The Political Economy of Foreign Investment in Latin America

Abstract

Examination of foreign investment inflows, stock, and outgoing profit flows from Latin America in the neoliberal period shows that the basic tenet of the dependency thesis still holds: there is a huge and underreported transfer of surplus value out of the continent. European capital has overtaken U.S. capital as a source of investment, and within the Andean region there are two distinct groups of countries with regard to investment regime: the Andean nations of the Alianza Bolivariana para los Pueblos de Nuestra América (Bolivia, Ecuador, and Venezuela), which have succeeded in increasing the proportion of surplus profits retained in their national economies against that part captured by international capital, and their non-ALBA neighbors. A new dialectic of domination and dependency is at work, with the focus on contesting bilateral free-trade agreements and investment treaties.

Un análisis de la inversión extranjera, las acciones y el flujo de beneficios externos producidos en América Latina durante el período neoliberal muestra que aún se mantiene el principio básico de la tesis de la dependencia: hay una enorme transferencia de plusvalía fuera del continente, una buena parte de la cual no se reporta. El capital europeo ha superado al capital estadounidense como fuente de inversión y, dentro de la región andina, hay dos grupos de países con distintas estrategias en relación al régimen de inversiones: en el primero están los miembros de la Alianza Bolivariana para los Pueblos de Nuestra América (Bolivia, Ecuador y Venezuela), que han logrado aumentar la proporción de excedentes retenidos en sus economías nacionales en relación a la parte capturada por el capital internacional; en el segundo, sus vecinos que no pertenecen a ALBA. Aquí se está desarrollando una nueva dialéctica de dominación y dependencia centrada en la disputa alrededor de acuerdos bilaterales de libre comercio y tratados de inversión.

Keywords

Foreign direct investment Dependency Europe Regime of accumulation

At the turn of the millennium it was fitting to present Latin America as a continent poised at the crossroads, trying to decide the direction it would take. At issue was whether countries would accept, reject, or accommodate the United States’ grand plan, the Free Trade Agreement of the Americas (FTAA). The agreement was defeated, but the strategic threat behind it has taken on new forms. While the specific indecision of that historical moment has passed, the rift that it fostered has continued to grow as each government determines its development strategy.

The international economic context has for the past decade been set by the prolonged boom in commodity prices that fuels expanding production in China and India. Global competition has shaped sectors in Latin American countries depending on whether they are competing with or supplying materials for the new production platforms in Asia. Large parts of South America have experienced an upsurge in export-oriented production, with the primary sectors attracting large-scale foreign capital investments and, in Brazil, domestic capital as well. This has meant the return, especially in the smaller, less industrialized countries, of a dependent extractive economy based on the export of nonrenewable natural resources. The question is not simply how Latin America has been reincorporated into the global economy but how global capital has reinserted itself into Latin America, exploiting labor and land, in the current conditions. Out-transfers of value are leaving the popular classes just as impoverished as before, with the additional legacies of dispossession and environmental destruction, except where national governments have taken programmatic action to break the cycle of capitalist underdevelopment.

The Andean countries are a case in point. The political dynamics of the subregion have been marked by a polarization between Chile, Peru, and Colombia, on the one hand, and Venezuela, Bolivia, and, more equivocally, Ecuador, on the other. One point of difference between the groupings concerns the political economy of foreign investment. This article uses quantitative data as evidence of a distinction between the former group, which is openly collusive with foreign capital, and the latter, which seeks to regulate and contain the penetration of global capital. Two political-economic models are rubbing against each other in permanent friction, giving rise to a new level of indeterminacy and, as with a geological fault line, a constantly threatening tension.

The 2008 financial crisis in the United States and Europe and ensuing austerity offensives amplify the resonance of any popular gains in Latin America, adding to the sense that there are more definitive battles to come—events that will decide whether history repeats itself with yet another catastrophic defeat for the left or whether it will be possible to consolidate a completely distinct political economy that opens new possibilities beyond capitalism.

Modernization vs. Dependency Revisited

There is a commonality between the current cycle of capitalist development and previous cycles. From the multidimensional and often confused discussion of globalization themes, a contest has emerged that revisits the debates between the modernization and dependency paradigms of the 1960s and 1970s. The modernization school was represented by John F. Kennedy’s presidential adviser W. W. Rostow (1990 [1960]), who argued that developing countries would have to modernize their traditional social forms, behaviors, and institutions, following the same road as the rich, industrialized countries of the North, as a precondition for the “takeoff” of their economies. The dependency school emerged in clear opposition to this view, holding that exploitative relations exist between the rich countries at the center of the world system and the poor countries in the periphery. As a leading dependency writer put it, underdevelopment is “a consequence and part of the process of the world expansion of capitalism,” with a “transfer of resources from the most backward and dependent sectors to the most advanced and dominant ones” (Santos, 1970: 231).

Modernization is the ideological self-expression of foreign capital that sees itself as the positive subject bringing progress. The return of the modernization paradigm and its fight for hegemony is theorized in recent work by writers of the center-right (Edwards, 2009; 2010; Fukuyama, 2008; Reid, 2007). Presenting itself as the challenger to a radical and romantic but essentially outmoded populist orthodoxy, the right has thrown down the gauntlet. According to Edwards (2009: 31), “The idea that Latin America’s long-term decline is the result of a vast Northern, capitalistic, and Anglo Saxon conspiracy, simply, doesn’t hold any water. The causes of the region’s mediocre economic performance have to be looked for inside of Latin America.” Michael Reid adds, “Latin America has moved on. . . . It is no longer the Latin America of Galeano, brilliant propagandist though he is, for a particular vision of history.”¹ The modernizers’ problematization of underdevelopment focuses on bad governance or, as Edwards puts it, “poor policies and weak institutions.” It follows that, to succeed, Latin American countries should adopt “good governance” and “strong policies” and reform their institutions. Governments will deserve these positive adjectives only insofar as they open their markets and encourage foreign trade and investment (Fukuyama, 2008: 282). Thus, although the role of foreign capital is but one point in a development strategy, it is the pivot around which the entire debate revolves.

