Foreign Direct Investment and Net Reverse Transfers from Latin America and the Caribbean: Econometric Evidence for Chile

This paper addresses the important question of whether the widespread adoption of market-based and outward-oriented reforms in Latin America has reversed the net transfer of resources from the region to the developed nations of the world. It provides econometric (time-series) evidence for the impact of foreign direct investment flows and reverse net transfers of profits and interest on labor productivity growth in the case of Chile. The selection of Chile is notable because it was one of the first countries to adopt market-based reforms and it is generally considered one of the best performing economies in the region, even in comparison to larger economies such as Brazil and Mexico. This paper documents reverse flows of capital that are not only large in absolute terms, but also relative to gross domestic product and gross fixed capital formation. It represents foregone opportunities for domestic investment in physical and human capital and may further undermine the country’s already strained capacity to generate future income and employment opportunities for its population. In this connection, the error-correction estimates for Chile suggest that, once remittances of profits and interest are deducted, the positive economic impact (and importance) of the growth rate in the net foreign capital stock per worker on labor productivity growth is diminished, ceteris paribus. The paper addresses the endogeneity and serial correlation problem via use of the parametric dynamic ordinary least squares and non-parametric fully modified ordinary least squares long-run estimator for the Chilean labor productivity equation in level form. The generated estimates are, in general, consistent with the error-correction estimates. The paper does not address the important question of whether the financial and technological (managerial) knowhow foreign capital ostensibly brings to the country (and the region) is enough to offset the negative effects emanating from the unprecedented reverse transfer of resources in recent decades.