5 Aid and Investment

Official Development Assistance (ODA)²⁰ and Foreign Direct Investment (FDI) are two main indicators of the external dependency of Latin American economies that will be analysed in this section.

5.1 Official Development Assistance

ODA does not have the same importance for all the Latin American countries when measured by its share of GDP. ODA is more important for Nicaragua and Guyana (27% and 15%) followed by Honduras, Bolivia and Suriname (7%, 6% and 4%). In Belize, Ecuador, El Salvador, Guatemala and Paraguay this indicator varies between 1 and 2%; and it is less than 1% in the rest of countries. The ODA in Latin America represents 0.18% of GDP.

Table 14 ODA importance and distribution in Latin America, 2000

Source: ^a (OECD, 2001) ; ^b(World Bank, 2002); ^c GDP for 1998^.

The average of ODA 1999-2000 (Figure 18) shows that four countries concentrate more than 58% of the ODA for Latin America. These are: Honduras, Nicaragua, Bolivia and Peru. Guatemala and Brazil both received 7% each and the rest of countries less than 6% each. The countries that received less ODA were Mexico, Costa Rica and Panama. Similar trends were observed in 2000, Brazil and Guatemala received 9% and 8% of the total for Latin America, and the rest of countries, less than 5% (Table 14 ).

Figure 18 Net ODA distribution in Latin America, 1999-2000

Source: (OECD, 2001)

Distribution of ODA by sector

ODA for Latin America and the Caribbean has an emphasis on economic and social infrastructure and services (53%); education, health and population, together, is another main area (20% of total ODA) (Figure 19). Within Latin America, the distribution of ODA by sector varies along countries (Figure 20 and Figure 25).

The main ODA recipients as a proportion of their GDP in 2000 are Nicaragua, Guyana, Honduras, Bolivia and Suriname. They receive more than 20% of ODA for other social sectors except for Suriname (5%). For Bolivia, the main aid sector is action related to debt (35%) and for Suriname, health (35%). Nicaragua and Honduras’ second main sector is emergency aid (13% and 19% respectively) and for Guyana is action related to debt (21%). Economic infrastructure is particularly important for Suriname (29%).

The main ODA recipients in Latin America in total amount ODA are Honduras, Nicaragua, Bolivia and Peru. For these countries, other social sectors received more funding than education and health. Emergency aid is very low in these countries, less than 1%; except for Nicaragua, with 13%. The second main sector for these countries is action relating to debt, 35% for Bolivia and more than 10% for the rest. Peru is the only country with more than 40% of ODA in other social sectors.

Figure 19 ODA distribution by sector in LAC and the world, 1999

Source: (OECD, 2001)

5.1.1 Outlook of ODA and relevance for forestry

ODA structure is relevant for the forestry country outlook since it shows which sectors are priorities for the donors and consequently what sort of forestry sector development could attract donor support. Although this is a top-down approach, the currently donor support schemes tend to be user-driven. Therefore, understanding the ODA sector structure is an indirect way to know the priority areas for development and how the forestry sector could have included. For example, donors will be more likely to support debt swaps in Bolivia (Figure 23), medicinal plants programs in Suriname and community forestry in Guyana (Figure 21) corresponding to the ODA priorities of action related to debt, health and social sectors, respectively.

As countries get richer, they will tend to get less aid and other countries will remain poor and dependant on aid. Using the GDP per capita projections of chapter 3, countries like Guyana, Nicaragua and Honduras, which are particularly dependant on aid, will stay the same in 2020. Bolivia, Suriname, Paraguay and Guatemala, lower-middle income economies, are not as dependant as the former two, but its economic situation will not improve much either. Ecuador and El Salvador and especially Belize might improve its current economic situation, therefore, will tend to receive less aid. The rest of countries do not receive more than 1% of aid and will improve its economic situation with respect to 2000.

Figure 20 ODA structure of Nicaragua, 1999-2000

Figure 21 ODA structure of Guyana, 1999-2000

Figure 22 ODA structure of Honduras, 1999-2000

Figure 23 ODA structure of Bolivia, 1999-2000

Figure 24 ODA structure of Suriname, 1999-2000

Figure 25 ODA structure of Peru, 1999-2000

5.2 Foreign Direct Investment

Macroeconomic stabilization, trade liberalization, privatization programmes, deregulation of policies regarding private investment and regional integration have contributed to creating a favourable environment for FDI²¹ in Latin America (OECD, 2000). The four largest economies of Latin America – Mexico, Argentina, Brazil and Chile – have been constantly receiving over 70% of the total inward FDI in the region since the 1970s. This trend remained unchanged in the 1990s. However, it should be kept in mind that the amount of FDI attracted by some of the smaller countries are quite significant when measured against the size of their economies (OECD, 2000).