The dependency paradigm generated a vast literature (see Chilcote, 2003). In his classic article, Theotônio dos Santos (1970: 231) says that dependency is “a situation in which the economy of certain countries is conditioned by the development and expansion of another economy to which the former is subjected.” There was within the dependency paradigm a wide-ranging debate as to the causes and mechanisms of the dependent condition. The Marxist wing sought to ground dependency in a class analysis of exploitation, leading to a reformulation of the concept even at its most general level. Thus, Enrique Dussel (2001: 205) emphasizes that dependency is an “international social relation” and identifies the essence of the concept as the “transfer of surplus value” out of the dependent region. According to dependency theory, the empirical issue of value transfer is a crucial demarcation. Value transfer is an area in which apparently simple quantitative differences can represent fundamentally important categorical differences. The dependency school argues that systemic value extraction generates underdevelopment or, at best, conditions a dependent development. Foreign investment specifically is reliant on a bipolar relation; investments that flow in do so only on the condition that profits are made and flow back to the investing party. Rather than deny this, modernizers are content to leave the issue of profit flows in the background.

The modernizers’ bluster is especially marked when it comes to the role of foreign direct investment (FDI). FDI is conventionally defined as ownership by a foreign party of 10 percent or more of an enterprise, enough to give it a “lasting interest” (OECD, 2001). Modernizers deem FDI essential for development. Railing against what they consider to be the harmful residual influence of left-wing dependency thought, they claim that “the facts” are on their side. Reid (2007: 39) portrays the dependency school as “a theory in search of facts” and argues that dependency theorists “employed ad hoc reasoning, such as the notion that foreign investment decapitalized Latin America because the value of repatriated profits over time might exceed the value of the original investment. This confused a stock and a flow.” He is mistaken: dependency theory does not claim that foreign investment has “decapitalized” Latin America. Rather, it claims that foreign investment has exploited Latin America—that predatory capitalism has meant that a significant portion of the value produced in the region is transferred out of it as profit. In short, dependency theory does not confuse FDI stocks with FDI flows. Reid’s own error is, however, more basic: he fails to distinguish qualitatively between FDI flowing in as capital seeking profit and the realized dividends and other profits flowing out. Ignoring outgoing profit flows is a crucial feature of the right’s version. Reid sees multinationals as positive agents, albeit with a few flaws; he denies the extractive and exploitative character of the investment relationship. What he ignores is the raison d’être for these investments: that they generate a return on the capital invested. In fact, this is only partially measured by the profit revenues flowing out of Latin America.

This article argues for a restatement of the dependency thesis appropriately adapted to the specific conditions of underdevelopment in the neoliberal period. It disputes the modernizers’ central thesis that foreign investment is in and of itself beneficial. A fuller challenge would require an evaluation of the social and environmental effects of foreign investment that is beyond the scope of one article. Here I concentrate on establishing the quantitative aspects of financial flows as a point of departure in a wider debate.

The article actualizes Dussel’s general concept of dependency as value transfer. It asks how big the profits from FDI are and where they are going. It then focuses on the sharp differentiation in the Andean region between two types of investment regime. The argument rests on interpreting the economic indicators on international transfers and falls into three parts. First, there has been a truly dramatic upsurge in European Union (EU) direct investment in the region; European capital has become a major beneficiary of value transfers out of Latin America. Secondly, the splitting of the Andean countries into two camps is demonstrable in the pattern of investment flows and especially of repatriated profit flows. Thirdly, these measures are the leading edge of a “free-trade” architecture designed to consolidate and deepen neoliberalism.

On the Particularity of Neoliberalism as a Phase

Adopting the insights of the dependency thesis does not entail assuming that nothing has changed in the region. Indeed, the neoliberal project over the past two decades has clearly been to open up new fields for capital accumulation in Latin America, especially through the programmatic commitment to privatization. Echoing Harrison’s (2010) description of the neoliberal project in Africa as a form of social engineering, I suggest that neoliberalism in Latin America tends toward political re-engineering, a common project of an ensemble of right-wing forces seeking to establish stable state regimes that will be conducive to profitable capital accumulation over the next generation. These new regimes of capital accumulation are not at all laissez-faire; if anything, they tend toward a strand of neoconservatism in which the government goes on the offensive against any opposition.

The project is quite traditional in its economics, entailing the subordination of all policy objectives to investment-led, export-oriented growth. Its innovative elements are the transnational coordination of specific political mechanisms required by the new regime of accumulation in the form of free-trade and investment agreements backed up by national and supranational institutions and intense ideological framing of the project that is intolerant of social sectors that are not in line with it. With the more democratically representative branches of the liberal state subordinated to the executive, sectors are marked as illegitimate political actors and their political expression delegitimized, isolated, and criminalized while multinationals are guaranteed privileged access and secure and high profits. Free-trade and investment agreements from the United States and, increasingly, the EU are crucial mechanisms in the new regime of accumulation (see Latimer, 2012).

The FTAA was thwarted by a combination of popular mobilization and progressive government action that reached its height in 2003 and 2004. Despite President Bush’s evident discomfort at the loss to U.S. prestige, his policy team immediately moved to a “plan B” strategy of signing bilateral agreements with friendly governments in the region. Building on the basis of the North American Free Trade Agreement (the economic bloc between the United States, Mexico, and Canada that has been in force since 1994), the United States has driven its new bilateral strategy hard, implementing an agreement with Chile in 2004 and then, with far more evident opposition, with five countries in Central America and the Dominican Republic in 2006. Today, free-trade agreements and bilateral investment treaties play a role analogous to the structural adjustment programs of the 1980s or, in the case of Africa, the Highly Indebted Poor Countries initiative, which sought to “‘lock in’ neoliberal fundamentals” (Harrison, 2010: 43).

Choosing and Reading the Economic Indicators

At first sight the aggregate economic indicators suggest that Latin America has done well in the new millennium, with aggregate growth of the gross domestic product (GDP) averaging around 4 percent from 2002 to 2011 despite the dip in 2009 (World Bank, 2012). The growth has been mostly led by exports in primary and raw materials fueled by burgeoning demand from China and by remittances from emigrants. As Pérez Caldentey and Vernengo (2008: 1) write, “Latin America now exports commodities and people.” They show that oil-exporting countries have seen rising prices (as have mineral exporters) while the textile-exporting countries of Central America have seen declining ones. Overall, there has been a return to the orthodox model of export-oriented growth. But does this constitute development? In order to understand the debate about development and growth, we need to reexamine some of the standard indicators.

