Investment Rise Due to Privatisations

By Néfer Muñoz, IPS, 12 June 2000

SAN JOSE, Jun 12 (IPS) - Central America's improved record in attracting direct foreign investment is a mirage because the increased flow of capital to the region has mostly come through sales, mergers and privatisations of state-run enterprises, according to economic policy experts.

"Direct foreign investment is of major importance for the region, but most of the resources obtained did not come from productive or stable capital," said Uruguayan economist Eduardo Gitli, of the International Centre for Economic Policy at the National University of Costa Rica.

According to data from the Latin American Integration Association (ALADI), the combined direct foreign investment in Central America jumped from 1.04 billion dollars in 1996 to 2.96 billion in 1998.

But in El Salvador, Guatemala, Honduras, Nicaragua and Panama, this type of investment grew primarily as a result of the sales of governmental entities, Gitli told IPS.

For example, El Salvador's 1998 sale of its state-run telecommunications sector opened the way for foreign private firms in the country, including France Telecom and Spain's Telef¢nica.

Guatemala, meanwhile, partially privatised three electrical energy companies and sold 51 percent of the shares in the state- run telephone company, Telgua, to the Luca consortium, headed by Tel‚fonos de Mexico and Guatemalan and Honduran entrepreneurs.

An ALADI report indicates that the inflow of direct foreign capital to El Salvador was 875 million dollars and 600 million in Guatemala in 1998.

But the Costa Rican International Centre for Economic Policy presents quite a different panorama: the scale of investment drops drastically if privatisations are not included in the tally, leaving just 170 million dollars invested in El Salvador and 90 million in Guatemala in 1998.

Seen from this perspective, the level of incoming capital in Guatemala, El Salvador and Panama is expected to decline this year, because the process of selling off public firms is reaching an end and overall economic performance continues to be poor.

An exception to this scenario is occurring in Costa Rica, where policies of economic liberalisation continue under discussion and the privatisation process has yet to begin.

"The reality is that new foreign investment in the region is quite low," emphasised Gitli.

In 1999, US-based economists Michael Porter and Jeffrey Sachs designed an economic strategy for Central America in which they maintain that attracting foreign capital is crucial for development in the region over the coming decades.

Local academics are saying the same thing, but also stressing that the region is of greater value if it acts as a bloc rather than each country trying to attract foreign investment on its own.

"Attracting investment is vital for the isthmus, but it is essential to bring in leading companies in technology and distribution, companies that do not come simply to take advantage of a moment when labour is cheap," Gitli added.

The economist says the firms to attract to the region are those that spur on "productive linkages," in other words, international companies that subcontract services and inputs with local businesses.

Gitli pointed to international companies like Intel, which has already set up shop in Costa Rica, Motorola, manufacturer of telecommunications accessories, or Pfizer pharmaceuticals, saying the bigger the corporation the more productive linkages it will generate with nationally-based companies.

But many Central American entrepreneurs have indicated that these linkages with international corporations have not played out in reality.

The secretary general of the Secretariat of Central American Economic Integration (SIECA), Haroldo Rodas, admitted that if the calculations on foreign investment do not include privatisations, the total is considerably less.

This is why political analysts continue to stress the need for a joint and coordinated strategy in the region to attract foreign investment.

"Despite the problems, we believe the recent expansion of the Caribbean Basin Initiative will be a first step towards strengthening foreign investment in the region," El Salvador's Napole¢n Guerrero, president of the Central American Federation of Chambers and Industrial Associations, told IPS.

He is not alone in his optimism, which is due in great measure to Washington's decision in May to broaden privileges under the Caribbean Basin Initiative, allowing the Central American nations to export textiles to the United States at zero tariffs.

This expansion of privileges will be an incentive for international companies in the clothing and 'maquiladora' sectors already in business in Central America to remain here, and for other companies to move to the region, according to various experts.

But others do not see the privatisations and concessions in the region as "inflating the numbers" as far as foreign investment.

"It may be that once the privatisation process is over that the volume of investment could fall a little, but I disagree that investment will drop dramatically," Ricardo Monge, an economist with the Coalition of Initiatives for Development in Costa Rica, told IPS.

The Coalition has become a model organisation within the region because, working from the private sector, it has successfully promoted policies to attract investment in Costa Rica.

According to Monge, the benefits of privatisation and market liberalisation are not limited to initial investments only - from international companies that acquire shares in state-run enterprises - but that they also result from the ensuing chain reaction of new investments in technology and the creation of new services.