Statistics about foreign investments in the world for 1999 show that the top country is the United States and the second is the United Kingdom. They are both reciprocally the greatest investors in each other. Rather surprisingly, Sweden appears in third place, followed by China in fourth, but in China one has to take into account that about 40% of the investments there will come from Hong Kong. Also it is curious that only 16% of the foreign investment in China comes from the United States, even though 68% of the United States´ total trade is with Asia. France is fifth and the Netherlands sixth. Brazil comes seventh, the first Latin American country, immediately before Germany, and Argentina is in tenth place, but on a per capita basis had much larger investments in that year than Brazil. Hong Kong with a massive US$23bn. is next. Mexico is in fifteenth place with US$l1bn., and Chile in eighteenth place with US$9bn. On a per capita basis, foreign investments in Chile were greater than even in Argentina for that year. The figures for stocks show Brazil in ninth place, just after Canada, Mexico in sixteenth place with US$72bn. and Argentina with US$62bn. in nineteenth place. Brazil has more than the combined foreign investments in Mexico and Argentina. If one looks at the foreign direct investment flows in Latin American countries, one finds that Argentina had an increase from 1997 and 1998 to 1999 of about five times. That dropped in 2000 and will drop dramatically this year. The reason why it went up in 1999 was because many automakers began their operations, in order to serve the Brazilian markets. Bolivia has been quite stable. Brazil has been growing from US$l8bn. in 1997, US$29bn. in 1998, US$31bn. in 1999 and US$33bn. in 2000. This year there is going to be a major drop of foreign investments in Brazil and the number is going to be approximately US$20bn. Chile went from US$3.3bn in 1997 and in 1998 it dropped to US$1.8bn. It 1999 it went up to US$9.2bn., and in 2000 there was negative investment. In Colombia, the flow of investments indicates the deterioration of the institutional climate there since 1997. In Mexico, investments have been quite stable – US$12bn. in 1997 and US$13bn. in 2000. It is expected that this year it should be a bit higher, at around US$15bn, as a result of the privatisation of a large segment of the financial sector. Peru went up from US$1.7bn in 1997, slightly to US$1.9bn. in 1999, and then decreased in 2000, when there was a liquidity crisis in Latin America. Venezuela has been stable; it is an oil-producing and exporting country. 2000 has shown a better volume of investments than 1999, one of the very few exceptions in Latin America.

If one looks at the total foreign direct investments in Latin America for 1999, one sees MERCOSUL as the largest recipient of foreign investments in Latin America. MERCOSUL is the trading group created in 1991 by Argentina, Brazil, Paraguay and Uruguay. It . has been enormously successful in trade matters, though it is going through a very difficult time at the moment. MERCOSUL received US$53bn., Mexico US$11bn. and the remaining countries of Latin America US$16bn. The region in total received US$81bn. Associated members of the MERCOSUL countries are Bolivia and Chile. Investment in Brazil has grown dramatically since 1995. The monetary stabilisation plan of 1994 was eminently successful, and foreign investments reacted immediately, though this year we are going to see a decrease to the threshold of about US$20bn. Spain, surprisingly, is the largest investor in Brazil. European Union countries represent about 50% of foreign investments in Brazil, and the United States about 20%. Portugal, proportionally to the size of its economy, invests in Brazil one hundred times more than the United States! The statistics show the Cayman Islands figuring as one of the major investors in Brazil. The Cayman Islands is used by Brazilian investors, so that should be interpreted as Brazilian investment in Brazil rather than foreign investment. Looking at the direct investment sectors, one sees that services account for 75%. Brazil´s economy today is about 60% services, industry is 23% and agriculture is 2%. Brazil has the largest unsubsidised agriculture in the world, and that probably explains why investment in Brazilian agriculture is so poor – because investors in this area are very used to subsidies. In Argentina, the investment level in 1997, 1998 and 2000 was practically the same. 1999 was a great year for foreign direct investments in Argentina. In the profile of investors by countries, the European Union includes the main investors in Argentina; of the European investors, Spain is by far the largest. The United States comes second with 25% and Japan with 8%. By sector, the figures are 55% in services, 33% in industry and 1I%,, in agriculture, most of the investments in services being in financial services. In Mexico, the figure for 1997 was US$12.8bn., and investment stayed at the same level in the subsequent years, so it is very stable. In Mexico (unlike Brazil and Argentina), the United States and Canada are responsible for 68% of the investments, and the European Union countries are responsible for only 24% – exactly the reverse of the situation in Brazil and Argentina. Looking at the investment by sector, one sees that 60% goes to industry, 33% in services and 7% in agriculture. This year, the percentage of investments in the services area will be higher than investments in the industrial sector.

