Trade, direct investment and production policies

Abstract

During the 1990s, the economies of Latin America and the Caribbean implemented a series of far-reaching structural reforms and took a new direction in terms of economic policy. At first, these liberalization measures were primarily focused on national financial markets and the initial opening-up of trade, but they were soon extended to include the swift liberalization of external capital flows, and some countries embarked upon intensive privatization programmes. This set of reforms generated increases in foreign trade (particularly exports) and higher foreign direct investment. However, the growth path of the region's countries is a far cry from one of intensive, steady expansion -and this document analyses possible reasons for this. This paper posits that there is no unequivocally positive link between trade openness and economic growth, given the importance of the context and how the process of liberalization is carried out. The way in which changes are processed within economies is crucial if the productive fabric is to be strengthened rather than destroyed. The link between increased exports and growth is not necessarily positive either, as it depends on the types of exports and their potential to generate linkages that boost the rest of the productive structure. Similarly, in the case of foreign direct investment, there is no unequivocally positive relationship between FDI and growth, as the link between the two depends on the type of FDI, its objectives and target sectors. This therefore leaves considerable scope for productive policies to promote these linkages and ensure that the region's export position and the foreign investment it receives contribute to the buoyancy of national economies. The present document closes with an analysis of precisely those characteristics that productive policies need to include if they are to achieve that objective.