INVESTMENT IN KEY LDC DEBTORS: STRUGGLING TO REGAIN LOST GROUND

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97R00694R000500150001-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: December 14, 2010
• Sequence Number: 1
• Publication Date: August 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
To Regain Lost Ground
Investment in Key
LDC Debtors: Struggling
Confidential
Confidential
GI 85-10196
August 1985
copy 3 3 7
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m, Intelligence
Investment in Key
LDC Debtors: Struggling
To Regain Lost Ground
This paper was prepared b~ [ the
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
Economics Division, OGI
Confidential
G/ 85-10196
August 1985
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Investment in Key
LDC Debtors: Struggling
To Regain Lost Ground
Key Judgments The high investment growth that powered the economies of the key LDC
Information available debtors during the past two decades may be a thing of the past. The fallout
as of 15 July 1985 from this dramatic shift in investment behavior will multiply the economic
was used in this report.
and political problems these countries will face during the next decade. In
particular, slow investment growth is limiting, and will continue to limit,
their economic recovery. Slow economic growth, in turn, will aggravate
existing political and social tensions as it becomes clear that, even after
four years of declining living standards, several more years of painful
economic austerity will be necessary. Sluggish investment growth, which
slows structural adjustment and the transmission of technology, will also
place additional strain on the international financial system by jeopardiz-
ing debtor compliance with IMF programs and eroding LDC trade
competitiveness.
After an unprecedented four-year plunge, investment in the key LDC
debtors is beginning to recover. Even if this recovery can be sustained, we
believe investment will grow at a historically slow rate during the next five
years. Mexico should lead with investment growth averaging 4 to 6 percent
annually. Investment growth in Brazil, Chile, Peru, the Philippines, and
Venezuela should fall within the 2-to-5-percent range. In Argentina and
Nigeria, investment probably will be sluggish-averaging 1- to 3-percent
growth. Even if investment grows at the highest projected rate through
1989, only Venezuela, the Philippines, and Nigeria will regain the ground
lost since the international financial crisis.
In our view, three key factors underlie this lackluster investment perfor-
mance-unattractive returns, financing difficulties, and political-economic
uncertainty. While the expected returns from investment projects may rise
as economic activity slowly picks up, returns should remain well below the
levels enjoyed during the 1960s and 1970s. In addition, the high cost and
limited availability of investment funds will put a damper on capital
formation. Domestic savings are likely to remain depressed and access to
foreign capital probably will not be fully restored. We also foresee no
significant improvement in the underlying level of political-economic
stability in these countries. Capital flight, spurred by political-economic
uncertainty, will remain a major obstacle to investment growth. The level
of uncertainty could fall marginally, however, if the course of economic
adjustment becomes clearer
Confidential
GI 85-10196
August 1985
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An investment recovery as weak as we predict could easily be derailed by
economic and political shocks. In particular, deteriorating global economic
conditions could slow investment growth dramatically. While an oil price
slump may free some resources for investment in the oil importers, it would
choke off investment growth in the oil exporters-Mexico, Venezuela,
Nigeria, and Peru. A runup of interest rates would stifle investment in all
eight countries; Venezuela and Nigeria, with lower interest-payment
burdens, are somewhat less vulnerable. Because of their dependence on
export earnings, a worldwide recession, or even rising protectionism, could
also significantly reduce investment growth. The investment outlook for
several countries-for example, Chile, Peru, and Argentina-would be
downgraded considerably if the price of a key commodity should fall
sharpl
Investment is also highly sensitive to the general political and economic
climate in the key LDC debtors. If political conditions deteriorate,
investment growth could be significantly lower than our projections.
During periods of political instability, investors find it impossible to gauge
the future returns from projects and increased capital flight shrinks the
pool of investment funds. In contrast, if these countries abandoned their
current policies of economic intervention and regulation, a surge in
economic activity would surely follow, powered by investment growth well
above our projections. However, given the short-run economic and political
costs, we believe significant economic policy reform is unlikely during the
next five years
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events in and US relations with these strategic LDCs
This research paper is part of a Directorate of Intelligence research effort
to assess the longer term effects of the LDC foreign debt crisis. It examines
the dramatic shift in investment behavior that occurred in eight LDC
debtors when they experienced severe international financial problems.
Our investment outlook presents an estimate of each country's investment
behavior during the next five years. These investment trends will play a
major role in determining economic growth, the pace of structural
adjustment, technological advancement, international financial positions,
and compliance with IMF programs-factors that in turn affect political
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Key Judgments
Financial Problems Alter Investment Trends
Investment Plunges
Investment Patterns Shift
Key Factors Underlying the Investment Slump
Investment Outlook
6
Limited Recovery
7
Individual Country Outlooks
9
Factors Affecting the Outlook
11
Implications
12
Slower Economic Growth
12
Slower Structural Adjustment
12
12
Appendixes
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Figure 1
Key LDC Debtors, 1985
Confidential Viii
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Investment in Key
LDC Debtors: Struggling
To Regain Lost Groundfl
Investment in the key LDC debtors rose steadily
during the decade before the international financial
crisis as these countries committed an increasing
share of their economic resources to expanding the
productive capacity of their economies.' Powered by
impressive investment growth, these LDCs made sig-
nificant economic progress; their GDP, for example,
grew at an average annual rate of less than 5.5
percent, during the turbulent 1971-80 period. Interna-
tional financial problems in the early 1980s, however,
caused a dramatic shift in investment behavior. This
shift could have important effects on economic and
political conditions in these LDCs over the longer
term.
Investment Plunges
The recent international financial crisis shattered the
decades-old trend of sustained investment growth in
the key LDC debtors. Key indicators of their invest-
ment performance have fallen off dramatically to the
levels of the mid-1970s (figure 2). Last year, invest-
ment in these countries was nearly $55 billion lower
than in 1980, a decline of 30 percent. In contrast to
the average annual growth rate of 7.3 percent
achieved during the previous decade, investment fell
by an average of 8.2 percent annually during the past
four years. The contraction in investment was more
severe than the general slump in economic activity;
real GDP fell, on average, about 1 percent annually
since 1980. Consequently, the share of GDP devoted
to capital formation slipped 6 percentage points to
17.2 percent.
' Key LDC debtors include Argentina, Brazil, Chile, Mexico,
Nigeria, Peru, the Philippines, and Venezuela. These developing
countries, deemed of strategic interest to the United States, have
encountered serious economic problems as a result of their large
foreign debt. Unless otherwise indicated, investment refers to gross
fixed investment investment in structures, machinery, and equip-
ment. Data were drawn from a variety of open sources: publications
of international organizations such as the United Nations, Interna-
tional Monetary Fund, and World Bank; country handbooks pub-
lished by central banks and other government entities; in-country
discussions with bankers, businessmen, and government officials;
and an external analysis contract. All growth rates were calculated
from constant-dollar values. All dollar values are measured in 1980
US dollarsF_____1
Figure 2
Key LDC Debtors: Investment,
1970-84
Billion 1980 US S
250
Investment last year was well below 1980 levels in
each key LDC debtor. In Argentina, investment
plunged by a total of nearly 55 percent during the past
four years (figure 4). The share of the country's GDP
devoted to capital formation also dropped off, falling
from 23 to 12 percent. The investment slump was
severe, but less dramatic, in Chile, Brazil, Peru, and
Mexico. At the end of last year, investment in these
countries stood 25 to 35 percent below 1980 levels.
Nigeria, the Philippines, and Venezuela fared some-
what better, registering investment declines of only 10
percent. Recent trends indicate that the investment
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According to economic theory, the linkage between
investment and GDP runs in both directions (figure 3).