The Economic Commission for Latin America and the Caribbean (ECLAC), the UN development agency, provides data based on returns from national governments. ECLAC analysts draw attention to the dependency concept of “net resource transfers” defined as “net capital inflows less net interest and other investment income payments abroad” (Bárcena and Titelman, 2009: 9). Notoriously, because of its onerous debt repayments, Latin America suffered hugely negative “net resource transfers” in the 1980s; it paid out (many times over) against its debt liabilities amounts of money far higher than any incoming investment. By contrast, the neoliberal investment boom of the early 1990s meant a positive “net resource transfer,” with much more capital flowing in than going out (ECLAC, 2009: 161). From the early 2000s there is once again a net transfer out of the region, with repatriated profits considerably exceeding new investment; “the net transfer of resources turned negative in 2002 and has averaged US$ billion 72 annually for the period 2002–2008”(Bárcena and Titelman, 2009: 9).

Net resource transfer is a blunt instrument that needs to be disaggregated to grasp the underlying movements. We need to interrogate the data in more detail to discover where the transfers are coming from and where are they going. The sources used are ECLAC, the UN Conference on Trade and Development (UNCTAD), the U.S. Bureau of Economic Analysis (BEA), and the EU’s Eurostat service. They are all compiled in terms of the IMF standard set of definitions for national accounts (IMF, 1993). Because the data from the BEA and Eurostat show considerable change from the first year to the second year of reporting, using data from the second year avoids the worst fluctuations. This means, however, that data are included only up to 2010, even though in 2011 there was a significant increase in FDI flows into Latin America and the Caribbean, estimated at 27 percent (UNCTAD, 2012a: 3).

In my computations of the source data to make the information more digestible, discrepancies or errors of interpretation may have been introduced with regard to the originating countries and destination countries included, the monetary unit of the indicators, and the definition of the indicator. The originating countries included are limited to the United States and the EU countries, which between them source about three-quarters of the FDI in the period under consideration. This is because the United States and the EU provide data indicating the rate of return on their investments. A complete analysis would need to interrogate the national accounts of all originating countries. For the destination countries there is a major transparency issue. Flows through Caribbean offshore financial centers (Anguilla, Bermuda, the Cayman Islands, the Virgin Islands, and, arguably, Panama), where the identity of the originating and destination countries is kept opaque, have become huge since around 2005. For example, some 27 percent of nonpetroleum foreign investment in Colombia from 2006 to 2010 entered via the Antilles and Panama, but their ultimate origin is not recorded (ProExport Colombia, 2012). Woodward (2001: 25) observes that the growing incidence of offshore banking contributes to the apparent statelessness of corporations. Corporations using offshore centers are, however, not so much stateless as tax-averse (Shaxson, 2011). This phenomenon accelerated in the first decade of the twenty-first century. By 2008, U.S. flows into Bermuda (US$7.8 billion) and the UK’s Caribbean islands (US$25.9 billion) were far greater than U.S. investment flows into the whole of Latin America combined (US$19.9 billion) (BEA, 2012a). At the same time there has been a change in the form of the investment vehicle, with investments made through holding companies rising from 9 percent of outward investments in 1982 to 36 percent in 2008 (Ibarra and Koncz, 2009: 25). The Caribbean islands are for the most part excluded from the aggregate data presented here, but the “Bermuda triangle” money flows are now so enormous that the conclusions of any analysis that cannot identify ultimate sources and destinations are no more than indicative.

There are differences in the countries included in the regional aggregations. The EU and U.S. statistical services report Guyana and Surinam as part of South America. ECLAC reports Guyana and Surinam as part of the Caribbean and consequently does not include them in its aggregate figures for Latin America. Guyane (French Guyana) does not appear in the data. ECLAC figures report Haiti and Cuba separately, whereas the U.S. figures do not. The EU includes Haiti as part of the Caribbean and Cuba as part of Latin America, and so on. At the same time, the EU has grown in the period under consideration from 15 to 27 affiliated states. EU figures are for all of the countries included in the EU in any given year. Important though these differences are politically, it is estimated that they cause only minor discrepancies in the data and certainly much less than the offshoring of investment flows.

The monetary unit of the indicator is in most cases U.S. dollars. The EU’s statistics are in euros and are converted here into U.S. dollars at an exchange rate appropriate to the specific item—at the end of the year for investment stocks and an estimated average over the year for flows. The convention followed here is that a billion is a thousand million.

The definitions of the indicators are conceptually grounded in free-market ideology. This does not invalidate their use, but critical qualifications are made in the following presentation.

U.S. and EU Investments: Flows in, Stocks and Profits out

In the first decade of the twenty-first century, the EU was the biggest source of FDI to Latin America and the Caribbean, with about 40 percent of the total. The United States and Canada invested 28 percent, and there was a small but increasing share from Oceania and Asia (Table 1). Starting with investment flows into Latin America, from 1997 to 2010 U.S.-based and EU-based multinationals directly invested between them a total of US$588.6 billion (Figure 1). The overall pattern is an investment boom in the late 1990s, collapse of investments in the early 2000s (with a net disinvestment of U.S. capital from South America in 2002) and a buildup again to 2007, a wobble as the financial crisis began to hit at the end of 2008, and finally the beginnings of recovery.

Table 1

Origins of Foreign Direct Investment (Percentages) in Latin America and the Caribbean, 2000–2010

	2000-2005						2006-2010
	U.S. and Canada	EU	Latin America and Caribbean	Asia and Oceania	Other	Total	U.S. and Canada	EU	Latin America and Caribbean	Asia and Oceania	Other	Total
Latin America	37.8	43.2	5.3	2.6	11.1	100.0	28.2	40.0	8.5	6.2	17.1	100.0
Brazil	22.2	53.9	3.9	4.7	15.4	100.0	14.4	44.6	5.3	13.6	22.2	100.0
Mexico	58.9	33.7	1.2	2.0	4.2	100.0	49.4	43.3	1.4	0.9	5.0	100.0

Source: ECLAC (2012a: 64).

