By PAULO NOGUEIRA BATISTA JR.*
New foreign investments are presented as a seal of trust or good behavior, without taking into account that the topic is vast and controversial
Is foreign investment positive or negative for a country? As with many economic questions, the answer is: it depends. There are advantages and disadvantages. It is therefore worth examining the topic a little more closely.
It's not what is usually done. Slogans and simplifications predominate. In the government, for example, there has been a lot of buzz around the announcement of some new investments from abroad. New foreign investments are presented as a seal of trust or good behavior. “Brazil is back”, it is proclaimed. (This slogan, by the way, is one of the most worn out internationally.) Furthermore, a program was instituted, with some fanfare, that offers exchange rate protection to certain foreign investors.
The topic of the pros and cons of foreign investment is vast and controversial. I don't want to go on too long and so I select points that seem most relevant.
Allow me, reader, to be a little more technical again in this article. I'll do my best not to overcomplicate things, but there are inevitably tricky aspects. I repeat the suggestion I made on another occasion. If you are not an economist, do not be discouraged if one passage or another seems incomprehensible to you. Keep going and if you can understand, say, 70 or 80% of the text, it will have been worth it.
Positive aspects of foreign investment: facts and half-truths
I start with the potentially positive aspects of foreign investment. There are basically two: (i) investment from abroad brings in foreign exchange revenue and constitutes a type of capital contribution that, in addition to not increasing the country's external debt, covers in a relatively stable way any possible current account balance of payments deficit; and (ii) foreign investment can contribute to an increase in gross fixed capital formation, translating into an increase in the economy's potential growth in the long term.
These arguments are valid and widely publicized. These are half-truths, however. And the half truth, as Tennyson said, is more dangerous than the pure and simple lie. There is nothing worse than “true lies”, those that have some factual or logical basis, and “sincere” lies, those that are propagated with conviction.
It is a fact, yes, that foreign investment brings revenue in foreign currency and can, therefore, help finance an imbalance in the current account (the part of the balance of payments that corresponds to the trade balance, services and income). And, in fact, as receiving investment does not constitute a financial obligation, it does not increase the country's net external debt. The variation in the latter corresponds to the current account deficit deducting the net inflow of investments (direct and portfolio).
It is also true that investment can be a relatively stable way of compensating for any imbalance in external current accounts. Investments in productive capacity may even leave the country at some point in the future, but not quickly, as there are significant time lags between the decision to divest and its implementation.
More importantly: investments in productive capacity, referred to in statistics as “direct investments”, can indeed reinforce the economy's capital stock and its long-term growth.
So do these arguments seem convincing? I believe so, especially since technical terms can impress laypeople. And all the more so because Brazilians distrust what they understand and accept better what they don't understand, as Nelson Rodrigues said, pointing out one of the many facets of our mongrel complex: if I understand, the Brazilian thinks in his humility as an old dog, then It shouldn't be a big deal. Despite this, I try to clarify, showing where the gaps and fallacies are in both arguments. We will see that these arguments are only partially true.
Foreign investments and external accounts – correcting omissions
Firstly, one should not lose sight of the fact that it is of little use, from the perspective of the future commitment of external accounts, to absorb investments instead of loans. Investments are, by definition, outside the classification of external debt. They are, however, part of the broader concept of a country's net external liabilities.
This is the sum of the debt and the stock of foreign investments less the country's external assets abroad in the form of credits and investments. Debts generate interest payments; investments, profit payments and dividends. Debts have a repayment schedule; Investments can be repatriated, although without a fixed schedule.
The most comprehensive and most relevant concept, therefore, is that of net external liabilities. The increase in net external liabilities corresponds to the current account deficit. If there is a deficit, foreign liabilities grow anyway, whether as debt or as investment. Contrary to what it may seem, the differences between the two forms of capital are not always significant.
Furthermore, it is not necessarily true that foreign investment constitutes a more stable form of capital. There are two forms of investment in balance of payments statistics: direct investment and portfolio investment. Direct investment is the one potentially most linked to capital formation (or the purchase of existing productive capacity). Portfolio includes, for example, purchases by foreigners (non-residents) of shares on the country's stock exchange or acquisition of debt securities (public and private).
Portfolio capital, which may predominate in certain situations, is typically speculative or short-term. It cannot be considered stable or reliable. From this point of view, medium and long-term external debt is better.
A possible aggravating factor is that direct investments recorded in the balance of payments include an unknown portion of portfolio investments. This classification problem, raised in a recent article¹, can only be clarified with detailed access to data that only the Central Bank has.
In any case, it is important to consider that it is not advisable, in general, to run substantial deficits in current external accounts, even if covered by direct investments. stricto sensu. This is especially true in situations where important debt maturities or risks of abrupt exit of portfolio capital are added to the current deficit.
