Globe, Latin America, United Kingdom

Latin America, financially at the mercy of world powers

Foreign investment in the region comes principally from the United States, and with it, the resulting reliance on adopting the U.S.’s decisions about all matters concerning monetary and fiscal policy.

 

Teyuné Díaz Díaz

 

This state of affairs makes it possible for the flow of money to be reversed, carrying it from Latin America towards the U.S. Treasury.

External financing in Latin America and the Caribbean is vital to complement the insufficiencies in public and private funds in the region, but the benefits depend on the behaviour of the countries issuing these investments.

This is how Carola Sala sets out the situation. She is an associate professor in the International Economics Research Centre at the University of Havana, Cuba.

In an interview with Prensa Latina, Sala emphasises that such a situation puts Latin America in a badly defined position, which creates uncertainty and vulnerabilities.

She explains that with the raise in rates of interest levied by the U.S. Federal Reserve, the capital funds based in Latin America are abandoning the region to look for a differential of positive interest which confers value within the financial market of the north.

This phenomenon is of a global nature, Sala then specified, because the funds disseminated around the world return to Washington in search of greater profitability. This has the effect of destabilising economies in general, but the severest effect is suffered by our region, she asserted.

Financing the region

As Sala has said, the finance received by Latin America and the Caribbean has various sources: some come from private funds – basically the investments – and others from official funds, these last ones are more stable but are currently at a standstill, with little room for growth.

Raising official flows of capital is greatly compromised in the region, explains the researcher, saying that Latin American countries mainly qualify as middle income countries: “This heterogeneous definition affects – to a greater extent – depending on and according to the growth of income per capita in each territory.”

In this context, official developmental aid is depressed in the region, if we consider that the only countries to receive official lines of investment are those defined as low income.

As regards private financing, investments come in two portfolio types: short term, basically on the money market, and direct, which is characterised by being more long term and directed towards the manufacturing and industry sector.

External endowments are considered direct investments, explains the expert, when the process is consistent and enduring.

And remember that in the context of rising US interest rates, this capital is therefore also hoping to yield greater profits. Currently, adds Sala, clandestine manoeuvres are also impacting external payments, and so is the siphoning of funds through tax evasion and their deposit in so called tax havens.

What we are talking about, she states, is a sustained process of external financing that travels from developing countries to developed countries.

The draining of capital demands concrete mechanisms for controlling the capital account and the movement of money that is flowing into and out of our economies, she emphasises.

The solutions

The solutions, deems the expert, depend in large part upon well-designed economic policy, which is not so simple; this would require the domestic authorities to be interested and qualified and to shift their system of interests towards macro problems.

Making these measures a reality is very difficult given the different political interests, the strategies designed by parties in government and in opposition and the diverse economic agendas.

As a result, the orchestration of economic policies is necessarily different for each nation and may not be focused on this problem of economic draining in particular, reflects the associate professor of the University of Havana.

“It is necessary to have a clear plan,” she says, “of which flows you want, what you need and where you want to direct them, because otherwise the devised policy gets thrown off course.”

To deal with the inflow and outflow of capital it’s necessary to determine what will be done with the investment and to direct it towards strategic and fundamental sectors.

Photo Prensa Latina

In the particular case of Latin America, investment comes where it wants, in the quantity it wants, which hinders foreign investment from having a truly positive effect, as it could do if it were to address domestic investment, gross formation of capital, creating jobs or acquiring new technologies, explains the researcher.

“Unfortunately – she says – if the movement towards the right is consolidated in Latin America, it would mean a huge step backwards in terms of the regional objectives in the 2030 Agenda for Sustainable Development, because the interests of the political class in power define the development strategies and the tools used to reach them.” In the hypothetical case that the right dominates politics and welfare needs are overlooked, the direction that politics is going in will contribute even more to the bad management of capital flow, to increasing the gulf between rich and poor, to in balances between sectors and to the stripping of capital from the region.

In this case we would see a lamentably negative trend compared to the real possibility that Latin America can advance economically.  (PL)

(Translated by Elizabeth Dann – Email: elizabethdann@blueyonder.co.uk) – Photos: Pixabay

 

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