In Argentina, Brazil and Mexico, the legal regimes governing foreign investment have undergone extensive modifications in the 1990s, as a result of market liberalisation in Latin America. Such modifications included not only the lifting of most of the existing restrictions on foreign capital, including some of a constitutional nature, but also many of a monetary nature. Argentina, for instance, adopted in 1991 a dollar-based and freely convertible currency. Brazil, on the other hand, migrated from the transitory to the standard clause of the IMF Agreement, making its currency a convertible one, and the same is happening with Mexico. Both Argentina and Mexico entered into investment agreements with the United States, guaranteeing convertibility, and Mexico signed one with the European Union as well. Probably of all developing countries in the world, no country adhered more keenly to the prescriptions of the IMF than Argentina.

It followed the prescriptions very thoroughly and even went ahead of the standard prescriptions of the IMF. Starting at given points in the 1990s, all those countries had enormous fiscal successes in their respective monetary policies, compared with the preceding years and decades, and thus have succeeded, as I have indicated, in attracting large amounts of foreign investment. Brazil and Mexico have similar monetary policies – both somewhat different from that in Argentina. Inflation targeting was adopted by Brazil in 1994 and the same policy was adopted by the Mexico Central Bank earlier this year. In spite of those fiscal successes and unilateral liberalisation by all of those countries, the trade increases did not correspond to what was done in terms of domestic liberalisation. Developing countries in general, and Brazil and Argentina in particular, were the greatest losers of the GATT, and the experience of the WTO was dramatic for both countries. At the end of the GATT, the World Bank estimated that developed countries were reaping about 64% of the benefits, but the experience of the WTO showed that – according to the IMF – the developed countries reaped about 77% of the benefits. Argentina, in particular, and more than Brazil, was greatly hurt, because of the difficulties in accessing the markets of the trade partners in agricultural commodities. Massive subsidies – in practice in the European Union mostly, but also in the United States – have prevented Argentina from accessing those markets. Without a large domestic market, and without economies of scale domestically, the Argentine economy suffered enormously as a result of this lack of access. For Brazilian companies, there was a similar effect in the field of agriculture and also in relation to some industrialised goods. Brazil has been suffering economic sanctions from the United States for forty years now, and every single area in which Brazil is competitive in the industrial sector faces some unilateral barrier from the United States; this has become a very serious stumbling block in the economic relations between the two countries, and it is also a great obstacle to the development of the country.

