FDI AND SUSTAINABLE DEVELOPMENT IN THE AMERICAS

Kevin P. Gallagher, Daniel Chudnovsky and Roberto Porzecanski

Since the early 1980s nations in Latin America have been implementing a cluster of deep reforms to their economies. Referred to in the United States as the Washington Consensus and in Latin America as "neoliberalism," the reforms include a package of economic policies intended to promote economic development by opening national economies to global market forces. Over the last twenty-five years, governments throughout Latin America have reduced tariffs and other protectionist measures, eliminated barriers to foreign investment, restored "fiscal discipline" by reducing government spending and promoted the export sector of the economy (Williamson 1990).

Now, after 25 years of free-market reforms, many citizens in the hemisphere — and some governments — are questioning the wisdom of the Washington Consensus. Indeed, between October 2005 and December 2006, sixteen Latin American nations held either presidential or congressional elections. Nearly all of these contests have been referred to as referendum on the reforms. In many of the region's most significant economies — Argentina, Bolivia, Brazil, Chile, Uruguay, and Venezuela, candidates critical of the Washington Consensus prevailed. In other nations the outcome of the vote was so close that right-leaning governments at the very least have no mandate to deepen existing reforms.

This sea change in Latin American democracy has been portrayed in the Western press as an irrational resurgence by protectionists. However, a closer look at the record of the Washington Consensus shows that the concerns of citizens and governments can be justified. Indeed, the region has not experienced the economic growth that was promised would come as a result of the reforms. Economic growth has occurred at an annual rate of less than two percent between 1980 and 2005, compared to a rate of 5.5 percent between 1960 and 1980. Growth was faster during the 1990s than in the 1980s, but it still did not compare to the period previous to the reforms. Chile is the one exception, where growth rates almost doubled over the past twenty years compared to the 1960 to 1980 period. In addition, a debate has arisen over the extent to which Chile deviated significantly from Washington Consensus policies to achieve that growth.

The promise, among others, of following these policies is that FDI by multinational corporations will flow to your country 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.

This book evaluates the extent to which FDI fostered sustainable development in the Americas. Drawing on case studies from across the region — Argentina, Brazil, Bolivia, Chile, Costa Rica, Ecuador, Mexico, Uruguay, and Venezuela — the authors in this volume specifically look at how foreign investment during the reform period has affected economic growth, environmental policy and performance, and the countries' political economy. The authors have each authored numerous studies on the performance of FDI in their countries and region. Their chapters in this book synthesize that work and the work of others, most often for the first time in the English language. Hence, these chapters should not be seen as original research studies, but as synthesizing assessments of the situation in specific regions, written by leading in-country experts in the field. By and large, and consistent with the broader literature on the subject, the authors in this volume find that investment regime liberalization-led FDI has been a limited success at best in the Latin American case (for an exhaustive review of the literature, see Gallagher and Porzecanski (2007). In summary, we find that:

1. FDI was concentrated in a smaller handful of countries in the region.

2. FDI was attracted by traditional determinants, not whether a nation has a regional or bi-lateral trade and/or investment treaty (RBTIA) or if it can serve as a pollution haven for foreign firms.

3. When FDI did come, foreign firms tend to have higher levels of productivity and higher wages than were likely to increase trade in the region.

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

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

It should be said up front that although this volume is highly critical of the performance of FDI under the Washington Consensus, the findings here should not be in any way be interpreted as recommending that FDI is not beneficial for sustainable development. Indeed, for economies to develop in a sustainable manner all forms of investment are crucial. The findings in this volume suggest that LAC (Latin America and the Caribbean) is simply not rising to the challenge to make FDI work for sustainable development. In order to rise to this challenge, the authors in this volume suggest three lessons for LAC and other developing countries seeking to successfully place FDI as part of a comprehensive...