Will the initiative to attract investment work?

Buenos Aires Herald. 25 de septiembre de 2016.

Macri’s gov’t needs to reverse Argentina’s reputation but target is far from simple

“Opening up to the world” has been a consistent message for the government of Mauricio Macri. The recent so-called “Mini-Davos” meeting is a key example. The main point of the Investment and Business Forum was to communicate to international business leaders that Argentina has a positive investment climate.

Will the initiative to court foreign direct investment produce concrete results? And if the investment does come, will it deliver the hoped-for increases in overall prosperity and well-being, as well as greater stature on the international stage, for the country? Scholarship on the political economy of foreign investment is not the equivalent of a crystal ball, but it can shed some light on the factors that are most likely to determine success or failure in the long run.

Ideological critics say making overtures to international capital is equivalent to falling in step with a race to the bottom in the form of reductions in social and environmental protections and selling out countries’ sovereignty. However, many, but not all, academic studies have found that foreign direct investment can actually produce the opposite, more positive dynamic of a race to the top. Foreign firms may bring with them better technologies and often pay higher salaries. Countries that have social and environmental spending supported by taxes receive more foreign direct investment than countries with lower standards.

Race-to-the-bottom tactics to attract investment can even be counterproductive. Environmentalism, to take one interesting and important example, these days is best presented as a market opportunity rather than a burden. Because of its natural resources, Argentina has the chance to be an important world player in the field of green energy. Thus, that the government seems to have embraced this lesson is reason for optimism.

Investors take many factors into account when making their decisions about where to invest. They prefer lower taxes and more flexible regulations, of course, but other aspects of the political context can be equally or more important. These include consistently-applied rules and institutions that they believe will protect their property rights. Systems for the resolution of disputes are especially key, particularly when we consider that the government is prioritizing investment infrastructure areas that affect citizens directly. While in the short term it can be tempting for investors and the governments that court them to try to make agreements that sidestep legal or regulatory institutions that are perceived as cumbersome or even antagonistic, it is best to build systems that will be perceived as legitimate by the public.

Argentina has a reputation for not meeting investors’ expectations in the past. Some have suggested that capital has short memory: if correct, that works in favour of the government’s initiative. If, on the other hand, their memory is long, investors might prefer to wait for a transformation of the whole political system (including the consolidation of the Cambiemos Let’s Change coalition and the nature of the opposition) before they risk entering the country.

A final point to consider is the impact of courting and receiving investment on Argentina’s international relations. Greater multipolarity in the international system means that foreign investment may come from a more diversified set of countries. Firms from the wealthy market democracies are still crucial, but there were representatives from 68 countries at the Mini Davos meeting. Scholars are only now beginning to explore questions about how large geopolitical changes affect the bargaining between governments and multinational firms.

To summarize, there are many open questions, but most of the evidence points toward the conclusion that seeking foreign investment can bring positive results for Argentina overall.