Figure 1.

FDI Flows into Latin America: U.S. vs. EU Origin, 1997–2010 (BEA, 2012a; Eurostat, 2012; and author’s computation)

It is clear that the EU overtook the United States as the main origin of FDI in Latin America during the period. Starting from similar inward investment flows in 1997, the investment flows from EU-based multinationals were greater than flows from the United States each year. Over the five years 1998–2002 EU-based multinationals invested far more heavily. Within the EU, Spain emerged as a major source of FDI to Latin America, surpassing the United States in 1999 and 2000. Spanish investments declined over the next five years but nonetheless still run at about a third of all EU investment. The reduced inflow of FDI from the EU in 2008 is partly due to the behavior of what the statisticians call “Special Purpose Entities” (SPEs). SPEs are “often empty shells or holding companies” (Eurostat, 2010) that are not reported in EU national data. According to Eurostat there was “a large amount of disinvestment by SPEs, mainly from the Netherlands, which is not explicitly shown in the tables but in fact reduces the EU total” (European Statistical Data Support, personal communication, May 17, 2010). In other words, opaque investment flows through financial centers operate increasingly inside the EU itself as well as through physically offshore locations, and this presents a statistical challenge (ECLAC, 2012a: 67).

The year-on-year annual investment flows aggregate into assets held in a country, becoming FDI stocks, with appropriate adjustments for capital gains, retained profits, and other factors. FDI stock is also known as the “foreign investment position” when viewed from the perspective of the source country. The combined investment position of the United States and the EU in Latin America, calculated on a historical cost basis, more than tripled, from US$191.8 billion to US$756.2 billion, between 1997 and 2010. Whereas U.S.-owned FDI stocks in Latin America doubled in this period, EU-owned stocks increased sixfold.

The investment surge from EU countries in the late 1990s meant that by the turn of the millennium the EU’s position in the region overtook that of the United States and has continued to climb. At the beginning of the period U.S.-based multinationals held two-thirds more assets than EU-based multinationals; by 2010 EU-based multinationals had nearly double the Latin American direct investment stock of their U.S. counterparts (Figure 2). According to its national accounts, Spain’s investment position in Latin America at the end of 2010 stood at stock assets valued at 125.1 billion euros (US$215.3 billion), making Spanish-based multinationals owners of 42 percent of all EU stock in Latin America (Banco de España, 2012: 140). The Netherlands is another significant EU source of FDI; between 2005 and 2010 its investments in Argentina, Brazil, and Mexico totaled US$51 billion (ECLAC, 2012a: 64–65).

Figure 2.

FDI Stock (Investment Position) in Latin America: U.S. vs. EU, 1997–2010 (BEA, 2012b; Eurostat, 2012; and author’s computation)

The crucial indicator ignored by Reid in his polemic against dependency theory is the flow of investment income out of Latin America. The headline figure is that U.S.-based and EU-based multinationals extracted a total of US$477.6 billion in direct investment income out of Latin America between 1997 and 2010. For the period as a whole, U.S. investment income, at US$250.8 billion, exceeds that of its EU counterparts, with US$226.8 billion. Here again, however, the rise of EU-based multinationals is marked, starting from only a third of U.S. investment income in 1997, when the EU’s heavy investments of the late 1990s began to generate revenue streams back to their owners, and ending with profits similar to those of U.S. corporations from 2005 on (Figure 3).

Figure 3.

FDI Income from Latin America: U.S. vs. EU Destination, 1997–2010 (BEA, 2012c; Eurostat, 2012; and author’s computation)

The rule-of-thumb calculation conventionally used for the aggregate rate of return on FDI is to divide the repatriated profits in one year by the FDI stock at the end of the previous year, expressed as a percentage. The combined U.S. and EU FDI stock in Latin America at the end of 2009 of US$661.8 billion generated profit revenue of US$66.7 billion in 2010, an apparent overall rate of return of 10.1 percent on capital invested. It is striking that U.S. profits drawn out of Latin America have stayed on a par with EU profits despite the relative diminution of U.S. investment stock.

The profit generated by a subsidiary includes the earnings reinvested in it as well as the dividends that are repatriated to the foreign investor. Among Latin American countries, only Brazil does not keep track of this figure (ECLAC, 2012b: 67). The proportion of reinvested earnings has grown considerably in recent years, representing 45 percent of FDI flows to South American countries other than Brazil in 2003–2011 (UNCTAD, 2012a: 53). To the degree that reinvested earnings have been growing, there is a diminishing proportion of incoming FDI that is actually new investment. The reinvested earnings of U.S. corporations in Latin America were 89.4 percent of all U.S. FDI from 2003 to 2010 (BEA, 2012d). A consequence of the reinvestment has been the pronounced accumulation of foreign assets inside Latin America, building a permanent economic presence as a claim on future profits and political pressure that is accommodated to different degrees from one country to another.

Investment Profiles of Latin American Countries

Next we look at the figures from the Latin America side of the investment relation and ask where in Latin America the burgeoning FDI profits have come from. To explore this question I introduce another standard indicator, “FDI intensity,” which shows for each country the ratio of incoming FDI stock to GDP and is conventionally taken as an indicator of how “open” an economy is (Eurostat, 2010). Taken on its own this indicator is subject to various qualifications, especially concerning the use of GDP as a measure of value added in production (Smith, 2010). Furthermore, “open” is of course an ideologically weighted term suggesting positivity against the negative of “closed.” The differential incidence of the neoliberal model is well illustrated by a summary of stocks of incoming FDI compared with GDP in different Latin American countries from 1990 to 2010 (Table 2). The overall pattern in the 1990s is of a rapid opening up of South America to foreign investments; the regional ratio of FDI stock to GDP increased by two and a half times, from 9.6 percent to 23.4 percent, in just 10 years. Chile stands out; by 1990 the Pinochet regime had invited FDI penetration that was already an order of magnitude higher than its neighbors’. The dictatorship in Bolivia also had atypically high FDI stock in proportion to GDP. Although in 2000 the most FDI-penetrated economies were still Chile and Bolivia, during the 1990s the sharpest relative increases in FDI stock were in Argentina, Bolivia, Peru, and Paraguay. Of the two largest Latin American economies, that of Brazil has throughout been typical of the trend, and while Mexico had lower than the average FDI intensity in the 1990s, it has since 2000 continued to accumulate FDI liabilities at a greater rate than its GDP.