A way to scale the importance of FDI in the different Latin American economies is to divide the FDI stock²², indicator of foreign corporate presence, by the national GDP. The results (Figure 26 FDI stock as a share of GDP in Latin America, 2000) show that Latin America is highly dependant on foreign capital as they represent 26% of the regional GDP. The minimum value of this indicator is 10% for Uruguay and the maximum 93% in Guyana. The index is also very high in Panama and Nicaragua, 67% and 66% respectively and is negative for Suriname (-121%), presumably because foreign companies do not reinvest their profits back into the local economy. The range of this index (FDI/GDP) for the rest of Latin American countries is

• 51% - 75%: Ecuador, Chile, Bolivia;

• 26% - 50%: Argentina, Costa Rica, Brazil, Belize;

• 10% - 25%: Uruguay, Colombia, El Salvador, Paraguay, Mexico, Guatemala, Peru, Venezuela and Honduras
(Figure 26 FDI stock as a share of GDP in Latin America, 2000).

Figure 26 FDI stock as a share of GDP in Latin America, 2000

Source: (UNCTAD, 2002) and (World Bank, 2002)

Table 15 Foreign investment in Latin America, 2000

Source: ^a (OECD, 2001); ^b (UNCTAD, 2002); ^c(World Bank, 2002); ^d GDP for 1998^.

5.2.1 Foreign Direct Investment Net Flows

In this section we will analyse the trends in FDI annual influx and net flows in Latin America. FDI inflows for Latin America and the Caribbean represented only 11.6% of the world FDI in 2000. This is a small share in global terms, considering that United States only, attracted 16.9% and the EU 43.9% in 2000.

FDI influx into Latin America is determined by global forces and regional processes. After a decade of outstanding growth in the 1990s, the FDI influxes Latin America have decreased from US$ 85 billion in 1999 to US$ 66 billion in 2001 (Figure 27). The forecast for the whole world is not promising either because of the uncertainty about the economic recovery of the United States and the low expectations for the economic growth of Europe and Japan. In general, a lower growth rate will result in less investment, businesses income and a reduction of share values that will affect FDI (CEPAL/ECLAC., 2002).

The main regional factor for the decrease of FDI is that the economic reforms which attracted the majority of FDI during the 1990s, mainly privatization of State-owned companies linked to energy and basic service sectors, has finished. The second main regional factor is that the acquisition of national companies by multinational enterprises or transnational corporations (TNC), which created a FDI influx in the late 1990s, has turned into a consolidation phase. Therefore, the future FDI should have a major component of new investment or greenfield projects, which is more difficult to obtain and is closely linked to the plans of the TNCs in Latin America (CEPAL/ECLAC., 2002). Other factors that contributed to creating a favorable climate for foreign investments in the 1990s were: macroeconomic stabilization, trade liberalization, deregulation of policies regarding private investment and regional integration (OECD, 2000).

Developing countries, emerging economies and countries in transition see FDI as a source of economic development and modernization, income growth and employment (OECD, 2002).

Table 16 FDI flows in the World 2000, in percentage.

Source: (UNCTAD, 2002)

Some specific factors for the peaks of FDI in Latin America (Figure 27) are: The privatization processes in Argentina, Peru and Venezuela in the 1990s; the entry of Mexico in NAFTA in 1994; the privatization of TELEBRAS in Brazil in 1998; the acquisition of YPF and Enersis by Repsol (Spain) in Chile and the accelerated fusion and acquisition processes in 1999; and the acquisition of the Mexican Banacci (Banamex-Accival) by the American group Citicorp in 2001 (CEPAL/ECLAC., 2002) which accounted for more than 50% of the total FDI in the country. Not only Mexico has increased its FDI inflows in 2001, FDI in Chile rose by 50% in 2001, to reach US$ 5.5 billion (UNCTAD, 2002).

Figure 27 Trends of investment inflows in Latin America, 1970-2001 (US$ million)

Source: (UNCTAD, 2002)

FDI inflows in the first quarter of 2002 were US$ 6.7 billion for Brazil (US$ 6.8 billion during the same period for 2001) and US$ 2.8 billion for Mexico. The United States received 4 times more than Brazil during the same period (US$ 24.6 billion) (UNCTAD, 2002).