A change in the level of either variable will affect the
other
Investment Affects GDP
A change in investment spending affects GDP by
altering the demand and supply of goods. An increase
in investment, for example, raises GDP by first
stimulating demand. Since investment is a component
of demand, an increase in investment causes an
equivalent rise in demand immediately. In addition,
there will be ever-smaller "induced" increases in
demand over the longer term as this demand increase
filters through the economy. An increase in invest-
ment also raises GDP by accelerating the expansion
of productive capacity. An investment increase leads
to faster growth in the economy's capital stock, which
in turn leads to faster expansion of the economy's
potential to produce goods over the longer term
GDP Affects Investment
Changes in GDP affect all three of the major determi-
nants of investment. An increase in GDP, for exam-
ple, stimulates investment spending by raising the
expected returns from projects and increasing the
availability of funds. Since investors view current
demand as a key indicator offuture demand, GDP
increases cause investors to revise upward their as-
sessments offuture returns from projects. The supply
of internally generated funds also increases when
GDP increases because government tax receipts and
firm profits rise. Rising economic activity does, how-
ever, drive up the cost of projects, somewhat reducing
the rise in investment spurred by changes in the other
more important determinants
downturn may have bottomed out in Brazil, Chile,
Mexico, and Venezuela while it continues in Argenti-
na, Nigeria, Peru, and the Philippines
Investment Patterns Shift
While shattering the trend of sustained investment
growth, the international financial crisis also broke
the pattern of investment in the key LDC debtors that
evolved during the 1970s. During the past few years,
government and industry reordered their investment-
project priorities, the role of the public and foreign
sectors declined, and the growing dependence on
foreign capital to finance investment was broken.
Government and Industry Reorder Priorities. Beset
by international financial problems, the governments
and industries of the key LDC debtors reordered their
investment priorities. Governments shifted limited
investment funds to projects having: favorable bal-
ance-of-payments effects, high short-term economic
payoffs, or high social/ political impact:
given high priority. "Downstream investment" pro-
jects that spur production utilizing locally produced
inputs were also given special consideration. Brazil,
for example, exploits its abundant hydroelectric
power and ore deposits to produce metals for export.
The governments also looked favorably on projects
whose construction did not rely on imported goods
and services.
? High Short-Term Economic Payoffs. Governments
devoted more resources to smaller projects that
yield identifiable economic benefits within one or
two years. By leveraging past investment, an in-
creasing share of the capital budget was allocated to
the maintenance and expansion of existing facilities.
Grandiose industrial projects that expanded into
new areas with uncertain economic returns and long
gestation periods were avoided. Gone too were the
glamour projects-fancy international airports, ho-
tels, and superhighways-with dubious economic
value.
? Favorable Balance-of-Payments Effects. Projects
that expand the country's capacity to produce
export-oriented or import-substituting goods were
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Figure 3
Linkage Between Investment and GDP
Expected returns from investment projects
Cost availability of investment funds
Figure 4
Key LDC Debtors: Total Change
in Investment, 1981-84
? High Social/Political Impact. Governments favored
investment projects that lessened the political fall-
out from harsh economic austerity. High-visibility
projects boosting living standards, especially of the
lower class, were given top priority. Projects with
high employment content were especially desirable.
In Chile, an emergency public-housing project, em-
ploying 80,000 workers, was planned that would
build an additional 30,000 homes in 1983. Invest-
ment funds were also earmarked for small infra-
structure projects that yield demonstrable improve-
ments in health, education, communication, and
transportation
At the same time, private investment funds in the key
LDC debtors were shifted into industries nurtured by
government assistance when international financial
problems arose. Government incentives and protection
spurred investment in targeted industries by raising
the returns from prospective investment projects in
these industries above the returns from projects in the
rest of the private sector. Protectionist measures
allowed firms producing goods for domestic consump-
tion to enjoy above-average rates of return by shelter-
ing them from foreign competition. An array of
government subsidies in import-substituting and ex-
port industries boosted rates of return in these sectors
as well. Brazil's "informatics law" is the best example
of government industrial targeting. This measure
stimulated local investment in the information-pro-
cessing industry by barring imports and providing
special assistance to local producers who rushed to fill
the void
Roles of Public and Foreign Sectors Decline. Like
project priorities, the sectoral breakdown of invest-
ment also changed when financial problems arose.
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Incomplete data suggest that the public sector's direct
role in the investment process, which expanded rapid-
ly before the international financial crisis, declined
sharply during the past few years. When international
financial problems developed, governments were con-
fronted with declining revenues and political con-
straints on raising taxes. They chose to cut investment
spending on infrastructure and in state enterprises
rather than trim outlays in the more politically sensi-
tive areas of defense and social welfare. We believe
the governments of most key LDC debtors slashed
their investment budgets between 30 and 50 percent
in 1983, cuts in capital expenditure significantly
higher than the drop in total investment that occurred
that year.
Similarly, the international financial crisis reduced
even further the role of foreign direct investors in the
key LDC debtors. The upward trend in foreign direct
investment, which developed during the 1970s, was
broken. Foreign investment reached $6.5 billion in
1981 before plummeting by nearly 75 percent during
the next three years. Brazil and Mexico were the
hardest hit; their foreign investment fell from about
$2 billion each in 1980 to about $600 million and
$300 million, respectively, in 1984. Investment by
foreigners continued to be the most erratic component
of investment, reacting faster and more dramatically
to changes in the investment environment than other
private investment. Since foreign investment fell off
faster than investment by private residents, the for-
eign share of investment slipped to 1.3 percent in
1984-down a percentage point from 1980.
Dependence on Foreign Capital To Finance Invest-
ment Broken. Trends in investment finance also were
altered by the international financial crisis. The in-
creased reliance of the key LDC debtors on foreign
capital to finance domestic investment was reversed.
Foreign capital inflows-the savings of foreigners
obtained mostly through foreign borrowing-fell off
dramatically. The amount of foreign savings absorbed
by these countries plunged from $35 billion in 1982 to
about $4.5 billion in 1984-nearly a 90-percent drop.'
Foreign savings inflows in 1984 were about $10 billion
lower in both Brazil and Mexico than four years
earlier. This sudden drop in foreign savings inflows
occurred when commercial banks ceased voluntary
lending to most LDCs following Mexico's debt-
payment moratorium. The loss of access to foreign
savings, coupled with stagnant domestic savings,
resulted in an equally dramatic drop in the share of
investment financed by foreign savings. This share fell
from about 20 percent during 1981-82 to less than 4
percent during the following two years.
Key Factors Underlying the Investment Slump
The international financial crisis forced the key LDC
debtors to undertake economic adjustment, which, in
turn, caused the investment slump. During the previ-
ous decade, their economies were buffeted by external
shocks-oil price jumps, global recessions, and high
interest rates. Initially, these countries tried to post-
pone the necessary adjustment. Aided by foreign
borrowing, they pursued expansionary monetary and
fiscal policies and supported overvalued exchange
rates. These domestic policy errors led to massive
government budget deficits, spiraling inflation, capital
flight, and a further deterioration in the balance of
payments. Consequently, foreign borrowing acceler-
ated and the burden of debt mounted. Following
Mexico's debt-payment moratorium in August 1982,
banker attitudes shifted, leading to a cutoff of volun-
tary lending to most LDCs. The key LDC debtors
could not postpone economic adjustment any longer.
The measures implementing economic adjustment in
the key LDC debtors precipitated the sharp drop in
investment that occurred during the past four years.
Except for Nigeria and Venezuela, these countries
were forced to adopt IMF-supported adjustment pro-
grams to secure badly needed financing and resched-
uling. Although they have avoided formal adoption of
IMF programs, Nigeria and Venezuela have devel-
oped their own adjustment programs. In general, IMF
adjustment programs mandate economic austerity to
stabilize the balance of payments and a gradual
return to free markets to boost economic efficiency.
Specifically, these programs require: domestic credit
contraction, lower government deficits, real wage
reductions, trade liberalization, exchange rate devalu-
ations, and deregulation of prices and interest rates.
Implementation of these adjustment measures in the
key LDC debtors resulted in financing difficulties,
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A Simple Model of Investment Determination
Economists have developed a simple model that
explains investment determination in an economy
(figure 5). According to that model, investment is
linked to the difference between the optimal capital
stock and the current stock of capital. Although
project financing and project cost are also important,
expected returns are the major determinant of the
optimal capital stock and hence the flow of invest-
ment. The necessity of projecting returns, especially
in LDCs, injects considerable uncertainty into the
process of investment decisionmaking. To estimate
future returns, investors must project a wide range of
variables that determine future economic and politi-
cal conditions. Changes in the expected future path of
these variables cause investors to recalculate the
optimal capital stock, possibly resulting in a sharp
drop or a sudden surge in investment activityF__-]
Figure 5
A Simple Model of
Investment Determination
economic recession, and heightened uncertainty-the
key factors we believe are directly responsible for the
recent investment slump.