Table 2

FDI Intensity (Incoming FDI Stocks as a Percentage of GDP) by Latin American Country, 1990–2010

	1990	2000	2007	2008	2009	2010
Argentina	5.5	23.8	25.7	23.5	25.9	23.6
Bolivia	21.1	61.8	41.8	36.0	37.0	35.0
Brazil	8.5	19.0	23.2	17.8	25.2	32.3
Chile	48.1	60.8	60.7	58.2	79.5	76.0
Colombia	7.3	11.9	27.2	27.7	32.0	28.7
Ecuador	14.5	39.8	23.2	20.7	22.4	20.1
Paraguay	8.5	18.7	18.5	14.2	18.7	17.4
Peru	4.5	20.7	25.0	25.0	26.5	27.3
Uruguay	8.0	10.4	26.2	25.7	40.0	36.8
Venezuela	8.2	30.3	18.6	14.1	12.6	10.3
South America	9.6	23.4	26.2	21.6	27.7	30.8
Mexico	8.5	16.7	25.3	27.3	31.6	32.0

Source: UNCTAD (2009; 2012b).

Whereas Chile has maintained its same high degree of FDI penetration over the past decade, Bolivia has reduced its dependence on FDI, although it is still at a high level. Venezuela markedly and, to a lesser degree, Ecuador have since 2000 reduced their FDI stock compared with GDP. By contrast, Colombia and Uruguay, two countries that experienced slight increases in FDI stock in the 1990s, have since 2000 rapidly opened up their economies to investment. During the 2000s the greatest contrasts in movement of FDI stock relative to GDP are found in the Andean subregion, with Bolivia, Venezuela, and Ecuador, which reduced their FDI stock relative to their annual GDP, contrasting with Peru and especially Colombia, which increased it from under 12 percent to 29 percent of GDP in 10 years. If Chile was the forerunner of the neoliberal model, Colombia and Peru have since pushed hard in the same direction.

The governments of Bolivia, Ecuador, and Venezuela carried out limited nationalizations in 2006 and 2007 and have increased their regulation of foreign investment over the past decade (Rebossio, 2012; Tsolakis, 2011). In Bolivia these measures were in direct response to the popular water wars and gas war that brought Evo Morales to government. In Venezuela, Hugo Chávez has regained control of the hydrocarbon sector from the domination of foreign capital. The state oil corporation Petróleos de Venezuela acts as a vehicle for government redistribution policy and is expected to enter into joint ventures with many different international partners (Stanley, 2008; Wallis and Paranga, 2012). The degree to which Bolivia, Ecuador, and Venezuela have been able to break from the extractivist model and what this means for the project of twenty-first-century socialism are topics that need careful analysis (see Ellner in this issue). What is clear is that they have sought less one-sided terms of engagement with foreign investors. They have all withdrawn from the World Bank’s International Center for the Settlement of Investment Disputes. Evidence that foreign investors continue to see them as the least attractive destinations comes from Spanish corporations, which cite political instability and juridical insecurity as the two main reasons for not investing (IE Business School, 2012: 23); Chile, Colombia, Peru, and Brazil are the main investment targets for these corporations (13).

The picture of divergent trends is corroborated by analysis of incoming FDI flows by host country, comparing the annual average for the 1990s with the annual average for 2005–2010 (Table 3). Argentina was a major target for FDI investment in the 1990s, attracting 24.2 percent of all FDI coming into South America. The big gainers in attracting FDI in the 2000 decade compared with the 1990s were Chile, Peru, Uruguay, and Colombia. In 2005–2010 Chile took 17.8 percent and Colombia took 12.8 percent of all of South America’s FDI. By contrast, Bolivia, Ecuador, and Venezuela’s incoming FDI declined in absolute terms, and their aggregate relative share fell from 11.4 percent to just 0.8 percent of all FDI coming into South America. Again, these figures indicate the existence of two distinct political-economic regimes for FDI in the Andean subregion.

Table 3

Annual Average FDI Inflows to South America (US$million) by Country, 1990–2000 and 2005–2010

	1990–2000		2005–2010
	US$m	% of Total	US$m	% of Total
Argentina	7,141	24.2	6,226	9.5
Bolivia	452	1.5	320	0.5
Brazil	12,000	40.6	31,320	47.7
Chile	3,393	11.5	11,656	17.8
Colombia	1,864	6.3	8,408	12.8
Ecuador	494	1.7	408	0.6
Peru	1,506	5.1	5,228	8.0
Paraguay	135	0.5	227	0.3
Uruguay	130	0.4	1,621	2.5
Venezuela	2,375	8.0	-179	-0.3
Other South America	35	0.1	372	0.6
South America	29,525	100.0	65,607	100.0

Source: UNCTAD (2010; 2012a) and author’s computation.

Brazil, the biggest country and economy in South America, increased its incoming FDI from US$12 billion a year to over US$31 billion a year in this period, and its share of all South America’s incoming FDI rose from 40.6 percent to 47.7 percent. While in Brazil too the export sector has been the main driver of economic growth, in many cases, especially in food extraction and minerals, national capital has also benefited and been able to accumulate rapidly. This is the basis of Brazil’s strong move to form “national champions,” with the result that since 2003 its outgoing investments have increased rapidly and account for some 67 percent of the outgoing direct investment from all Latin American countries from 2000 to 2010. Nonetheless, FDI flows into Brazil were four times the outgoing direct investments over this same period (ECLAC, 2012b). Analyzing this complex combination prompts a return to the theses of superexploitation and subimperialism first developed by Ruy Mauro Marini. Of all the dependency theoreticians, it was Marini who mostly firmly placed the social relations of production and the experience of the working class at the center of analysis. He demonstrated that under the conditions of mid-nineteenth-century free trade with Britain, the mechanism of unequal exchange operated as a profit squeeze on Brazilian export capitalists, who responded by increasing the exploitation of their workforces, which were exhausted, poorly paid, and barely able to subsist (Marini, 1973; Sotelo Valencia, 2005). Marini’s innovative yet fundamentally materialist thesis was critiqued by Cardoso and Serra, who preferred a more contingent explanation based on political institutions. Their exchange remains a vital entry point into serious study of underdevelopment as a singularity of the capitalist social relation (Kay, 1989).

