Investment and Economic Reform in Latin America

Abstract:
One of the major objectives of economic reforms in Latin America was to boost the level of investments. Several reform measures like trade liberalization. Tax relaxations, deregulation and labor market reforms were undertaken to realize this objective. While the level of investment declined in the initial stages of economic reforms, it grew significantly in the later stages.
The economic reforms in Latin America had significant impact on the level of investment. The reforms undertaken in the 1980s and 1990s induced several changes in the structure and functioning of the Latin American economies. Specific reform measures were undertaken to boost the level of investments.

Important among them are –
Trade liberalization.
Tax relaxations on profit.
Deregulation.
Labor market reforms.

The effects of economic reforms on investment was noticeable in eight countries – Argentina, Brazil, Colombia, Mexico, Costa Rica, Bolivia, Chile and Peru. These eight countries are the economically most important ones in the Latin American economy, accounting for 90% of the total Latin American GDP and 80% of the Latin American population.
Factors affecting investment during economic reforms in Latin America

The relationship between economic reforms and investment in Latin America has been influenced by three important factors –
Uncertainty prevailed in the making of investment decisions in those economies that were late to adopt economic reforms. Argentina, Columbia, Peru and Brazil initiated reforms as late as the 1990s and hence they did not get enough time to settle into a new economic set up. This caused uncertainty in investment decisions.
All reform measures were not taken up simultaneously. Most Latin American countries took a gradual approach to reforms. While foreign trade was liberalized in the initial stages, measures like privatization and labor market reforms were taken up only in much later stages. This again affected the level of investments.
Slow development of the economic reform process in Latin American economies negatively affected the efforts to boost investment.

Decline of investment in initial stages
In Latin America, the uncertainties in the initial stages of economic reforms caused investments to decline.

These uncertainties cast negative influences on the investment decisions of firms in the following ways –
Immense caution was exercised by firms in taking investment decisions. The socio-economic situation, political scenario, sustainability concerns and potential competition in the market, were major influencers behind the cautious approach of firms to investment.
In the case of privatization of public sector units, investment was delayed because the firms wanted to rationalize the process of production before investing. This included measures like retrenchment of workforce, new production techniques, etc. However in many Latin American countries these measures could not be adopted in the initial stages of reforms which resulted in delay in the inflow of investments.

Rise in investments in later stages
In the later stages, economic reforms boosted the level of investments in many Latin American countries.

The major factors behind the boost to investment are –
Economic reforms enabled enterprises to bring down cost of production thereby increasing competitiveness and profitability. This led to increase in investments.
Trade liberalization led to expansion of exports in many Latin American countries. This increased investments in the export based industries.
Economic reforms encouraged the growth and expansion of private enterprises. The potential to earn higher profits motivated big firms to expand and diversify further thus increasing their investments.
In many countries of Latin America, privatization was taken up in the later stages of economic reforms. In certain cases privatization contracts included investment commitments thereby leading to increase in investments.

 

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Last Updated on : 26th June 2013

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