Financing Difficulties. We believe financing difficul-
ties were the most important factor underlying the
recent investment slump in the key LDC debtors.
Foreign and domestic savings-the pool of funds
available for investment-dropped to levels 80 and 8
percent lower, respectively, than in 1980 (figure 6).
Foreign savings, obtained mostly through foreign
borrowing, plunged as commercial banks ceased
voluntary lending when they downgraded the
creditworthiness of these countries following Mexico's
debt-payment moratorium. Domestic savings con-
tracted when national income fell and the real returns
to savers grew increasingly negative, because regulat-
ed interest rates did not adjust to spiraling inflation.
Interest and exchange rate distortions, coupled with
rising political uncertainty, aggravated the savings
shortage by spurring capital flight and profit remit-
tances. We estimate that more than $100 billion in
capital was sent out of Argentina, Brazil, Mexico, and
Venezuela during 1979-83. Lower savings stifled in-
vestment by pushing up the cost of funds in unregulat-
ed capital markets and causing a shortage of funds in
Economic Recession. Our analysis indicates that eco-
nomic recession was another key factor underlying the
recent investment downturn in the key LDC debtors.
GDP fell at an average annual rate of about 1 percent
during the past four years after growing by nearly 6
percent, on average, during the 1971-80 period (figure
7). This slump in aggregate demand can be traced to
deep cuts in government expenditure and a dropoff in
consumer spending caused by falling real wages and
rising unemployment. Reduced demand led to an
investment decline when the expected returns from
investment projects plummeted and internally gener-
ated investment funds dried up as profits dwindled or
turned to losses. When the level of economic activity
slowed, capacity utilization in these countries slipped
to record lows in the 50-to-60-percent range, putting
additional downward pressure on investment
regulated markets
25X1
25X1
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Figure 6
Key LDC Debtors: Savings,
1970-84
? Foreign savings ? Domestic savings
Heightened Uncertainty. We believe heightened un-
certainty in the key LDC debtors during the past few
years also contributed to poor investment perfor-
mance. Financial problems increased economic uncer-
tainty by forcing sudden adjustment on economic
systems that evolved over several decades. Investors
had difficulty formulating an economic outlook-a
vital input to the investment decisionmaking pro-
cess-when the pace, mechanism, and extent of the
economic adjustment were unclear. Much of this
increased economic uncertainty arose because govern-
ments, which determine the parameters of the eco-
nomic adjustment, play such a dominant role in the
economy. Financial problems also contributed to in-
creased political uncertainty.' During the period,
Figure 7
Key LDC Debtors: GDP Growth,
1970-84
there were uneasy transition to civilian rule in Argen-
tina and Brazil; periods of martial law in Peru, Chile,
and the Philippines; a military coup in Nigeria; and
growing opposition to the ruling party in Mexico. This
heightened economic and political uncertainty ham-
pered investment because investors found it impossi-
ble to gauge the future returns from prospective
investment projects and because massive capital flight
restricted the supply of investment funds.
Investment during the next five years will play an
important role in determining the strength of the
expected economic recovery in the key LDC debtors.
Our statistical analysis indicates that GDP growth in
these countries rose by four-tenths of a percentage
point for each percentage point rise in the investment
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Government Intervention: Source of Investor
Uncertainty
Government intervention in the economies of the key
LDC debtors complicates private investment deci-
sions. During the 1970s, the role of government in
their economies advanced along two fronts. Govern-
ment rules and regulations proliferated, severely dis-
torting the allocation of economic resources in the
private sector. State enterprises expanded rapidly,
many producing goods and services in direct competi-
tion with private companies. Given the current level of
government economic intervention, investment deci-
sions depend, in large part, on assessments of future
government behavior. When assessing long-term in-
vestment projects, local investors must anticipate
future government rules, regulations, policies, and
procedures affecting domestic production, foreign
trade, and international finance. Foreign investors
bear the additional burden of projecting future gov-
ernment policies relating to foreign direct investment.
The dominant role of government in the economy and
the uncertainty about future government policies
implementing economic adjustment are responsible,
we believe, for a large share of current investor
uncertainty in the key LDC debtors
The following examples illustrate the extent of gov-
ernment intervention in the economies of the key LDC
debtors. In the area of international trade and .fi-
nance, most governments:
? Maintain an "official" exchange rate.
? Provide foreign exchange only for approved
transactions.
? Require import and export licenses.
? Set import and export quotas.
? Impose tariffs on imports.
? Provide export subsidies.
? Register capital inflows.
? Approve capital outflows.
Within the domestic economy, governments generally:
? Control prices and provide subsidies.
? Set minimum wages and some employee benefits.
? Link wage increases to inflation.
? Set interest rates on deposits and loans.
? Control the level of domestic and foreign credit.
? Allocate credit to preferred sectors.
? Impose taxes and provide subsidies in selected
sectors.
? Monopolize public utility industries.
? Run state enterprises that dominate key sectors.
? Act as sole buyer and seller of major commodities.
In the area of foreign direct investment, many
governments:
? Require approval and registration of investment.
? Restrict entry into certain sectors.
? Tax repatriated profits.
? Limit royalty, dividend, and profit remittances.
? Restrict the share of equity ownership.
? Limit access to domestic credit.
? Provide only partial protection of patents, trade-
marks, and copyrights.
? Set performance requirements-local content, em-
ployment, exports, employee training, and technol-
ogy transfer
rate during the 1970s. Investment will also help
determine other important economic variables: the
pace of structural adjustment, technological advance-
ment, balance-of-payments positions, and compliance
with IMF programs. These variables will in turn
affect political events in and US relations with these
strategic LDC
Limited Recovery
We believe investment in the key LDC debtors will
rebound during the next five years, although it is
unlikely that investment growth will be high enough
to restore investment to its level before the interna-
tional financial crisis. We expect investment to grow
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at an average annual rate of 3 to 5 percent during the
rest of this decade, a dramatic improvement over the
average decline of 8.2 percent registered during the
past four years, but well below the 7.3-percent aver-
age growth of the 1971-80 period. Even if these
countries sustain investment growth of 5 percent
during the next five years, only two-thirds of the
1981-84 investment decline would be reversed; real
investment in 1989 would still be 9 percent lower than
in 1980. We also project that the share of GDP
devoted to capital formation will remain around last
year's level of 17-percent-substantially lower than in
1980
On the basis of our analysis of political and economic
trends in the key LDC debtors, we expect the follow-
ing pattern of investment in these countries during the
next five years:
? Continued Public Investment Rationalization. We
believe public investment rationalization, which be-
gan after the international financial crisis, will
continue, but at a slower pace. Governments will
favor projects that improve the balance of pay-
ments, yield identifiable short-term economic bene-
fits, or boost the living standards of the lower
income groups. Because severe economic problems
forced this rationalization, it is likely that some
backsliding will occur as economic pressures slowly
dissipate. Limited investment funds, however,
should minimize backsliding.
? Uneven Private Investment Recovery. We believe
investment will recover in nearly every industry but
at widely varying rates. As demand rises, so too will
the expected returns from investment projects. Ex-
pected returns will determine the investment growth
rate in each industry. There may, however, be a
lengthy lag between the demand and investment
recoveries because many industries are operating at
record-low levels of capacity utilization. Construc-
tion and consumer-oriented industries will probably
lead the investment recovery. Investment in indus-
tries nurtured by government assistance should also
remain strong.
? Public Sector's Role Unchanged. We foresee no
significant change in the public sector's share of
investment. Limited government resources and pres-
sure to maintain spending in the politically sensitive
areas of defense and social welfare should rule out
major increases in public investment. On the other
hand, despite privatization rhetoric, a deeply rooted
orientation toward active government participation
in the economy should preclude a significant drop in
public investment.
