[stop-imf] Six Myths About the Benefits of Foreign Investment

[robert weissman]

www.counterpunch.org
Independence Day Weekend Edition
July 2 / 4, 2005
Six Myths About the Benefits of Foreign Investment
The Pretensions of Neoliberalism
By JAMES PETRAS

There are several myths about foreign investment propounded by orthodox
economists, publicists for multinational corporations, and the press:

Myth #1 - Foreign Investment (FI) creates new enterprises, gains or expands
markets and stimulates new research and development of local technological
'know-how'.
In fact most FI is directed toward buying privatized and profitable
existing
public enterprises and private firms, taking over existing markets and
selling or renting technology designed and developed at the "home office".
Since the late 1980's over half of foreign investment in Latin America was
directed toward purchasing existing enterprises, usually at below market
valuation. Instead of complementing local public or private capital, FI
"crowds out" local capital and public initiative and undermines emerging
technological research centers.
With regard to market expansion, the record is mixed: in some sectors where
public enterprises were starved for funds, like telecommunications, the new
foreign owners may have expanded the number of users and enlarged the
market. In other cases, like water, electricity and transportation, the new
foreign owners have reduced the market, especially to low-income
classes, by
raising charges beyond the means of most consumers.
The experience with foreign invesment and technological transfers is
largely
negative: over 80% of research and development is carried out in the main
office. The "transfers of technology" is the rental of sale of techniques
developed elsewhere, rather than local design. The multinationals usually
charge subsidiaries excess royalty fees, service and management costs, to
artificially or fraudulently lower profits and taxes to local governments.

Myth #2 Foreign invesement increases the export competitiveness of an
industry, and stimulates the local economy via secondary and tertiary
purchases and sales.
In reality foreign investors buy up lucrative mineral resources and export
them with little or no value added. Most of the minerals are converted into
semi-finished or finished value added goods - processed, refined,
manufactured - in home countries or elsewhere, creating jobs, diversified
economies and skills. The privatization of the lucrative giant iron mine
Vale del Doce in Brazil in the 1990's has led to huge profits for the new
owners and the sale of raw ore overseas, particularly to China in the 21st
century. China converts iron ore to steel for transport, machine industries
and a host of job-generating metallurgical enterprises. In Bolivia, the
privatization of the gas and petrol industry in the mid 1990's has led to
billions in profits in the 21st century and the loss of hundreds of
thousands of jobs in processing and conversion of petroleum and gas into
value added goods, plus failure to supply local low-income consumers. The
extraction of raw materials is capital intensive using few workers.
Processing and manufacture is more labor intensive and job creating.

Myth # 3 Foreign investors provide tax revenue to bolster the local
treasury
and hard currency earnings to finance imports.
The reality is foreign investors engage in tax frauds, swindles in
purchasing public enterprises, and large scale money laundering.
In May 2005, the Venezuelan government has announced billion-dollar tax
evasions and frauds committed by major overseas petroleum companies which
signed on to service contracts since the 1990's. The entire Russian
petroleum and gas sector was stolen by a new class of billionaire robber
oligarchs, associated with foreign investors, who subsequently evaded
taxes,
as illustrated by the trial and conviction of two oligarchs, Platon Lebedev
and Mikhail Khodorkovsky for $29 billion in tax evasion facilitated by US
and European banks.
The impact of the multinational corporations on the balance of payments
over
the long run is negative. For example, most assembly plants in export zones
import all their inputs machinery, design and know-how and export the
semi-finished or finished product. The resulting trade balance depends on
the cost of the inputs relative to the value of exports. In many cases the
imported components charged to the local economy are greater than the value
added in the export zone. Secondly most of the revenues from the export
platform accrue to the capitalists since the key to success is low wages
leading to the creation of personal empires.
The Brazilian experience over the past decade and a half illustratives the
negative external balances resulting from foreign investment and externally
funded investment. In 2004 Brazil paid foreign bankers $46 billion (USD) in
interest and principle while receiving only $16 billion dollars in new
loans, leading to a net outflow of $30 billion dollars. (2) Between January
and April 2005 Brazil was bled for $4.6 billion (USD) in interest payments,
$3.7 billion in profit remittances by multinational corporations, $1.7
billion for 'external services' and $7.3 billion in payments of
principle in
the debt. (3) The total drain of $17.3 billion dollars far exceeded the
positive commercial trade balance of $12.2 billion dollars. (4) In other
words, the FI-led export model led to new indebtedness to pay for the
shortfall, the loss of employment by small and medium farmers at the mercy
of the agro-business elites and the destruction of the environment.

Myth #4 - Maintaining debt payments is essential to securing financial good
standing in international markets and maintaining the integrity of the
financial system. Both are crucial to sound development.
The historical record reveals that incurring debt under dubious
circumstances and paying back illegally contracted loans by
non-representative governments jeopardized the long-term financial standing
and integrity of the domestic financial system and led to a financial
collapse, as displayed in he Argentine experience between 1976-2001.
A substantial part of the public external and internal debt was illegally
contracted and had little development utility. A lawsuit launched by an
Argentine economist, Olmos, against payment of the Argentine foreign debt
revealed that the foreign private debts of Citibank, First National Bank of
Boston, Deutsch Bank, Chase Manhattan Bank and Bank of America were taken
over by the Argentine government. (5) The same is true of debts of
subsidiaries of overseas banks. The Olmos lawsuit also documented how the
Argentine dictatorship and subsequent regimes borrowed to secure hard
currency to facilitate capital flight in dollars. The foreign loans went
directly to the Central Bank, which made the dollars available to the rich
who recycled the dollars to their overseas accounts. Between 1978-1981 over
$38 billion USD fled the country. Most of the foreign loans were used to
finance the "economic" openings, luxury imports and non-productive goods,
especially military equipment. The Olmos case pointed to a perverse source
of greater indebtedness: the Argentine regime borrowed at high interest
rates and then deposited the funds with the same lender banks at lower
interest rates leaving a net loss of several billion dollars, added to the
foreign debt.