Figure 28 Trends of investment net flows in Latin America, 1980-2001 (US$ million)

Source: (UNCTAD, 2002)

5.2.2 Investment sectors

Prior to the wave of liberalisation, the majority of investment targeted the manufacturing sector and aimed at penetrating highly protected domestic markets. In the 1990s, however, privatisation and the opening up of industry previously closed to foreign investment induced a much higher growth of investment in the services sector, which is usually market oriented investment (OECD, 2000).

The main FDI sector in Mexico is manufacturing which absorbed 51% of the total FDI in the country between 1999 and 2001. Services is the second main sector, with 33% of total FDI (1994-2001) being financial sector the main sub-sector (UNCTAD, 2002). In Brazil, the main FDI sector is also manufacturing which captured 33% of the FDI in 2001. Other main sectors are telecommunications and financial services accounting for 20% and10% respectively. (CEPAL/ECLAC 2002).

FDI in resource-based activities was especially important in the Andean countries. Bolivia received US$ 647 million in FDI, 50% for oil and gas extraction; Ecuador received US$ 1.3 billion, 85% of which was in petroleum; and Venezuela attracted US$ 3.4 billion in total inflows, 24% lower than in 2000, mainly for concerns over political and economy stability (UNCTAD, 2002).

5.2.3 Foreign Investors

While the United States is by far the largest investor in Latin America, Spain has become very active since the mid-1990s, especially in MERCOSUR, Chile and the Andean countries. Latin America’s share of Spain’s total FDI soared from 29% to 72% between 1990-1998 and a very large proportion of those FDI flows went to the services industry. A very large proportion of those FDI flows went to the services industry, through privatisation or M&A that became possible thanks to deregulation. Since 1996, Spain has overtaken the United Kingdom as main European investor (OECD, 2000). However, outflows from Spain almost halved in 2002, as investors cut back in Latin America, despite the large acquisitions by Telefónica. The crisis in Argentina (Box 3) resulted in heavy losses for some Spanish firms. Contrary to this trend, outflows from Italy to Argentina increased by 75 % from a relatively low level (UNCTAD, 2002).

In the second half of the 1990s, FDI inflows from the European Union grew markedly in Latin America. This trend was the result of a combination of very specific factors on both sides of the Atlantic; the rapid consolidation of the European market, liberalization of the Latin American markets and expectations of growth opened up new business opportunities in the region. Thus, at the outset, firms that faced a difficult situation in the European environment –especially Spanish and Portuguese firms– saw in Latin America a tremendous opportunity to grow. Soon after, other European companies followed the Spanish ones and currently they compete for its share in the Latin American market. A pendant assignment for European investors is Mexico where the high level of domestic content regulation in NAFTA has discouraged this capital inflow (CEPAL/ECLAC., 2002).

Within NAFTA, the flow of FDI has been highly dynamic since the beginning of the 1990s, before the signature of the treaty. In 2001 the annual FDI influx was more than US$ 24 billion, mainly because of the sale of the main financial Mexican group Banamex-Accival. This operation accounted for US$ 12.5 billion. The FDI flux from the US represented 83% of the total for Mexico in 2001 (CEPAL/ECLAC., 2002). Therefore, FDI flows continue to strengthen the consolidation of the NAFTA market, with Mexico emerging as an increasingly important partner (UNCTAD, 2002)

5.2.4 Intraregional investment

FDI of Brazil in Argentina rose from of US$ 80 million in 1993 to US$ 425 million in 1997. In the same period, the FDI of Argentina in Brazil increased from 1,1% to 2,5% of the total FDI in Brazil . Before 1986, 75% of FDI between Brazil, Argentina and Uruguay were concentrated in the service sector, particularly on finance. However, after 10 years, the intra-regional investments are concentrating on manufactures (CEPAL/ECLAC., 2002).

5.2.5 Total investment

In 2000 the average of internal investment (Gross capital formation²³) in Latin America was 21.21% and the regional indicator was slightly lower, 20.6%. For a list of the level of total investment in Latin America for 2000 see Table 17.

Table 17 Total investment in Latin America, 2000

Source: WDI 2002.