? Minor Role for Foreign Direct Investment. We
believe that foreign investment will rise, possibly to
its peak before the international financial crisis, but
it will continue to play a minor role in the invest-
ment process. It is unlikely that foreign investment
will exceed $6 billion per year or that its share of
total investment will surpass 2 percent. The bulk of
foreign investment in these countries should flow
into Brazil and Mexico. Although the foreign in-
vestment environment will slowly improve, major
structural impediments will remain. In general,
these countries have not addressed the key concerns
of foreign investors, the majority of which existed
before the international financial crisis.
? Investment Financed Solely by Domestic Re-
sources. These countries will probably have to rely
almost exclusively on domestic savings to finance
future investment. They will be unable to tap the
savings of foreigners through foreign borrowing to
the extent they did before the international financial
crisis. We believe that voluntary commercial lend-
ing to these countries will remain sharply curtailed.
Loans from official sources are expected to increase
only moderately. Consequently, we expect foreign
savings to finance no more than 5 percent of
investment during the rest of the decade
In our judgment, the projected investment rebound
will be caused by economic recovery in the key LDC
debtors during the next five years. Aggregate demand
could grow at an average annual rate of 3 to 5
percent, less than the 6-percent average growth of the
1971-80 period, but a significant improvement over
the average decline of about 1 percent during the last
four years. This demand recovery should stimulate
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Figure 8
Key LDC Debtors: Five-Year
Investment Outlook
Investment growth
--~ Indicates projected range, 1985-89
Indicates average. 1971-80
Venezuela
Brazil
Chile
Peru
Philippines
Argentina
Nigeria
Key LDC Debtors
I I l' I
-L - - 1 L- L
Figure 9
Key LDC Debtors: Rankings
by Key Factors Underlying
the Investment Outlook
Ranking relative to other key LDC debtors
? Highest
1
Lowest
Demand
prospects
Availability Stability of Investment
of investment political- prospects
Argentina
Brazil
funds economic
system
Chile
Mexico
Nigeria
Peru
Philippines
Venezuela
II 12
investment by increasing the expected returns from
investment projects. We foresee minimal improve-
ment, however, in the other key factors affecting the
pace of investment. Sluggish domestic savings and
limited access to foreign savings suggest that the high
cost/limited availability of investment funds will con-
tinue to put a damper on capital formation. A signifi-
cant improvement in the underlying level of political-
economic stability in these countries is also unlikely.
The level of investor uncertainty should fall marginal-
ly, however, as the economic pressures associated with
economic adjustment dissipate
Individual Country Outlooks
Our analysis, described below, indicates that invest-
ment growth in the key LDC debtors will vary widely
across countries during 1985-89; our projections of
average annual investment growth vary between I
and 6 percent (figure 8). These projections were
developed by ranking each country according to the
key factors that will determine investment growth
during the period-aggregate demand prospects,
cost/availability of investment funds, and stability of
the political-economic system (figure 9). On the basis
of these rankings, investment growth prospects were
assessed and a range of average annual investment
growth was set for each country. Our projections were
then compared to, and in some cases revised in light
of, the investment growth forecasts of major economic
consulting firms and other country experts. Given the
volatility of investment spending, our projections
should be viewed as benchmarks that indicate the
underlying trend in investment growth. As has histori-
cally been the case, annual investment growth may
fluctuate dramatically around five-year averages.
We believe Mexico will lead the key LDC debtors
with investment growth averaging 4 to 6 percent
annually during the next five years, at least
25 percent slower than during the 1971-80 period.
Although problems exist, Mexico's demand prospects
25X1
25X1
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and political-economic stability are ranked higher
than those of the other countries. After a period of
harsh austerity, demand is projected by the major
economic consulting firms to grow at an average
annual rate approaching 5 percent during 1985-89.
Although opposition parties are gaining strength, the
long tenure of the government party should lead to
relative political-economic stability. Regarding the
availability of investment funds, only Venezuela is
ranked higher. Mexico's banking system, mature by
LDC standards, is relatively efficient at mobilizing
domestic savings.
Inflation, devaluation fears, and capi-
tal flight will continue to dampen domestic savings
growth and limit the supply of funds available for
investment.
In Venezuela and Brazil annual investment growth
could average 3 to 5 percent through 1989. Venezue-
la's investment growth could come within a percent-
age point of the average annual rate of the 1970s;
investment in Brazil may grow at least 50 percent
slower. With demand projected to grow at an annual
rate of about 4 percent, the demand prospects of these
countries are relatively good. Venezuela's traditional-
ly high savings rate, low inflation, and relatively
stable currency earned Caracas the highest ranking
for availability of investment funds. Investment funds
may be scarce in Brazil because of triple-digit infla-
tion and high devaluation risk. Given Venezuela's two
decades of democracy and the broad popular and
military support for the constitutional process in
Brazil, the future political-economic environment of
these two countries should be relatively stable
In Peru, Chile, and the Philippines, we believe invest-
ment will grow 2 to 4 percent a year through 1989.
Investment growth in the Philippines may fall dra-
matically from the 11.2-percent annual rate regis-
tered during the 1970s. In contrast, Chile's invest-
ment growth rate may rise moderately from an
average of 1.1 percent during that period. Demand
prospects in these countries are considered fair-GDP
is expected to grow, on average, about 3 percent a
year. Historically low savings in Chile and inflation
and devaluation concerns in Peru and the Philippines
should limit the supply of investment funds. In Peru
and the Philippines, inflation/devaluation rates were
roughly 110 and 60 percent, respectively, last year.
Although Peru's domestic problems are more serious,
instability in all three countries should stifle invest-
ment growth. In Peru, the nationalistic, left-leaning
policies of President-elect Garcia, the Sendero
Luminoso insurgency, and a history of shifting eco-
nomic policies raise serious concerns about political-
economic stability. In the Philippines, a country with
a more stable economic system, the Aquino assassina-
tion, the succession question raised by President
Marcos's ill health, and a growing insurgency have
boosted the level of investor uncertainty. In Chile, we
believe rising opposition to the repressive rule of
President Pinochet will keep the level of political-
economic uncertainty high
Average annual investment growth in Argentina and
Nigeria should be slower than in the other countries,
averaging only 1 to 3 percent through 1989. Argentin-
a's investment growth may match its rate of the
1970s, but Nigeria's rate could be a full 7 percentage
points lower. Demand in these countries should be
sluggish, expanding at an average of about 2 percent a
year. Historically, low savings have restricted the
supply of investment funds in these countries. This
trend should continue as inflation-about 600 and
30 percent last year in Argentina and Nigeria, respec-
tively-and devaluation risk discourage domestic sav-
ing and spur further capital flight. Although Argenti-
na has recently taken bold steps to reduce runaway
inflation, the country's economic system may remain
unstable. Political stability, however, may improve
marginally under President Alfonsin. Although eco-
nomic crisis could bring down his government, if the
economy continues to limp along, Alfonsin may be the
first democratically elected leader since 1952 to com-
plete his term. Nigeria, on the other hand, has a more
stable economic system, but its political prospects are
dismal. Lagos probably will continue to suffer from
numerous political problems: divisions in the ruling
military, student dissatisfaction, and regional tension.
Even if investment in each country grows at the
highest projected rate through 1989, only three key
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LDC debtors will regain the ground lost since the
international financial crisis (figure 12 at the end of
appendix A). Venezuela, the Philippines, and Nigeria
could have investment in 1989 that is 13, 7, and 2
percent higher, respectively, than before the crisis.
Their full recovery will result from investment down-
turns that were less severe than the other countries'
rather than particularly rapid investment growth dur-
ing 1985-89. In contrast, we project investment in
Argentina, which should remain sluggish through
1989 following its precipitate decline in the 1981-84
period, will still be at least 46 percent lower in 1989
than in 1980. Peru and Chile may regain more lost
ground than Argentina, but their investment should
still fall about 30 percent short of precrisis peaks. The
top two debtors, Mexico and Brazil, aided by relative-
ly high investment growth, should regain all but about
15 and 10 percent, respectively, of the ground lost
following international financial problems
Factors Affecting the Outlook
Our investment growth projections are sensitive to
five key global economic variables: oil prices, interest
rates, world GDP growth, commodity prices, and
commercial bank lending. Through the balance of
payments, changes in these variables could affect the
required level of domestic austerity, in turn affecting
the pace of investment. Shifts in these global econom-
ic conditions generally will have different effects on
the investment outlook of individual key LDC debt-
ors. Specifically:
? Falling Oil Prices. An oil price slump would slow
investment growth in the oil exporters-Mexico,
Venezuela, Nigeria, and Peru-and free more re-
sources for investment in the oil importers Brazil,
Chile, and the Philippines. Oil price changes would
have little direct effect on Argentina because of
Buenos Aires' energy independence.
