as no surprise to find that virtually all newly elected governments in Latin America are rethinking the role of FDI in their economies. While some countries are just beginning to debate the issue, others are going so far as to nationalize foreign firms. Yet, most governments are looking for a balanced approach.

    What this report makes clear is that new policies are needed. Based on this new research, three broad lessons can be drawn out as principles for policy-making in this field:

    1. FDI is not an end but a means to sustainable development. Simply attracting FDI is not enough to generate economic growth in an environmentally sustainable manner. The report shows that even in the nations that received the largest proportion of FDI in the region – Brazil, Argentina, and Mexico – FDI fell short of generating spillovers and sustained economic growth. FDI needs to be part of a comprehensive development strategy aimed at raising the standards of living of the nation's population with minimal damage to the environment.

    2. FDI policy needs to be paired with significant and targeted domestic policies that upgrade the capabilities of national firms and provide a benchmark of environmental protection. There are numerous country-specific policies that are either being implemented or debated regarding ways in which Latin American and Caribbean nations can overcome market failures, access to credit problems, and competitiveness issues on the part of their domestic firms. In this regard, lessons from Asia may be drawn, since many nations in that region have put in place targeted industrial policies to link domestic firms to foreign firms to enable domestic firms to develop into competitive exporters themselves.

    3. International agreements, whether at the World Trade Organization (WTO) or at the level of regional or bilateral trade and/or investment treaties (RBTIAs), need to leave developing nations the "policy space" to pursue the domestic policies necessary to foster sustainable development through FDI.

    The emerging international regime of international investment rules is restricting the ability of developing nations to pursue some of the policy instruments that have been successful at channeling FDI for development in Asia and elsewhere. When acting collectively under the auspices of the WTO, developing nations have largely succeeded in blocking proposals that would further restrict such policy space.

    However, slower movement in global trade talks has led to a proliferation of RBTIAs between developed and developing countries. In these negotiations developing countries have much less bargaining power and end up exchanging policy space for market access.

    End Notes

    1. The full report can be downloaded at: http://ase.tufts.edu/gdae/WorkingGroup_FDI.htm

    Kevin Gallagher is Assistant Professor of International Relations at Boston University, Research Associate, Global Development and Environment Institute, Tufts University. Andrés López is Director of the Centro de Investigaciones para la Transformación, and Professor of Economics at the University of Buenos Aires, Argentina. They are contributors to the CIP Americas Policy Program at www.americaspolicy.org.

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    • Show Comments (22)

    • João da Silva

      mcv
      [quote]” just over the news” truck drivers owner operator out of busines 70%
      surrendering their trucks to bank!? 80% [/quote]

      Was it an honorable surrender according to the Geneva conventions? 😀

    • João da Silva

      mcv
      [quote]joao will drown!!!![/quote]

      Did ya get my earlier coded messages?

    • CHC À¢€“ Chronicle Herpes Carrier
      The man with itchy genitaliaÀ¢€¦. Question:

      How can an organism (chc) with such small pee brain vomit so much garbage all at once?

      Time for Pepto-Bismol!

      Costinha

    • mcv

      if ch.c goes to beach and decide to go into the water till his waist…..joao will drown!!!! 😉 😉

    • mcv

      america is not made of rich people only!!!that is a growing poor class lately…is sad….but true!!!I’m seeing it!!

    • mcv

      so much for to be good!!!who would tell me that this (oil rising) is helping americans????food cost lot more,delivery,everything that uses transportantion is going up and so on…

    • mcv

      hooopss..I forgot to let u all knowing w/ country….USA…

    • mcv

      ” just over the news” truck drivers owner operator out of busines 70%
      surrendering their trucks to bank!? 80%
      reason?!!!oil going up to the roof!!!!cnn font!
      that hit me too!!!

    • João da Silva

      Jon
      [quote]It is okay Joao, I am an official “idiot” club member…..onwards and upwards[/quote]

      It is NOT okay with me, Jon. Ch.c has lots of explanations to put forth in this august forum why he called an Alberty oil millionaire an idiot. Aint going to put up with his temper tantrums unless he does.

      Do you think that he should be tried at the Hague? 😉

    • jon

      It is okay Joao, I am an official “idiot” club member…..onwards and upwards 😀 😀 😀

    • João da Silva

      Ch.c
      [quote]Ch C,

      I did not mean to hit such a raw nerve but please pay attention to Brazilian and Canadian oil in the future
      and do you think Putin does not still run his country?? Don’t be so naive!!
      [/quote]

      Mein Kamaraden, I am afraid that our Canuck friend has got you by your balls. You have anything to say ?