The transformations that took place in Argentina, Brazil and Mexico in the 1990s were very similar to those transformations in foreign investment that took place in Spain and Portugal towards the second half of the 1980s, with the accession of the two countries to the European Union. In Argentina, foreign investments are regulated by Law 21382 of 1976, which was heavily amended afterwards by a number of domestic Acts and several international treaties. This vast body of legislation deals not only with the legal treatment of foreign investments, but with matters of foreign exchange, jurisdiction, choice of law, monetary policy etc. Argentine law guarantees foreign capital investments non-discriminatory treatment in relation to national capital. The only differentiated treatment remaining in Argentine law with respect to limitation of foreign capital investments pertains to the area of broadcasting or land in areas of international frontiers. The former, however, has been construed by jurisprudence to be illegal, so in broadcasting investments are now admitted, and investments in the areas of frontiers will depend on governmental approval. In applying for governmental approval in Argentina, foreign investors will always find a very sympathetic ear, and approval to a request should be forthcoming unless it is unreasonable. The Argentine financial sector has been practically all denationalised now, and about 85% of it is in the hands of foreign investors. In this particular moment, when Argentina is going through a grave balance of payment crisis and an institutional economic crisis, there is a fear that the government will detach itself from the dollar link and all the banks will put their reserves abroad and so increase the balance of payment difficulties in the country. Investments in Argentina regarded by local law as foreign are those which originate abroad, as direct or portfolio investments in any local economic activity. There are no limitations on profit remittances or capital repatriation. Furthermore, the distribution of profits or dividends in Argentina is not, in general, subject to taxation.

In Brazil, the matter of foreign investment is regulated by Law 4131 of 1962, which has been extensively amended throughout the years. It is also regulated by the MERCOSUL treaty and sundry regulatory rules issued by the Central Bank of Brazil. Brazilian law guarantees non-discriminatory treatment to foreign capital. However, even though most restrictions on foreign capital were lifted in the 1990s, some remain, and these include property in rural areas, the exploration, transportation and refinery of oil, the exploration, transportation and industrialisation of nuclear materials, property in frontier areas, broadcasting and press and reinsurance. In the area of reinsurance, there is a commitment to liberalisation: restrictions on foreign capital have been gradually lifted, and we expect that they will be totally lifted in the next twelve months. There are no limitations on the remittances of profits or dividends or on the repatriation of capital. In general, the distribution of dividends is not taxed, but there are some exceptions, and capital gains are taxed at source at a rate of 15%. Foreign capital investments and loans must be registered with the Central Bank of Brazil. This is done by electronic means. Electronic communication has brought about a revolution in Brazil: the country has more internet users than all the Latin American countries combined. The federal circuit of the Brazil judiciary was the first to get ISO 9002 certification about two years ago. All the filings in the Federal Circuit are done by electronic means, and the follow-up of files can be done electronically. This is a major advance in a country of continental dimensions. Information to the Central Bank is also conveyed by electronic means. This is a very efficient way to approach this matter. This Central Bank register records investments, reinvestments, remittances of profits or dividends, repatriation of capital, payment of interest on loans and repayment of principal. It is done for statistical purposes, like in the European Union.

In Mexico foreign investments are regulated by the Foreign Investment Law of December 1996, which is a very new law. In addition, there are international treaties, which include the NAFTA treaty. This new law adjusted the internal legal order to the commitment assumed by the country in connection with the NAFTA agreement, simplifying the bureaucratic procedures required of foreign investors, providing them with added security. However, there are some restrictions on investments in certain areas of economic activity: only the Mexican Government may own or engage in operations involving the production of oil or electricity, or in mail telegraph activities, or in related products and service; activities pertaining to services such as the operation of credit unions, retail trade in petrol and gas and certain others in the transportation area are reserved to the Mexican Government. On the other hand, certain investments may be by foreign capital, but subject to certain limitations as to a given percentage of the share capital of the recipient company, which will involve capital control by Mexican nationals. This will depend on the area of activity in accordance with an itemisation provided by law. The financial sector has now been liberalised for foreign investments, and the situation in Mexico it is now very much the same as it is in Argentina. About 85% of the domestic financial sector is owned by foreign capital. It remains to be seen how, in the event of a possible crisis of balance of payments, the financial sector controlled by foreign investment will behave. There is the legal requirement of the registration of the foreign investments, under a simplified procedure very much like that of Brazil, though it is not done by electronic means there. There are no limitations on the payment of dividends or profits and on the repatriation of capital.