One special case referred to internal investment only is the BNDES (Brazilian Development Bank). It has financed projects for a total value of US$ 10.7 billion with emphasis on manufactures and trade and services, 51% and 36% respectively. BNDES is a major investment institution in Latin America, with a total investment 37% higher than the total IDB financing for Latin America²⁴ in 2001 (US$ 7.8 billion) (Figure 30).

The forest sector represented 5,5% of total BNDES investment and has more than doubled both its share and amount from 1999 (Figure 30).

Figure 29 Total investment in Latin America, 2000

Figure 30 BNDES investments in Brazil by sector, 2001

Source: (Ministero do Desonvolvimento, 2002)

Table 18 BNDES investment in forest sector (million of US$ and percentage)

Source: (Ministero do Desonvolvimento, 2002); (Ministero do Desonvolvimento, 2002)

Gross fixed capital represents 30% or more than their GDP for Honduras, Nicaragua, Belize and Panama. It varies between 20% and 23% for Peru, Brazil, Paraguay, Guyana, Chile and Mexico. The minimum values, 11% and 12% correspond to Suriname and Colombia, in the rest of countries it is between 14% and 17% (Bolivia, Guatemala, Venezuela, El Salvador, Ecuador, Costa Rica, Argentina, Uruguay). In monetary terms, the highest levels of gross fixed capital are found in Mexico and Brazil followed by Argentina, Venezuela and Chile (45, 21 and 17 US$ billion). It is around 10 US$ billion for Peru and Colombia and less than US$ 3 billion for the rest of countries. Belize, Guyana and Suriname have less than US$ 0.3 billion or US$ 300 million.

5.2.6 Outlook for investments in Latin America

The future investments plans are not only linked with social and economy stability, but also with the potential for economic and technological growth and development. Table 19 shows the pronounced future foreign direct investment influxes of multinational enterprises for the next five years. The services sector will be the main recipient of FDI for Latin America; electricity and telecommunications account for 44% and 17% of FDI, respectively. Oil and gas represent 15,8% of the total FDI. Infrastructure and transport account for 13,3% and the entire manufacture sector for 4,3%. This tendency confirms that Latin American countries are developing into tertiary economies or service oriented economies Figure 30. If foresters are not aware of this trend, financial opportunities for the sector could be lost.

Table 19 Future investments in Latin America by sector 2002-2006^a

Source: Adapted from CEPAL/ECLAC. (2002). “La inversión extranjera en América Latina y el Caribe”: p.15.
^a Based on announced projects between January 2001 and April 2002 by multinational enterprises.

Figure 31 Future investments in Latin America by sector 2002-2006

Source: CEPAL/ECLAC. (2002). “La inversión extranjera en América Latina y el Caribe”.

Brazil is attracting interest in both manufacturing and services, while Mexico is considered as a top destination only for manufacturing, and Chile and Argentina only for services. The most favoured countries as host destinations of FDI will be Brazil, Mexico, Argentina, Chile and Colombia for the period 2002-2005 (UNCTAD, 2002). (Figure 32 Host economies of investments in Latin America, 2002-2005

Chile is taking a different, more proactive approach towards investment. The first step of this approach towards FDI on high-technology has resulted in the opening of national office of investment promotion in Silicon Valley (CEPAL/ECLAC., 2002).

Figure 32 Host economies of investments in Latin America, 2002-2005

Source: (UNCTAD, 2002)

5.3 Competitiveness analysis of forestry for investment

Clusters are groups with intimately linked know-how and economic resources and the ability to cooperate (Ministry of Agriculture and Forestry, 2001). Forest clusters are the base of the competitiveness of the forest industry in Sweden and Finland. The IDB has recently studied the opportunities for adopting the forest cluster model in Latin America, especially in Argentina, Brazil, Chile, Colombia and Mexico (IDB, 2002).

The forest cluster concept strives to develop markets and improve competitiveness. It is focused on innovation, linkages and interdependencies and maintaining strong links that strengthen weak links that have hindered the attainment of competitiveness. Cluster analysis provides a useful theoretical framework for guiding long-term development success.

The IDB forest cluster study for LA found that there is a great potential in all five countries to develop forest clusters along the Nordic model. This is a good sign for investors in the sector. In summary:

• Brazil and Chile will be in the best position to expand their forest production, mostly due to existing, but still young, forest plantations and to a relatively stable macroeconomic development.