Myth # 5 Most Third World countries depend on foreign investment to provide
needed capital for development since local sources are not available or
inadequate.
Contrary to the opinion of most neo-liberal economists, most of what is
called foreign investment is really foreign borrowing of national
savings to
buy local enterprises and finance investments. Foreign investors and MNCs
secure overseas loans backed by local governments, or directly receive
loans
from local pension funds and banks =AD drawing on the local deposits and
worker pension payments. Recent reports on pension fund financing of US
MNCs
in Mexico shows that Banamex (purchased in the 21st century) secured a 28.9
billion peso (about $2.6 billion USD) loan, American Movil (Telcel) 13
billion pesos ($1.2 billion USD), Ford Motor (in long-term loans) (9.556
billion pesos) and one billion pesos (in short term loans), and General
Motors (financial sector) received 6.555 billion pesos. (6) This pattern of
foreign borrowing to take over local markets and productive facilities is
common practice, dispelling the notion that foreign investors bring "fresh
capital" into a country. Equally important, it refutes the notion that
Third
World countries "need" FI because of capital scarcity. Invitations to FI
divert local savings from local public and private investors, crowd out
local borrowers and force them to seek 'informal' money lenders charging
higher interest rates. Instead of complementing local investors FI compete
for local savings from a privileged position in the credit market, bringing
to bear their greater (overseas) assets and political influence in securing
loans from local lending agencies.

Myth #6 =AD The proponents of foreign investment argue that its entry serve=
s
as an anchor for attracting further investment and serves as a 'pole of
development'.
Nothing could be further from the truth. The experiences of foreign-owned
assembly plants in the Caribbean, Central America and Mexico speak to the
great instability and insecurity with the emergence of new sources of
cheaper labor in Asia, especially China and Viet Nam. Foreign investors are
more likely than local manufacturers to relocate to new low-wage areas,
creating a "boom and bust" economy. The practice of FI, in Mexico, the
Caribbean and Central America, faced with competition from Asia, is to
relocate, not to upgrade technology and skills or to move up to quality
products. Finally a long-term study of the impact of foreign investment on
development in India has found no correlation between this foreign
investment and growth. (7)

In sum, reliance on foreign investment is a risky, costly and limiting
development strategy. The benefits and costs are unevenly distributed
between the "sender" and receiver. In the larger historical picture it is
not surprising that none of the early, late or latest developing countries
put foreign investment into the center of their development scheme. Neither
the US, Germany and Japan in the 19th and 20th century, nor Russia, China,
Korea and Taiwan in the 20th century depended on it to advance their
industrial and financial institutions. Given the disadvantages cited in the
text, it is clear that the way ahead for developing countries is
throughminimizing it and maximizing national ownership and investment of
local financial resources, skills and enlarging and deepening local and
overseas markets through a diversified economy.
Because the negative economic, social and political costs of foreign
investment are evident to increasing numbers of people in the Third World,
particularly in Latin America, it is a major detonator of mass social
movements, and even revolutionary struggles, as is the case in Bolivia
during 2005. Since FI is a direct result of political decisions adopted at
the highest level of government, mass social struggles are as much or even
more so directed against the incumbent political regime responsible for
promoting and mollycoddling foreign investment. The increasing turn of
social movements toward political struggles for state power is directly
related to the increasing recognition that political power and foreign
investment are intimately connected. In the 21st century, at least in Latin
America, all of the electoral regimes, which have been overthrown by
popular
majorities, had deep structural links to foreign investment: Gutierrez in
Ecuador, Sanchez de Losada and Mesa in Bolivia and Fujimori in Peru.
The leader with the greatest sustained support in Latin America, President
Chavez in Venezuela, is precisely the only one who has increased
regulations
and taxes on foreign investment and redistributed the increased revenues to
the poor, working class and peasants. The question still remains whether
this new infusion of energy and class awareness can go beyond defeating
pro-FI regimes to constructing a state based on a broad alliance of class
forces, which goes beyond 'nationalization' and toward a socialist economy.

James Petras, a former Professor of Sociology at Binghamton University, New
York, owns a 50 year membership in the class struggle, is an adviser to the
landless and jobless in brazil and argentina and is co-author of
Globalization Unmasked (Zed). His new book with Henry Veltmeyer, Social
Movements and the State: Brazil, Ecuador, Bolivia and Argentina, will be
published in October 2005. He can be reached at: jpetras@binghamton.edu

Notes
(1) Paul Doremus et al, Myth of the Global Corporation, Princeton:
Princeton
University Press 1998
(2) Boletin: Cedada da Divida No 12, May 31, 2005, p2
(3) Ibid p2-3
(4) Ibid p2-3
(5) Cited in Boletin p6
(6) La Jornada June 7, 2005
(7) Tanushree Mazumdar, "Capital Flows into India", Economic and Political
Weekly, Vol XL No 21, p2183-2189