? Rising Interest Rates. A runup of interest rates
would probably choke off investment growth in all
eight countries. Because of their lower interest
payment burden, however, Venezuela and Nigeria
are less sensitive to interest rate increases. The other
countries are highly vulnerable. Last year, each one
devoted more than one-third of their foreign ex-
change earnings to interest payments.
? Slower World GDP Growth. Because the key LDC
debtors are dependent on exports earnings, a world-
wide recession, or even rising protectionism, could
have considerable impact on their investment
growth. Because nonoil exports react more to chang-
ing economic conditions, we would expect invest-
ment in Argentina, Brazil, Chile, and the Philip-
pines to fall off more than investment in the oil
exporters.
? Commodity Price Slump. In several countries, a
drop in the price of a key nonoil commodity could
have significant impact on investment. The invest-
ment outlook for Chile, and Peru to a lesser extent,
would be downgraded considerably if copper prices
fall sharply. As Buenos Aires becomes increasingly
dependent on grain exports, sagging grain prices
could damage Argentina's investment prospects.
? Resumption of Bank Lending. Although unlikely, a
resumption of voluntary commercial bank lending to
some countries would improve their investment out-
look significantly. Recent country risk ratings indi-
cate that Mexico and Venezuela would be the first
countries, if any, to secure voluntary bank lending.
With dismal credit ratings, Argentina and Chile
would probably be the last countries to secure loans.
Our investment projections are also highly sensitive to
political conditions in the key LDC debtors. The
lackluster investment performance of Peru, Argenti-
na, and Chile during the 1970s can be traced directly
to political upheaval that spilled over into the econo-
my. During periods of political instability, investment
declines because investors find it impossible to formu-
late an economic outlook-the key to gauging the
future returns from prospective investment projects.
Heightened political uncertainty also spurs capital
flight, choking off investment as the pool of funds
available for project financing shrinks. Our projec-
tions assume the most likely political scenario-no
significant improvement or deterioration in the under-
lying level of political stability in these countries
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during 1985-89. In the event of a major shift in a
country's political structure, investment growth could
differ significantly from our projection.
An unforeseen shift in the pace of domestic economic
policy reform in the key LDC debtors would also
invalidate our investment projections. We believe that
inefficient economic policies are a major roadblock
preventing the key LDC debtors from achieving their
full economic potential. Our previous research indi-
cates that the Latin American debtors have high
potential for rapid industrialization; the Philippines
and Nigeria have somewhat lower industrialization
potential.' Relative to other LDCs, most of these
countries have laid a strong foundation for develop-
ment, particularly in the areas of health, education,
and domestic infrastructure. They continue, however,
to follow economic policies hampering economic
growth. If they abandoned their current policies of
active intervention in and stringent regulation of their
economies, we believe that within several years there
could be a surge in economic activity, caused in part
by a dramatic increase in investment. However, given
the shortrun economic and political costs, we foresee
minimal reform of domestic economic policy during
1985-89.
The investment slump following the international
financial crisis and the historically slow investment
growth projected through 1989 portend a number of
future problems for these eight countries, which could
complicate US foreign policy
Slower Economic Growth
Because investment is required to expand the produc-
tive capacity of an economy, slow investment growth
in the key LDC debtors may limit their rate of
economic growth and development in the longer term.
Slow economic growth, coupled with rapid population
growth, could lead to minimal improvement or possi-
bly continued decline in living standards. On the heels
of the sharp drop in living standards registered recent-
ly in some countries, any further decline in the
standards of living could compound existing political
and economic tensions. In the short term, however,
slower investment should not limit economic growth
because of the record-low levels of capacity utilization
in most countries
Slower Structural Adjustment
Slow investment growth may impede structural ad-
justment in the key LDC debtors. In an attempt to
solve their international financial problems and, more
important, to qualify for badly needed bank loans,
these countries have embarked on structural adjust-
ment. If actively pursued, this economic restructuring
will require significant investment as capital stock
must be built up in emerging areas and replaced in
areas where the existing capital stock has become
obsolete. Given our investment projections, capital
shortages may arise and slow the pace of structural
adjustment. Slower structural adjustment could jeop-
ardize compliance with IMF programs in the short
term and cause international financial problems and
economic inefficiency to linger over the longer term.
Slower Technology Absorption
Slow investment growth may limit the transmission of
new technology in the key LDC debtors. Ongoing
investment is necessary if developing countries are to
capitalize on technological advances. Slower invest-
ment growth in these countries carries with it a slower
rate of technology absorption. With slow investment
growth, their capital stocks become outmoded and the
countries fall further behind technologically. By set-
ting up barriers to foreign direct investment, these
countries compound the problem by blocking a key
conduit for technological advances. If technology
absorption slows, economic growth may be slower and
trade competitiveness may be lost, further aggravat-
ing existing international financial problems
If these problems develop, US relations with the key
LDC debtors could become more contentious.
Specifically:
? Pressure on US Policy. There could be increased
pressure on Washington to take these countries'
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Economic Policy Reform: Limited Progress to Date
We believe that the elimination of inefficient econom-
ic policies in the key LDC debtors would precipitate a
surge in investment that would spark economic
growth. However, economic policy reform in these
countries since the international financial crisis has
been limited. These LDCs successfully reformed poli-
cies affecting the balance of payments, but their
success in curing domestic economic ills through
policy reform was less dramatic.
Through a mixture of administrative controls and
policy reform, these countries slashed their aggregate
current account deficit by nearly 90 percent since
1981. In 1984, the current accounts of Mexico and
Venezuela swung into surplus and the other coun-
tries' deficits were 40 to 95 percent lower than their
peak. Mexico, Brazil, and Venezuela improved their
current account balance by $8-10 billion each in the
year following financial crisis. This improvement can
be traced to strict control offoreign exchange and
imports and dramatic currency devaluations. Seven
countries sharply devalued their currencies, in real
terms, in 1982 or 1983 after several years of steady
appreciation. Nigeria, however, continues to stead-
fastly resist real devaluation
The aggregate fiscal deficit in these countries, which
grew by about 100 and 20 percent in 1981 and 1982,
began to slowly decline in 1983 as austerity measures
took hold. Mexico, Venezuela, and the Philippines
made the most progress. In contrast, deficits in
Argentina and Brazil continued to grow. The coun-
tries addressed fiscal deficits by first slashing invest-
ment spending by 30 to 50 percent in 1983. They then
turned to current expenditures, reducing real wages,
limiting subsidies, and scaling back state enterprises.
In Brazil, for example, Law 2065 was passed limiting
wage indexation and the Special Secretariat of State
Company Control was formed to scrutinize the bud-
gets of some 300 public companies. Increased atten-
tion was also paid to tax collection. To combat tax
evasion, Mexico formed a 3,000-lawyer task force
and stiffened the penalties for tax cheating
Although some key LDC debtors have taken steps to
reform their financial systems, most have made
minimal progress in controlling money supply growth.
Rapid money supply growth caused their average
inflation rate, excluding Argentina, to double during
the past four years, reaching 70 percent in 1984.
Inflation topped 600, 200, and 110 percent last year
in Argentina, Brazil, and Peru, respectively. Rapid
money supply growth can be traced to increased
pressure on central banks to expand domestic credit
to cover fiscal deficits previously financed by foreign
borrowing. More progress has been made in the area
of structural reform. Mexico, Brazil, and the Philip-
pines have taken some steps to consolidate or deregu-
late their financial systems. Like the rest of the
countries, however, their financial systems remain
highly regulated.