Along with FDI stocks and flows, as we have seen, the third crucial element is the repatriated profits that accrue from foreign investments. Modernization theorists like Reid overlook this indicator completely. Moreover, the reform-oriented, institutionalized opposition to neoliberalism known as “neo-structuralism” (for a review of this literature see Kirby, 2009) has also underplayed the significance of repatriated profits. The relevant summary was not published in ECLAC’s annual reports until 2012, although it is available in the detailed national figures. The nomenclature used here follows the standard IMF categories in the balance of payments that national accounts are expected to adhere to. The IMF divides income headings between compensation for employees and investment income and subdivides investment income between receipts and payments of income from direct investments, income from portfolio investments, and other investment income (including loan interest payments). These items appear under the “Income” heading of the current account but should be more readily identified for what they really are: property income-related profit transfers.

The outflow of investment income from Latin American countries in 2010 alone totaled US$139.4 billion; with an inflowing investment income of US$26.0 billion. The outgoing profit flow amounted to US$77.7 billion in direct investment profits, US$18.6 in portfolio investment profits, and US$30.4 billion profits from company loans and other investments. When these are offset against incoming profits for Latin American multinationals investing abroad and employees’ compensation transferred to Latin American countries, there still remains a negative balance on income of US$113.4 billion (ECLAC, 2012b).

The net outflow of profits, or “negative income balance,” constitutes nearly 3 percent of the Latin America’s aggregate annual GDP and is firm evidence that the dependency school contention of a transfer of value out of the continent remains valid. This figure understates the full extent of this value transfer; a full estimate would need to include other value-transfer mechanisms such as international prices below commodity values, loan interest payments, and the emigration of socially prepared labor power.

The concept of the net outflow of profits helps to highlight differences in political-economic regime in the Andean region. Comparing the aggregate income balances between 1997 and 2010 of Bolivia, Ecuador, and Venezuela with those of Chile, Colombia, and Peru (Figure 4), we observe that for the first five years of the period outflowing revenues moved roughly in step. A point of sharp divergence came around 2003, when the net outflow of revenues from Bolivia, Ecuador, and Venezuela began to decline; outflowing revenues from Bolivia and Ecuador stayed fairly stable from 2003 to 2010, and the group’s aggregate figures reflect primarily the sea change in Venezuela’s policy after the 2003 failed coup attempt. These figures are crucial; they demonstrate that Venezuela is not acting like a normally dependent Third World country, a source of net profits for foreign investors. We see outlined in these figures the effect of the Alianza Bolivariana para los Pueblos de Nuestra América (Bolivarian Alliance for the Peoples of Our America—ALBA) in diminishing dependency. By contrast, the returns to foreign direct investors in Chile, Colombia, and Peru all accelerated sharply from 2002 on. In 2010 alone Colombia returned US$12.1 billion in repatriated investment income, Chile US$15.4 billion, and Peru US$10.0 billion (ECLAC, 2012b). The extractive-industry investors in these three countries have reaped the profits of the commodities price boom that began to slow down only in 2008.

Figure 4.

Andean Countries’ Income Balances, 1997–2010: Bolivia, Ecuador, and Venezuela (BEV) vs. Chile, Colombia, and Peru (CCP) (ECLAC, 2012b)

The Politics of European Capital’s Expansionist Agenda

“¡Por qué no te callas!” The outburst of Juan Carlos, King of Spain, directed at President Hugo Chávez during the Ibero-American Summit in Chile in November 2007 has passed into legend. Chávez had been joined by Nicaraguan president Daniel Ortega in a concerted rebuke of Spain. Juan Carlos’s exclamation became a hit with the populist right. What was it that drove the Venezuelan and Nicaraguan leaders to break so sharply with the courtesies of international protocol?

Chávez and Ortega had two good reasons to complain, and together they illuminate the growing importance of European capital and its associated forceful right-wing project in Latin America. Chávez brought into full view the constant agitation by the supposedly democratic, constitutional Spanish elite against progressive Latin American governments. Earlier on in the summit, José Luis Zapatero had demanded respect for his predecessor, José María Aznar, the leader of the conservative Partido Popular who had governed Spain from 1996 to 2004. Noting that Aznar had openly backed the attempted coup against his government in April 2002, Chávez insisted on registering his opinion of Aznar as a fascist, with some justification. Aznar spent a good deal of 2007 on tour in Latin America accusing Chávez of being an “adversary of liberty.” During the very week of the summit, Aznar was visiting Colombia to preach his “gospel of overthrow”; presenting the report of a Spanish right-wing think tank (Cortés, 2007), Aznar extolled an alliance between the right in Colombia and the United States, urging the completion of Colombia’s free-trade agreement with the United States and censuring its critics as a risk to democracy itself (Aznar, 2007). Similarly, five days after the summit, Evo Morales denounced a plot against his government involving USAID, a Colombian paramilitary group, and, once again, Aznar’s Partido Popular.

The underlying reason for the confrontation lay in the expanding role of Spanish multinationals (the so-called new conquistadores, according to many popular movements); the “freedom” agenda is really to assert the “rights” of these and other European multinationals in the region, to guarantee the flow of profits. Spanish investments surged from 1993 on, concentrated in the banking sector, oil and gas exploration, telecommunications, and other privatized utilities, from which they were by 2008 drawing over US$10 billion in annual profits. Aznar’s “agenda for freedom” signals a concern with, in fact, the freedom of the investor. His report condemned all forms of state expropriation as a “powerful disincentive factor for investors” and advocated respect for the rights of property and a capacity to ensure the legal security of investments above all else (Cortés, 2007: 56): “Every citizen or corporation must have its property rights guaranteed and contracts freely entered into fulfilled, appealing as necessary to independent tribunals. The State’s attack on property rights, without making any distinction between citizens and national or foreign corporations, is ever present in the new populism that constitutes ‘socialism of the twenty-first century.’” The socially harmful consequences of privatization were of course not addressed by Aznar. It was left to Ortega to give voice to the groundswell of opposition in Nicaragua to the Spanish utility company Unión Fenosa, which had been responsible for cutting off communities unable to pay its exorbitant rates and demanding “compensation” from local authorities even when it had not supplied any service to them (Tribunal Permanente de los Pueblos, 2009). At odds, then, with the official image of Ibero-American harmony, there has been a growing battle over the terms of economic relations between Spanish capital and Latin America.