For a country that wants to preserve its autonomy, it is strategically better to clear the current account or, at most, run small deficits. In the case of Brazil, current external deficits have been modest in recent years. The Central Bank has just announced a current account deficit of 1,5% of GDP in the twelve months up to March. Investments recorded as “direct” doubled, reaching 3% of GDP.²
Foreign investments and productive capacity
Despite everything, there is no doubt that the most defensible form of external capital is that which takes the form of direct investments themselves. Having made the above reservations, direct investment stricto sensu It can, indeed, generate new productive capacity and, when it does so, it constitutes a more stable and lasting form of external capital.
Attention, however. There are prerequisites. And some questions need to be answered.
Direct investment, in the usual statistics, can not only appear mixed with some portfolio investments, as already indicated, but also includes two different types of direct investments: those that create new capacity (new companies or expansion of existing companies) and those that they simply buy pre-existing capacity. In the latter case, what occurs is denationalization of the economy (except in cases of acquisition by other foreigners of existing branches or subsidiaries of external companies).
Conceptual confusion is often great. If the investment that comes in corresponds only to the acquisition of existing companies, there is no immediate effect in terms of expanding demand and the overall rate of investment. Initially, there is a mere transfer of ownership of the installed production capacity. There will only be a real reinforcement of investment if the new owners are able and interested in expanding the companies they acquired.
By the way, there is talk of “privatization”, sometimes inappropriately, when foreign capital acquires control of state-owned companies. Now, what often happens is the purchase of Brazilian state-owned companies by foreign state-owned companies. In this case, there is no privatization at all, but pure and simple denationalization. New production capacity is not created, at least immediately, and business decision centers are transferred outside the country.
Another relevant question: when opening the economy to certain foreign direct investments, is the government concerned with establishing strategic counterparts? Does it condition, for example, authorization to invest on technology transfer commitments? Do you negotiate commitments to make purchases with national suppliers, stimulating production and job creation in the country?
China usually establishes this type of condition. Brazil, due to its size, is one of the largest recipients of foreign investment in the world. It has, in principle, bargaining power to establish requirements for technology transfer and purchases in national territory.
Guarantees against exchange rate risk
The government seems to be heading in a different direction. Instead of negotiating compensation, it offers guarantees. The offer of hedge exchange rate for financing foreign investments considered environmentally sustainable.³ A dubious decision, which still needs to be detailed and deserves more discussion. If I understand correctly, to encourage certain investments from abroad, the government nationalizes the exchange rate risk. In the event of a sharp depreciation of the Brazilian currency, the Treasury will pay the bill.
This is a program that generates fiscal risk and exchange rate risk. The risk of unexpected expenses is transferred to public coffers. If the devaluation of the national currency is greater than expected, the government incurs exchange rate and fiscal losses, that is, international reserves decrease and the public deficit increases. Interestingly, the financial market and the media, always so alarmed by the fiscal risk, seem to unreservedly support the new proposal.
Another issue, this one generally ignored: the assumption is that the investment guaranteed against exchange rate risk will in fact be additional, that is, that it would not happen in the absence of the state guarantee. Can it be ruled out, however, that beneficial investments would not occur anyway? It would be the worst of all worlds: in the hope of increasing foreign investment, the government would end up assuming the exchange rate risk of investments that would enter the country anyway. As the beneficiaries of this decision are big capital, no one protests, no one complains.
Liberal rejection of state interference
To finish, a brief comment on the Brazilian widows of neoliberalism. Representatives of this old guard could argue that trying to set conditions for investment entry violates free market rules. If they are coherent (which is not always the case) they would object, for the same general reason, to the government offering exchange rate protection to certain foreign investors.
But this liberal vision is fragile, defunct in the world, but still present in Brazil, especially in the discourse of the financial market and traditional media. Free competition in fragmented markets exists more in textbooks than in the reality of economies. In practice, what prevails is limited, oligopolitical competition between large corporations and blocks of capital.
The State participates and interferes in successful economies. And it watches, passively, inertly, in failed economies.
*Paulo Nogueira Batista Jr. is an economist. He was vice-president of the New Development Bank, established by the BRICS. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa). [https://amzn.to/44KpUfp]
Extended version of article published in the journal Capital letter, on May 03, 2024.
Notes
[1] Carlos Luque, Simão Silber, Francisco Vidal Luna and Roberto Zagha, “The enigma of direct investment in the country”, Valor Econômico, March 1, 2024, p. A14.
[2] With the aforementioned caveat that these records include a possibly unknown, perhaps significant, portion of portfolio investments.
[3] Official Gazette, Provisional measure, no. 1.213, of April 22, 2024. For a critical assessment of the assumptions of this program, see Ricardo Carneiro, “Capitalism without risk”, capital letter, April 15, 2024.
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