Some key LDC debtors have made progress in re-
forming highly visible economic policies that distort
the allocation of resources, but most other supply-
distorting policies and procedures remain. In the
politically sensitive area of price controls and subsi-
dies, the degree of reform spans the spectrum: Argen-
tina relied increasingly on price controls and subsi-
dies under Alfonsin; Brazil pursued an "off again, on
again" course; Mexico, Venezuela, and the Philip-
pines reduced the scope of price controls and subsi-
dies, concentrating on staple goods. In contrast, there
has been little variation in the degree of reform in
less-visible supply policies. Most supply-distorting
taxes, tariffs, producer pricing policies, trade con-
trols, administrative procedures, and legislative and
institutional constraints remain. In fact, given the
increased regulation of international trade and fi-
nance, supply distortion may actually be on the rise.
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needs into account during the formulation of US
monetary, fiscal, and trade policies.
? Pleas for US Assistance. They could press the
United States for increased development assistance.
In a cash-flow bind, the United States may be
forced into the role of "lender of last resort."
? United States Caught in Crossfire. If debtor-credi-
tor conflicts arise, the United States could be
caught in the middle; both debtors and creditors
would pressure Washington to support their posi-
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Appendix A
Investment Trends Before
the Financial Crisis
Investment in the key LDC debtors rose steadily
during the decade before the international financial
crisis as the countries committed an increasing share
of their economic resources to expanding the produc-
tive capacity of their economies. Despite deteriorating
investment climates in some countries, investment
grew at an average annual rate of 7.3 percent during
the 1971-80 period some 1.5 percentage points fast-
er than during the previous decade. On average, the
pace of investment surpassed the average annual
growth rate of GDP by nearly 2 percentage points.
Consequently, the share of GDP devoted to expansion
of the countries' capital stock rose to 23.5 percent in
1980--up from 19.8 percent in 1970.
The Philippines, Nigeria, and Brazil led the key LDC
debtors with average annual investment growth of
11.2, 10.4, and 9.6 percent, respectively. Investment
in the Philippines rose steadily following the imposi-
tion of martial law, which quelled the political unrest
that threatened the Marcos regime in the early 1970s.
Nigeria's rapid investment growth can be traced to a
dramatic expansion of state enterprises, especially in
the energy sector. Private-sector investment, however,
was stifled by nationalization fears and political insta-
bility-coups, attempted coups, and a shaky transi-
tion to civilian rule. Powered by demand growth
averaging 9 percent per year, strong domestic savings
growth, and more than $40 billion of net foreign
borrowing during the 1976-80 period, investment in
Brazil shot up from $23 billion in 1970 to $58 billion
in 1980.
In Mexico and Venezuela, investment grew at an
average annual rate of 8.3 and 6.1 percent, respective-
ly. Mexican investment expanded until financial prob-
lems arose in 1976-77 and then rose sharply through
the rest of the decade, financed by rising oil revenues
and foreign borrowing. Complementing rising state
enterprise investment, much of it in the oil industry,
private-sector investment was strong because of rising
demand, attractive financing, and a stable political-
economic system. In Venezuela, investment sagged
twice during the decade, when Caracas joined the
Andean Pact in 1974 and when the Herrera adminis-
tration embarked on economic austerity during 1978-
80. A proliferation of state enterprises and a surge in
foreign borrowing, which caused foreign debt to in-
crease tenfold during the 1976-80 period, precipitated
a jump in public-sector investment. Private-sector
investment was limited by modest demand growth and
a shrinking pool of locally generated investment
funds, the result of massive capital flight
Investment in Peru, Argentina, and Chile was slug-
gish during the 1970s, growing at average annual
rates of 5.1, 3.1, and 1.1 percent, respectively. Eco-
nomic and political upheaval was the root cause of
this lackluster investment performance: Peru adopted
Plan Inca in 1974-a plan for the eventual transfor-
mation of all economic institutions along socialist
lines: Juan and Isabel Peron led Argentina down the
socialist path until the military intervened in 1976 to
suppress growing civil unrest. In Chile, outbreak of
virtual civil war in 1973, during the term of socialist
President Allende, was followed by a five-year "state
of emergency." Investment in these countries was also
hampered by slack demand and scarce investment
funds. Demand grew only 2 to 3 percent a year, on
average, during this period. Domestic savings slumped
as accelerating inflation eroded the returns to savers.
The average annual inflation rate in Argentina and
Chile exceeded 120 percent
Supporting the view that investment growth is a
major determinant of the pace of economic develop-
ment, the historical relationship between investment
and GDP growth in the key LDC debtors is strong
(figure 10). Although a wide range of factors influence
the pace of economic development, investment is often
the key because capital generally is the scarcest of all
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Figure 10
Key LDC Debtors: GDP and
Investment Growth, 1960s and 70s
e 1960s
? 1970s
0 -2 0 2 4 6 8 10 12 14
Investment growth rate
the factors required to expand production in LDC
economies over the longer term. Our statistical analy-
sis indicates that investment growth explains nearly
70 percent of the variation in GDP growth in these
countries during the 1970s. Moreover, we estimate
that GDP growth rose by four-tenths of a percentage
point for each 1-percentage-point rise in the rate of
investment during the decade. Although the link
between the two is imperfect, the rate of investment is
an important predictor of GDP growth, which in turn
is a key indicator of future economic and political
conditions in LDCs
As the volume of investment in the key LDC debtors
rose, a pattern of investment evolved during the
decade before the international financial crisis. Im-
portant trends in the type, sector, and financing of
Figure 11
Key LDC Debtors: Pattern
of Investment, 1980
Machinery and
equipment 40.3
Private sector 64.0
Public sector 33.6
Foreigners 2.4
Domestic savings 89.1
Foreign savings 10.9
Types of Projects
Although investment projects in the private sector of
the key LDC debtors were small and highly diversi-
fied during the 1970s, public-sector investment was
generally concentrated in large construction projects.
This concentration may explain the rise in the con-
struction share of investment that occurred in most
countries during the period (figure 11). These projects
fall into four general categories:
? Resource Projects. In several countries, there was
large investment in projects exploiting mineral re-
sources. The surge in petroleum output in Mexico
and Nigeria was the result of massive investment in
the oil sector during the 1970s. In Peru and Chile,
investment funds were allocated to large mining
projects like Peru's Cuajone copper mine.
investment developed during this period
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Table 1
Key LDC Debtors: Sectoral Investment Trends
Investment
(billion 1980 US $)
Public Share of Investment
(percent)
Foreign Share of Investment
(percent)
Argentina
25.5
34.8
38.0
41.6
0.1
1.9
Brazil
23.3
58.4
18.5
10.4
3.5
3.2
Chile
4.4
4.9
56.9
26.5
NA
4.3
Mexico
19.6
43.7
33.0
43.0
3.2
4.9
Nigeria
7.9
21.2
29.3
62.0
5.1
NA
Peru
1.7
2.8
27.3
32.0
NA
1.0
Philippines
3.0
8.7
10.9
16.2
NA
2.9
Venezuela
8.3
15.0
23.2
50.0
NA
0.4
? Ittlrastructure Projects. Large projects that bolster
energy, transportation, and communication net-
works were given priority. Ambitious projects in this
category include Brazil's Trans-Amazon Highway
and Itaipu hydroelectric complex. More resources
were also devoted to improving previously ignored
residential housing stocks.
? Industrial Projects. A substantial amount of public
funds were invested in heavy industry facilities like
steel mills, aluminum smelters, petrochemical
plants, paper mills, and oil refineries. Rising invest-
ment in these projects help place Brazil, Mexico,
Venezuela, and the Philippines among the most
rapidly industrializing countries of the 1970s.
? "Glamour" Projects. Investment funds were also
sunk into large "prestige" projects that probably
were not justified on economic grounds. Such proj-
ects include international airports, fancy hotels,
subway systems, and superhighways. Brazil and
Argentina also embarked on costly nuclear power
programs.
Roles of Public and Foreign Sectors Rise
During the 197 1-80 period, the public sector's role in
the investment process expanded rapidly in most key
LDC debtors. As a group, the public sector's share of
investment reached 33.6 percent in 1980-up from
29.9 percent in 1970. Public-sector involvement, how-
ever, varied widely across countries (table 1). In 1980
the public sector's share was highest, 40 to 60 percent,
in Nigeria, Venezuela, Mexico, and Argentina, and
lowest, 10 to 20 percent, in Brazil and the Philippines.