• Argentina has one of the best forest development potentials on the continent but unfortunately it has struggled with a political and financial crisis, which may delay the medium- and long-term investments in the forestry sector

• In Colombia, the past dynamism in forestry has produced good results. However, the current limiting factor is the civil violence and state of war in the country.

• In Mexico, the emphasis on continuing to resolve the land tenure situation and the existence of a new Strategic Plan for Mexican Forestry may provide the possibility of increasing investments in forestry and developing a vital forest cluster in Mexico.

• Any internationally competitive large industry has to be based mostly on plantation rather than on natural forest.

The IDB analysis was done using the Porter diamond model for analyzing competitiveness (Figure 33). Its mains findings by country are:

Argentin

• Potential to be a major player in forestry in LA despite its financial crisis.

• Urgency for the federal government to formulate a new policy for natural forest management and eliminate the illegalities and tax evasion of small and medium enterprises (SMEs).

• 90% of forest industry based on plantation wood and is dominated by SMEs.

• Forest investment, especially Chilean in large forest industry these play a major role in exports from forest clusters.

Brazil

• Leader in plantations development in Latin America.

• Continuous investments and research and development programs.

• SMEs in local markets niches.

• National Forest Program (2000) includes subprograms for industrial and environmental plantations to help improve wood availability and environmental services in the future.

• Tradition for receiving foreign investment.

• Negative factors: corruption, uncontrolled deforestation, unsettled land tenure issues.

• Needs improved roads, ports, communications and training and support.

Chile

• Forest cluster based on forest plantation originally established with government incentives and oriented towards export market, owned by a few internationally competitive enterprises (80% of the total plantation area) who determine wood markets and prices.

• Small domestic market but big enough to test the products.

• Present incentive scheme favours small landowners and environmental plantings.

• High prices for land and land tenure dispute in indigenous areas.

• Small number of but successful SMEs.

• Needs more support for educating forest technicians and research and development.

• Needs better roads and port facilities to support its exports.

Colombia

• Forest sector weaker than in Argentina, Brazil or Chile.

• National Forest Plan already encompasses many of the concepts of forest clusters.

• Government incentives to support industrial forest plantations.

• Needs to improve road and port facilities; vocational and educational training.

• Negative factors: Current socio-political situation.

• Positive factors: Large tropical forest areas with valuable species and outstanding biodiversity.

Mexico

• Main advantage and threat: membership in NAFTA.

• Almost entirely based on community owned natural forests, rich in resources and poorly managed.

• Strategic Plan 2001-2025.

• Needs cooperation between industry and government.

• Legal restrictions related to land tenure have impeded forest plantations development.

Figure 33 Porter diamond model for analysing competitiveness

Source: (IDB, 2002)

Table 20 Competitiveness analysis of forestry in Latin American, selected countries

Source: Adapted from (IDB, 2002), Table 4. p.54.

²⁰ ODA - Grants or Loans to countries and territories on Part I of the Development Assistance Committee (DAC) List of Aid Recipients (developing countries) which are: (a) undertaken by the official sector; (b) with promotion of economic development and welfare as the main objective; (c) at concessional financial terms (if a loan, having a Grant Element of at least 25 per cent). In addition to financial flows, Technical Co-operation is included in aid. Grants, Loans and credits for military purposes are excluded. For the treatment of the forgiveness of Loans originally extended for military purposes. Transfer payments to private individuals (e.g. pensions, reparations or insurance payouts) are in general not counted. Official Development Assistance. The DAC list could be found at www.oecd.org. Source: (OECD, 2002)
²¹ Foreign direct investment (FDI) .- investment involving a long-term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). Flows of FDI comprise capital provided by a foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by a foreign direct investor. There are three components in FDI: equity capital, reinvested earnings and intra-company loans.
²² FDI stock is the value of the share of their capital and reserves (including retained profits) attributable to the parent enterprise, plus the net indebtedness of affiliates to the parent enterprises. Source: (UNCTAD, 2002)
²³ Gross capital formation (formerly gross domestic investment) — outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including commercial and industrial buildings, offices, schools, hospitals, and private residential dwellings. Inventories are stocks of goods held by firms to meet temporary or unexpected fluctuations in production or sales, and "work in progress." According to the 1993 SNA, net acquisitions of valuables are also considered capital formation. (World Bank, Organisation for Economic Co-operation and Development, United Nations).
²⁴ And Caribbean members of the BID: Bahamas, Barbados, Haiti, Jamaica, Dominican Republic and Trinidad and Tobago.