It is apparent that Argentina, Brazil and Mexico have greatly liberalised the legal treatment of foreign capital, as well as their respective monetary policies. The greatest liberalisation of all occurred in Argentina, not only in terms of the dollar tag, but also in the elimination of restrictions to foreign capital, as well as in the broadest privatisation programme of Latin America. With the benefit of hindsight, one can see that these initiatives had a disastrous effect on the local economies, with a major balance of payments crisis and a dramatic loss of competitiveness in the international trade markets. The liberalisation was not accompanied by access of their products to the trade partners, so both countries´ share of international trade decreased substantially, and Brazil´s fell by 50% of what it was before the trade liberalisation. Also, many companies in Argentina and Brazil were acquired by their international competitors in order to eliminate international competition, and the privatisation programme brought major redundancies in both countries. Unemployment now in Argentina is about 35%, the greatest in their history. The liberalisation of the monetary policy in Argentina done with the dollar tag was a delight for the local population, and it was done in the greatest tradition of populism of the government, because it ensured that the rich would have convertibility of their assets into hard currency. But it also ensured that small savers would have convertibility of their liquidity, and because Argentina had such a dramatic history of mismanagement of its monetary affairs, every cab driver in the country had a bank account in New York. So for them it was much easier to have their bank accounts for $800 or $900 in Argentina than to maintain those bank accounts in the United States or elsewhere in the world. So the measure was enormously popular, and – something very rare for Argentina – it was unanimous. But then it was punitive, because the main trade partner of Argentina is Brazil: Brazil has a floating currency, and the Brazilian currency has devaluated by more than half against the US dollar, whilst the Argentine currency has remained stable on account of the dollar tag. So Argentine sales to Brazil became less competitive. Trade with the United States represents only about 16% of Argentina´s foreign trade, so the country´s sources of dollar revenue are very limited.

As we have seen, Brazil has been by far the largest recipient of foreign direct investment in the area; notwithstanding that, it also is largely perceived as being at the threshold of a balance of payments crisis. More than 50m. people in the country live below the poverty line. Monetary and trade liberalisation brought increased unemployment and reduced participation in international trade. The quality of life of those who are well to do in the country is very much compromised by the poverty of the substantial part of the country´s population. Mexico, on the other hand, has further aligned its economy to that of the United States and now depends for 90% of its international trade on commerce with this country, exporting mostly low-value-added consumer products, without achieving any significant, if any, surplus in its balance of trade. The remittances of Mexican workers abroad have equalled those of foreign direct investments. In the past ten years, salaries in Mexico decreased from about $110 to $70 a month. Not less than 80% of the country´s population live now beneath the poverty line, and there is an annual deficit of approximately 200,000 jobs. The population of Mexico is 100m. people and it is estimated that about 150,000 Mexicans emigrate annually to the United States. In all these countries we have seen an increased dependency on foreign currency. This has had devastating effects on the social profile. Where the dependency is greatest is Argentina. Mexico has, of all the three countries, the best profile in terms of balance of payments, but it has had to rely on the continuing misery of its population to maintain the current model of its trade competitiveness – of selling low-cost products to the United States. It remains to be seen, in view of the crisis in the United States and the accession of China to the WTO, how Mexico will be affected: China is more competitive in terms of low-product goods than Mexico, and China is a traditional trade partner of the United States and will certainly increase its share of the market in this country. Argentina, after the end of the cycle of foreign investments, saw the end of the cycle of foreign loans. The country no longer has access to the international financial voluntary markets and now depends on handouts from multilateral organisations. Brazil, even though it still receives large amounts of foreign investment – about US$20bn. are expected this year – will not stave off a balance of payments crisis, because, sooner or later, every invested dollar will bring about $4 of debt, and as the country does not have an appropriate access to the trade markets of its trade partners, and its trade participation is ever decreasing, there is no source of hard currency other than loans and foreign direct investments. Thus, in view of the magnitude of the foreign debt, this will eventually become unserviceable. With the mounting foreign currency debt and flat trade balances, foreign investment will dry up, followed by diminishing foreign loans. The cycles of foreign investment have invariably finished in the region, and this time will be no exception.