During the decade the share rose in six countries by
an average of 14 percentage points. The share jumped
some 30 percentage points to 62 and 50 percent in
Nigeria and Venezuela, respectively, as state enter-
prises, especially those in the energy sector, expanded
rapidly. In contrast, a shift away from socialist ideolo-
gy in Chile and rapid private-sector growth in Brazil
caused the share to drop by 30.4 and 8.1 percentage
points, respectively]
Although foreign direct investment in the key LDC
debtors increased during the decade, foreign investors
played a minor role in the capital formation process.
Foreign investment reached $4.5 billion in 1980-$3
billion higher than in 1970. Brazil and Mexico, with
about $2 billion of foreign investment each, accounted
for nearly 90 percent of the total. The foreign share of
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Table 2
Key LDC Debtors: Trends in Investment Financing
Argentina
Brazil
Chile
Mexico
Nigeria
Peru
Philippines
Venezuela
Domestic Savings Foreign Savings a Foreign/Total
(billion 1980 US $) (billion 1980 US $) (percent)
25.7 28.7 0.3 4.8 1.2 14.3
24.2 53.9 1.6 12.8 6.3 19.2
2.3 4.7 0.2 2.0 7.1 29.4
20.5 42.6 2.1 8.2 9.2 16.1
8.0
2.9
3.7
14.1
investment, however, was only 2.4 percent in 1980, up
a fraction from 1970. The share rarely exceeded 5
percent in any country during the period. Excessive
government regulation and high country risk appear
to be the root causes of sluggish foreign investment
performance. Many of these countries adopted highly
restrictive foreign investment regulations, like those in
the Andean Pact, to shelter local industries and to
avoid "foreign economic domination." In others, polit-
ical instability and nationalization jitters clouded the
foreign investment climate
Growing Dependence on Foreign Capital
Although the contribution of foreign direct investors
was small, the key LDC debtors relied increasingly on
foreign savings, secured mostly through foreign bor-
rowing, to finance domestic investment during the
1970s. These LDCs absorbed more than $20 billion in
foreign savings in 1980-four times more than a
decade earlier. About $26 billion of foreign savings
flowed into the top three debtors-Argentina, Brazil,
and Mexico-that year (table 2). In contrast, Nigeria
and Venezuela, with surpluses because of rising oil
revenues and low debt service, each transferred $4.5
billion of their savings to foreigners. As a group,
2.0 2.5 17.5
-4.7 1.4 NA
foreign savings financed about 11 percent of invest-
ment in 1980-up from 4.5 percent in 1970. Chile's
reliance on foreign savings to finance investment was
far greater than that of the other countries. Nearly 30
percent of investment in Chile was financed by for-
eign savings in 1980, compared with an average of 17
percent in the other countries with foreign savings
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Figure 12
Key LDC Debtors: Investment, 1970-89a
Note scale change
Brazil
I I I I I I I I 1 I I I I I '. I I I I I I
0 1970 75 80 84 89 0 1970 75 80 84 89 0 1970 75
0 1970 75 80 84 89 0 1970 75 80 84 89 0 1970 75 80 84 89 0 1970 75 80 84 89
,'Shaded area represents the projected range of investment
during the 1981-89 period, as timing our projected range of
average annual investment growth.
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Appendix B
Supporting Data a
Table B-1
Key LDC Debtors: Volume of Investment
Total
52.6 65.1
93.7
143.1
Argentina
15.9 16.6
25.5
26.9
29.1
34.8
31.3
32.5
34.8
26.8
22.7
19.8
16.3
Brazil
51.1
50.3
53.1
55.4
58.4
54.3
52.7
44.4
41.4
Chile
2.5
2.9
3.4
4.0
4.9
5.6
3.5
3.0
3.2
Mexico
8.2 12.5
19.6
29.3
29.4
38.0
43.7
50.1
42.1
31.5
31.9
Nigeria
2.0 4.4
7.9
16.2
18.4
23.2
19.9
18.9
21.2
21.2
16.8
18.3
18.7
Peru
1.0 1.7
1.7
3.4
2.9
2.4
2.1
2.2
2.8
3.3
3.2
2.1
2.0
Philippines
1.7 2.7
3.0
5.7
6.2
6.5
7.3
8.4
8.7
8.8
8.9
8.6
7.8
Venezuela
7.8 9.
7
8.3
11.5
16.5
21.7
22.1
18.6
15.0
15.2
15.2
14.5
13.5
Table B-2
Key LDC Debtors: Average Annual Growth Rate of Investment
Total
4.3
6.5
10.2
9.1
8.4
0.9
Argentina
4.4
5.4
0
8.2
19.6
-10.1
Brazil
0
4.5
12.9
8.5
-1.6 5.6
4.3
5.4
-7.0
-2.9
- 15.7
-6.8
Chile
-5.6
7.3
-21.1
-16.7
16.0
17.2
17.6
22.5
14.3
-37.5
-14.3
6.7
Mexico
6.8
7.7
9.3
0.3
-6.8
15.3
20.3
15.0
14.6
-16.0
-25.2
1.3
Nigeria
15.8
43.6
24.6
13.6
26.1
-14.2
-5.0
12.2
0
- 20.8
8.9
2.2
Peru
21.4
6.2
6.2
-14.7
-17.2
-12.5
4.8
27.3
17.9
-3.0
-34.4
-4.8
Philippines
3.8
-11.8
32.6
8.8
4.8
12.3
15.1
3.6
1.1
1.1
-3.4
-9.3
Venezuela
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Table B-3
Key LDC Debtors: Investment as a Share of GDP
Total
19.9
19.1
19.8
Argentina
20.2
17.0
21.2
Brazil
22.0
19.0
21.5
Chile
20.4
19.9
20.5
Mexico -
16.4
17.8
19.9
Nigeria
__10.7
18.2
15.7
Peru
11.5
14.4
12.0
Philippines
14.4
17.8
15.4
22.6
23.4
24.0
23.6
23.1
23.5
22.9
20.7
18.3
17.2
19.4
21.1
23.7
22.1
21.5
22.9
18.8
16.8
14.3
11.5
26.5
26.2
24.4
24.6
24.1
23.5
22.3
21.4
18.6
17.2
15.6
12.6
13.3
14.4
15.6
17.8
19.2
14.0
12.1
12.4
21.7
20.9
18.8
20.1
22.1
23.5
24.9
21.0
16.5
16.4
24.3
24.9
29.4
26.7
24.0
26.8
28.3
22.9
26.1
27.0
19.2
16.0
13.3
11.7
11.8
14.4
16.3
15.8
11.7
11.1
21.8
22.2
21.8
23.1
24.9
Table B-4
Key LDC Debtors: Investment in Construction