Alongside Spain’s expansionist role, it is worth drawing attention to the exceptionally high profitability of UK-held direct investments. In 2008 these generated US$3.2 billion profits from their 2007 year-end investment position of US$15.3 billion, a remarkable rate of return averaging 20.8 percent, considerably higher than the EU average (my calculation based on Eurostat, 2012). To put it differently, holding just 5.9 percent of the EU’s capital directly invested in Latin America, UK companies nonetheless achieved 14.9 percent of the annual profit. The primary reason for this exceptional profitability of UK-sourced investments is their concentration in extractive industries that have benefited from the price boom for minerals and oil driven by the demand from China especially. Quite simply, the surplus profits from mining and hydrocarbons have flowed back to London (and a handful of other financial hubs) rather than being used for the benefit of the peoples of Chile, Colombia, and Peru. The surplus profits from oil and mining are correctly identified by Grinberg (2010) as a form of rent, akin to the ground rent of landowners on agricultural lands, that can be transferred through taxation from the primary sector to the rest of society, but what Grinberg strikingly avoids is the appropriation of ground rent by the multinational corporations. The conversion of rent into corporate superprofits is, as I argue elsewhere (Higginbottom, 2011), a defining characteristic of imperialism.

The current policy implications in terms of international relations have become increasingly evident in the European Commission’s concerted advocacy of free-trade agreements and bilateral investment treaties in the interests of EU-based corporations. The unfolding of the EU strategy and the way it has affected the division between the Andean countries is detailed by Latimer (2012). Latimer shows that many investment treaties are already in place and that, its pretensions to a more developmental ethos notwithstanding, the EU’s agenda has in practice proceeded “in lockstep” with a U.S. strategy for recovering from the setback of losing the FTAA and is directed to isolating efforts at regional integration on Bolivarian terms. Once in place, these agreements will provide a regime of accumulation that institutionalizes guarantees for sustained external transfers of surplus value.

Capitalist investment is not simply ownership of physical stock but a value relation in which the investing party has a claim on future profits. When the investment relation is international, the investment’s value is counted in the national financial accounts of the originating country as an asset and in those of the host country as a liability, a claim on future income (IMF, 1993: Chap. 23). The aggregated individual investments of private property represent the international investment position of a nation. The financial account is important for state monetary authorities not least because it indicates demand for the national currency, as capital flows require currency exchange between the host and the originating nation. In reality as well as in formal accounting terms, there has been a huge increase in Latin American countries’ liabilities to foreign investors expecting to draw future revenue from their investments. The conversion of potential revenue to actual revenue is exactly what happened in the wake of the 2008–2009 crisis.

Stagnation and crisis in their home markets have caused Spanish and Portuguese banks and corporations to cash in some of the capital assets they have built up in Latin America since the 1990s. Rathbone and Johnson (2012, citing IE Business School, 2012: 22) report that, using mechanisms that they call “capital extraction,” many European corporations have been releasing their accumulated capital assets, either by sell-offs or by listing the subsidiary on the host country’s stock exchange. Even after the sell-offs, the astonishing degree to which Spanish capital in particular continues to benefit from its ongoing extraction of surplus value is revealed in a corporate survey that found that “by 2015, most of the 30 largest Spanish companies with operations in Latin America expect revenues from the region to exceed those from home.”

Interim Conclusions, Further Investigation, and Debate

This article has explored foreign investment stocks and flows as one of the outward signs of dependency in the neoliberal phase of imperialism. The big picture is that U.S. and European capital today own three times more of Latin America than they did just 15 years ago. From the evidence presented it is reasonable to conclude that the basic tenet of the dependency thesis still holds: Galeano’s “veins of Latin America” are indeed still open. The new modernizers, pro-market writers like Reid, Edwards, and Fukuyama, talk up the positive effects of FDI but obscure the profit motive that is its driving force. Despite the claimed benefits of neoliberal globalization, Latin America remains not so much a developing continent as one that is being actively underdeveloped by the world capitalist system.

The data on income balance confirm that two very different FDI regimes have crystallized in the Andean subregion. The analysis here, admittedly oversimplifying a complex picture, contrasts the Andean ALBA nations (Bolivia, Ecuador, and Venezuela) with their non-ALBA neighbors (Chile, Colombia, and Peru). The crux of the difference is that the ALBA countries have succeeded in increasing the proportion of surplus profits retained in their national economies against that part captured by international capital. This marks a shift in recovering sovereignty over natural resources and, while it is not yet socialism, speaks at least to government commitment to social welfare and a developmental state.

Notwithstanding the fact that further investigation of the effects of the offshore financial centers is required, the above analysis indicates that during the neoliberal phase EU corporations are at least on a par with their U.S. counterparts as profiting from direct investments in Latin America. Contemporary imperialism in Latin America is not just about U.S. domination; it is also about that of Spain, the UK, and the rest of Europe. As Latimer (2012) has pointed out with special reference to Colombia and the Andean region, the United States, Canada, and Europe are in the main working in harness as they aggressively pursue investment treaties and free-trade agreements. Their corporations are in a real commercial competition, but at the same time they cooperate within a neoliberal institution-forming and agenda-setting framework that works for them.

There are several directions in which these conclusions could be deepened, refined, and modified. First, the emphasis on quantitative aspects has meant no qualitative analysis of the social and environmental effects of foreign investment. Secondly, the overview needs to be filled in with a picture of investment strategies and targeted sectors and any differentiation in strategy between the United States and Europe. Reports by UNCTAD (2012a) and ECLAC (2012a) address this issue, but there remains a gap between quantitative macro studies and more qualitative sectoral or micro case studies.