    • jon

      Ch C,

      I did not mean to hit such a raw nerve but please pay attention to Brazilian and Canadian oil in the future
      and do you think Putin does not still run his country?? Don’t be so naive!!

      Your diatribe here just caused your country to fall to this ranking:

      The United States and Iran finished in a virtual dead heat, and way down the list, in a magazine’s assessment of the peacefulness of 121 countries. Canada was in the top 10 most peaceful on the Economist’s Global Peace Index.

      Countries most at peace ranked first.

      Rank Country Score
      1 Norway 1.357
      2 New Zealand 1.363
      3 Denmark 1.377
      4 Ireland 1.396
      5 Japan 1.413
      6 Finland 1.447
      7 Sweden 1.478
      8 Canada 1.481
      9 Portugal 1.481
      10 Austria 1.483
      11 Belgium 1.498
      12 Germany 1.523
      13 Czech Republic 1.524
      14 Switzerland 1.526

      Sorry not “number one” in this category

    • João da Silva

      Jon
      [quote]And to the idiot Jon : ” as we are reaching “peak oil” and his country cannot solely rely on Putin’s oil and gas”
      – Well you proved that you got your University degree…..offered free at the purhcase of a detergent. Are you so sure…that we rely ONLY on Putin oil…..for our energy ????[/quote]

      Welcome to the club of “idiots”,”junkies”,”fools”, etc 😉

      Hey Ch.c, did it ever occur to you that Jon has a great sense of humor and likes to pull your leg (as Dnbaiacu does) 8)

    • ch.c.

      Ooops….smile
      “how do you explain that Brazil sudenly discover over 40 trillions barrels….in ONE year ?????????

      Is….. billions not trillions….obviously !
      Or……not yet trillions !! Who knows ?
      😀

    • ch.c.

      continued…..
      Conclusion : YESSSSSSSS…..lets have oil at $ 300.-, Lets every Brazilian be millionaire in US$. Just think of how much more we will be wealthy not only thourgh our exports that are already 25 times larger than Brazil when on a per capita basis, but also what Swiss firms such as Syngenta, NestlÀƒ© will generate profits with their production….IN BRAZIL, THUS NOT COUNTED in our GDP but in yours.
      It remains that the profits are……OURS NOT YOURS….to my knowledge….since profits were made with OUR INVESTMENTS IN BRAZIL OR ELSWHERE…AND NOT WITH YOUR INVESTMENTS OR TECHNOLOGIES !

      In my view Jon, you have only a feijado in half your brain. Just put some pesticides and fongicides made from Swiss firms. Add a lot of foreign fertilizers, and you will finally have a different view….more appropriate of who will end up make the most money !

      Here our motto is HIGH INVESTMENTS, HIGH SKILLS WILL GENERATE HIGH WEALTH !
      and for eternity…we will lead….not trail….the world development and wealth.
      What you have in the ground is worth a fraction of what people have in their brains.
      Proven for the last 1 million years ! Thus no reason to stop in the next million year.
      Oil was US$ 2.- in the 1950, today US$ 130.- ! We still dont produce oil…but are far more wealthy that 99,5 % of the world nations.

      And Jon the idiot who believes that you are smart with the peak oil story, why dont you read the following statement :
      ” À¢€œWhat people need to hear loud and clear is that we’re running out of energy”
      À¢€”George W. Bush, May 2001 –

      You finally wake up ????? Is Bush smart or not ? In my view he is an idiot !

      If there is peak oil, how do you explain that Brazil sudenly discover over 40 trillions barrels….in ONE year ?????????
      And will Brazil restricts its production…to keep oil price high…when Brazil is in need of over $ 200 billion in investments….just to produce this oil ? $ 200 billion is in fact the minimum of the minimum…….not my guess estimate just to put a number.
      And is Brazil not in need of generating high sales quantity…to produce this high production cost oil ? And what about the need to finally develop your miserable infrastructure….such as only 10 % of paved roads, and in those 10 % paved, 50 % have millions of potholes, leaving only 5 % of decent paved roads.

      I could continue for hours.

      Such as some of these trillions of US$ or whatever, will be managed by…..SWISS BANKS….even if branches are opened in the countries where oil is produced !!!!!!!!!!!!!!!!!!
      We beat you and will continue to do so wether you like it or not : hands up, hands down, hands in the pocket and even with fingers in the nose !