The third and fourth directions are really challenges to my main conclusions, for they concern ways in which FDI is changing that have not been addressed here, notably the rise of Latin American transnational corporations and the arrival of China as an investment source. The rise of the “trans-Latins” and China’s interest have a common characteristic, participation in the superprofits possible in the extractive sector while the commodities boom continues. In the space of one article it is not possible to do a full, multilayered analysis, and in particular no analytical detail is offered of investment trends in the two biggest economies, Brazil and Mexico, both homes to the new generation of “trans-Latin” corporations. The transfers from the two largest Latin American economies are present in the aggregate data because of their proportionate weight, and in that respect at least they are part of the general pattern of investment and profit flows. The emergence of China as a significant investor has already generated much commentary, including the notion of the “dragon in the room” (Gallagher and Porzecanski, 2010), and its role is a major development that needs to be analyzed. These caveats notwithstanding, this article specifically addresses a real gap in the contemporary literature. In this last section I start to draw out the political consequences of the economic trends that have been described with the aim of generating a broader discussion.

It is not only the U.S. eagle overhead and the Asian dragon at the door but the European elephant in the room that we should be concerned about. The idea that imperialism in Latin America is almost entirely about the United States still pervades radical analysis (see, e.g., Dominguez, Lievesley, and Ludlam, 2011), but there is no evidence that for Latin Americans on the ground European investment is preferable to U.S. investment.

There is a separate reason for identifying the stake of corporate Europe in Latin America from the point of view of class alliances and international solidarity with working-class, poor peasant, and indigenous social movements confronting the foreign companies that dominate their lives and the domestic governments dependent on them. Their embrace of dependency on FDI at all costs orients states strategically against citizens who are opposed to the investment projects. Let down and criminalized by their own entreguista regimes, Latin American social movements have been fighting the takeover of European multinationals across all sectors but especially against the community dispossession and environmental destruction generated by extractive industries and the unaffordable consequences of the privatization of public utilities. Social movements have purposefully linked up with solidarity groups to project their social resistance into the corporations’ home countries (for analysis see Higginbottom, 2008; 2010, and for examples visit the web sites of Ecologistas en Acción in Spain, the Colombia Solidarity Campaign in the UK, and the bicontinental network Enlazando Alternativas).²

Another area to evaluate is any qualitative difference between European and U.S. imperialism at the military-strategic level. Defending the strategic interests of European capital in Latin America is far from needing an independent military presence in the region, whether or not the EU has the capacity to act in such a united way. First, despite the social-movement campaigns and even when Argentina’s Repsol YPF nationalization is taken into account alongside the nationalizations of Bolivia, Ecuador, and Venezuela, the opposition does not amount to a generalized regional offensive against the multinationals. On the contrary, most governments, including the pink giant Brazil, still see FDI as a cornerstone of their development strategy. Secondly, European capital is, like U.S. capital, enjoying the benefit of the International Center for the Settlement of Investment Disputes, which is already policing its interests quite effectively. This indicates an international institutional regime that works for the benefit of invested capital in general, most of which still comes from the global North. Thirdly, the U.S. military presence has also directly benefited European-based extractive corporations. The flow of outgoing profits has been so large that Europe has in the main had no need to challenge the United States and transform commercial competition into state-led rivalries, the so-called banana wars notwithstanding. Mainstream politics in Europe has followed Washington on the major calls, considering Colombia a “democracy” despite two generations of state-inspired dirty war, accepting the constitutional coups in Honduras and Paraguay, attempting to divide and isolate ALBA, and so on. Fourthly, and with less stigma than the United States after the defeat of its grandiose FTAA project in 2005, Europe has been able to present corporate economic interests in the guise of bilateral cooperative development. Finally, one should not rule out a possible role for military intervention from certain expeditionary-equipped European states, including special operations should the need arise, as the UK has done in the Falklands/Malvinas war and in Colombia. Overall, though, European capital has for two decades been able to pursue its interests without resorting to such methods, primarily through the programmatic insistence on free trade and investment.

In the view of Robinson (2008), it no longer makes sense to conceive of European capital or “national capital” as general categories. He argues that globalization marks the transition to an entirely new epoch in the capitalist mode of production in which the transnationalization of capital, the state, and the dominant class are all substantive characteristics. Robinson overextrapolates from certain real tendencies in neoliberal globalization and understates the significant continuities with earlier phases of imperialism. He poses a number of theoretical challenges, but his dismissal of both Lenin’s (1964 [1917]) and Hilferding’s (1981 [1910]) framing of imperialism and the dependency thesis as concerned exclusively with external rather than internal class relations is quite inaccurate. It fails to appreciate the systems-analytical depth of Marini and other scholars who understand dependency as constructed through specific capitalist class relations. Robinson misses an essential side of Lenin’s analysis—that the monopoly capitals (multinationals) of the great powers were in competition for superprofits extracted from colonial and semicolonial territories, lands, and peoples. Lenin theorized what today would be termed the North-South divide as systemically reproduced by and constitutive of capitalism as imperialism. The hostile brothers of capitalism only become really hostile to the point of war when in a crisis one or another no longer has access to the superprofits drawn from the global South, but, as we have seen, both the United States (Canada also) and the EU have been able to enjoy stupendous profits from Latin America through its ‘opening up’ during the neoliberal period.” Again, the entry of China into the picture could change it significantly in the direction of increased geostrategic rivalry, although how that will work out is as yet unclear.

There are many new dimensions in the dialectic of domination and dependency at work in Latin America. What this article specifically brings out is that a strategy to defend and advance progressive change has to contend with European capital as well as U.S. capital. The specter of twenty-first-century socialism haunts Europe as well as the United States in that it is a challenge to the global capitalist system—imperialism—itself.

Footnotes

Notes

Andy Higginbottom is principal lecturer of international politics and human rights at Kingston University in the UK. He is also secretary of the Colombia Solidarity Campaign. He thanks Rosalind Bresnahan and Steve Ellner for their probing comments.

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