    • ch.c.

      To Joao and all !
      Joao : your “My question: Will the formation of UNASUR help to correct the situation? “
      – Of course not, the others (than Brazil) are even WORSE !!!! Thus you made club members….people worse than Brazil is.
      – It should not be named UNASUR….but UNSURE !!!!!

      And to the idiot Jon : ” as we are reaching “peak oil” and his country cannot solely rely on Putin’s oil and gas”
      – Well you proved that you got your University degree…..offered free at the purhcase of a detergent. Are you so sure…that we rely ONLY on Putin oil…..for our energy ????
      Read more before writing what you dont even know.
      – our country is one the world best for hydro electricity…for its needs.
      – we also have Nuclear plants…if you did not know.
      – the remaining is imported from SEVERAL SOURCES….not one…as any half idiot could correctly imagine.
      – and the EU is importing more NATURAL GAS than OIL….from “Putin”. And to my knowledge Natural Gas is far less polluting…than oil.
      – Ohhhh and if you did not know Putin is no longer the President. Another proof of your ignorance.
      – Further your “Putin” oil analysis makes me laugh….laugh…and laugh. You dont seem to know very well the map in their areas. There are many other free nations…..such as Georgia…also producing oil and gas.
      – This said, we have no oil or commodities in OUR grounds….but that did not stop us to become one the wealthiest country….in the WORLD, wether you like or not.
      – Not only one of the wealthiest but one of the most developed….which is different from wealthy alone.
      – do you think ONE second that high oil prices is only negative for us ? Of course not. Buying for example Petrobas shares going up…or down…..is free to my knowledge. And being one of the world wealthiest countries….guess where part of our pension funds have invested. And guess where part of people have invested their money? part through mutual funds, managed accounts through banks that invested in Petrobras…or the likes.
      And some of the non outsourced (managed) money….can also be invested in Petrobras or Schlumberger…..directly by the savers themselves. More simple there is not !
      – Corporations from our country have invested over the years over US$ 700 billion in other countries. This generates annual profit of around $ 70 billion…annually that is not counted in our GDP ! Or around $ 10’000.- per capita that should be added…to our GDP per capita that stand at over US$ 60’000.- as per the U.S. Census Bureau (not even ours….you see)
      – And the more idiots like Brazilians are wealthy, the more Swiss firms will be able to sell you….PREMIUM GOODS…….NOT LOW MARGIN COMMODITIES SUCH AS SUGAR or whatever.

    • João da Silva

      Jon
      [quote]yes, the 1970’s in Chile came into mind [/quote]

      Bright people think alike 🙂

      [quote]I am trying to convince Ch C to invest in the oil sands here as we are reaching “peak oil” and his country cannot solely rely on Putin’s oil and gas smilies/wink.gif[/quote]

      Hard to convince Ch.c, as he is the head of an ultra secret insurgent faction, that split from the main Bilderberg group. The situation in Geneva is very confused as well as alarming, as usual.

      [quote]the way everytime Petrobras drills off Rio, they are hitting black gold!![/quote]

      There is a joke among our friends here that every time there is a political scandal, Petrobras finds another oil well. The latest scandal is about the purchase of VARIG by Matlin Patterson. Did you know that Air Canada made a bid too, a couple of years ago?

      Look forward to hearing more of your words of wisdom 😉

    • jon

      Joao,

      yes, the 1970’s in Chile came into mind

      I am trying to convince Ch C to invest in the oil sands here as we are reaching “peak oil” and his country cannot solely rely on Putin’s oil and gas 😉 😉 and by the way everytime Petrobras drills off Rio, they are hitting black gold!!

    • João da Silva

      [quote]nor did the Chicago School of economics[/quote]

      Ah Jon, you talking about Chile and Milton Friedman,aren’t you? If so, well remembered.

      btw, how is the digging coming up in Alberta?

    • jon

      ..nor did the Chicago School of economics

    • João da Silva

      [quote]The Washington Consensus Didn’t Make Brazil and LatAm Wealthier[/quote]

      An excellent article and my congrats to the authors. My question: Will the formation of UNASUR help to correct the situation?

    • ch.c.

      Hello junkies Brazilians !
      Where are you ?????
      Red faced……in reading the article ?????

      😀 😉 😀 😉 😀 😉 😀 😉 😀 😉 😀 😉 😀 😉 😀 😉 😀 😉 😀 😉

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