Total
34.1
38.5
54.8
80.0
89.8
99.7
103.7
107.0
113.1
Argentina
9.5
9.3
15.9
16.8
18.6
20.5
20.2
20.2
21.9
Brazil
10.8
9.6
13.5
24.4
28.9
31.3
33.6
35.2
37.3
Chile
1.8
2.3
2.7
1.8
1.4
1.4
1.6
1.9
2.4
Mexico
16.5
16.1
18.3
20.7
23.3
Nigeria
10.5
13.8
12.1
11.8
13.5
Peru
Philippines
Venezuela
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Table B-5
Key LDC Debtors: Construction Investment as a Share of Total Investment
Total
64.8
59.2
58.5
55.9
57.5
58.9
60.7
60.1
59.7
Argentina
59.5
55.8
62.4
62.5
63.9
58.9
64.4
62.3
62.9
Brazil
82.3
68.4
58.0
51.9
56.5
62.2
63.3
63.5
63.9
Chile
61.2
67.6
61.5
59.2
56.7
48.9
46.8
47.8
48.2
Mexico
62.2
56.3
57.3
54.3
56.1
58.6
57.8
54.5
53.3
Nigeria
64.5
62.9
59.0
62.9
57.2
59.6
60.9
62.3
63.7
Peru
54.8
49.5
48.8
47.3
50.5
54.4
56.9
55.5
55.2
Philippines
57.5
55.2
39.0
40.9
49.1
51.8
48.5
47.3
47.6
Venezuela
53.5
53.7
57.9
60.7
57.1
55.2
59.6
64.2
61.1
Table B-6
Key LDC Debtors: Investment in Machinery and Equipment
Total
18.5
26.6
38.9
63.1
66.3
69.5
67.1
71.0
76.4
Argentina
6.4
7.3
9.6
10.1
10.5
14.3
11.1
12.3
12.9
Brazil
2.3
4.5
9.8
22.7
22.2
19.0
19.5
20.2
21.1
Chile
1.1
1.1
1.7
1.2
1.1
1.5
1.8
2.1
2.5
Mexico
3.1
5.5
8.4
13.4
12.9
11.3
13.3
17.3
20.4
Nigeria
0.7
1.6
3.2
6.0
7.9
9.4
7.8
7.1
7.7
Peru
0.5
0.9
0.9
1.8
1.4
1.1
0.9
1.0
1.3
Philippines
0.7
1.2
1.8
3.4
3.2
3.1
3.8
4.4
4.6
Venezuela
3.6
4.5
3.5
4.5
7.1
9.7
8.9
6.7
5.8
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Table B-7
Key LDC Debtors: Investment in Machinery and
Equipment as a Share of Total Investment
1960 1965 1970 1975 1976 1977 1978 1979 1980
Total 35.2 40.8 41.5 44.1 42.5 41.1 39.3 39.9 40.3
Argentina 40.5 44.2 37.6 37.5 36.1 41.1 35.6 37.7 37.1
Brazil 17.7 31.6 42.0 48.1 43.5 37.8 36.7 36.5 36.1
Chile 38.8 32.4 38.5 40.8 43.3 51.1 53.2 52.2 51.8
Mexico 37.8 43.7 42.7 45.7 43.9 41.4 42.2 45.5 46.7
Nigeria 35.5 37.1 41.0 37.1 42.8 40.4 39.1 37.7 36.3
Peru 45.2 50.5 51.2 52.7 49.5 45.6 43.1 44.5 44.8
Philippines 42.5 44.8 61.0 59.1 50.9 48.2 51.5 52.7 52.4
Venezuela 46.5 46.3 42.1 39.3 42.9 44.8 40.4 35.8 38.9
Table B-8
Key LDC Debtors: Investment in the Public Sector
Total 15.3 19.1 28.0 43.1 54.3 59.9 59.1 57.3 63.7
Argentina 4.0 5.1 9.7 10.8 13.4 15.6 14.3 13.4 14.5
Brazil 2.7 3.5 4.3 7.4 8.6 8.5 7.6 6.4 6.1
Chile 1.2 1.6 2.5 2.2 1.6 1.5 1.5 1.3 1.3
Mexico 3.3 4.0 6.5 12.1 11.2 10.4 13.7 16.1 18.8
Nigeria 1.0 1.4 2.3 5.7 12.4 15.1 13.0 11.5 13.1
Peru 0.1 0.2 0.5 1.2 1.0 0.8 0.6 0.7 0.9
Philippines 0.3 0.3 0.3 0.7 0.7 0.8 0.9 1.1 1.4
Venezuela 2.7 2.8 1.9 2.9 5.5 7.1 7.4 6.7 7.5
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Table B-9
Key LDC Debtors: Public-Sector Share of Total Investment
Total
29.1
29.3
29.9
30.1
34.8
35.4
34.6
32.2
33.6
Argentina
25.1
30.9
38.0
40.1
46.1
44.8
45.6
41.1
41.6
Brazil
20.7
24.9
18.5
15.8
16.8
16.9
14.4
11.6
10.4
Chile
41.2
48.4
56.9
73.7
62.8
53.4
45.5
33.3
26.5
Mexico
40.2
32.4
33.0
41.4
38.1
38.1
43.5
42.4
43.0
Nigeria
50.4
31.6
29.3
35.0
67.4
65.1
65.2
60.8
62.0
Peru
9.4
14.3
27.3
36.3
33.8
32.3
28.2
31.8
32.0
Philippines
15.3
11.3
10.9
12.0
11.9
11.8
11.7
13.3
16.2
Venezuela
35.2
28.6
23.2
25.6
33.3
32.7
33.7
36.2
50.0
Table B-10
Key LDC Debtors: Investment in the Private Sector by Locals
Total
36.3
44.7
64.2
95.5
99.0
105.0
107.1
115.3
121.3
Argentina
11.7
11.4
15.8
16.0
15.5
19.0
16.7
18.9
19.7
Brazil
10.0
10.2
18.2
37.9
40.4
39.4
43.0
46.3
50.5
Chile
1.6
1.8
2.1
0.7
0.9
1.3
1.6
2.4
3.4
Mexico
4.6
7.9
12.5
16.3
17.3
16.2
16.8
20.4
22.8
Nigeria
0.9
2.6
5.2
10.0
5.5
7.5
6.7
7.1
8.8
Peru
0.9
1.4
1.4
1.7
1.7
1.6
1.5
1.4
1.9
Philippines
1.5
2.4
2.7
4.9
5.3
5.4
6.2
7.1
7.0
Venezuela
5.1
6.9
6.4
8.0
12.2
14.6
14.6
11.8
7.4
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Table B-I1
Key LDC Debtors: Local Private Investment
as a Share of Total Investment
Total
69.0
68.6
68.5
66.8
63.4
62.0
62.7
64.8
64.0
Argentina
73.8
68.5
61.9
59.5
53.4
54.7
53.4
58.2
56.5
Brazil
76.3
72.5
78.0
80.4
79.1
78.3
81.0
83.5
86.4
Chile
54.3
54.3
46.6
24.0
37.3
45.6
47.9
59.9
69.2
Mexico
55.7
63.5
63.8
55.8
59.0
59.2
53.3
53.7
52.1
Nigeria
45.7
60.0
65.6
61.5
30.1
32.4
33.5
37.4
41.4
Peru
88.0
80.3
80.7
51.0
58.3
64.7
70.3
64.6
67.0
Philippines
88.5
89.6
90.7
85.6
85.2
83.6
85.0
84.1
80.9
Venezuela
65.6
71.3
77.3
69.4
74.0
67.3
65.9
63.3
49.6
Table B-12
Key LDC Debtors: Investment in the Private Sector by Foreigners
Total 1.0 1.3 1.5 4.5 2.8 4.3 4.6 5.4 4.5 6.5 4.8 2.4 1.7
Argentina 0.2 0.1 0 0.1 0.1 0.2 0.3 0.2 0.7 0.7 0.2 0.1 0.1
Brazil 0.4 0.4 0.8 1.8 2.1 2.4 2.5 2.7 1.9 2.3 2.5 1.3 0.6
Chile 0.1 -0.1 -0.2 0.1 0 0 0.2 0.3 0.2 0.3 0.3 0.1 0.1
Mexico 0.3 0.5 0.6 0.8 0.9 0.7 1.0 1.5 2.1 2.3 0.7 0.4 0.3
Nigeria 0.1 0.4 0.4 0.6 0.5 0.6 0.3 0.3 -0.7 0.2 0.3 0.3 0.2
Peru 0 0.1 -0.1 0.4 0.2 0.1 0 0.1 0 0.1 0.1 0 0.1
Philippines -0.1 0 0 0.1 0.2 0.3 0.2 0.2 0.3 0.4 0.4 0.1 0.1
Venezuela -0.1 0 0 0.6 -1.2 0 0.1 0.1 0.1 0.2 0.2 0.1 0.2
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Table B-13
Key LDC Debtors: Foreign Private-Sector Investment
as a Share of Total Investment
Total
1.9 2.1
1.6
3.1
1.8
2.6
2.7
3.0
2.4
3.5
2.9
1.7
1.3
Argentina
1.1 0.6
0.1
0.4
0.5
0.5
1.0
0.7
1.9
2.8
1.0
0.8
0.5
Brazil
3.0 2.6
3.5
3.8
4.1
4.8
4.6
4.9
3.2
4.2
4.8
2.8
1.4
Chile
4.5 NA
NA
2.3
NA
1.0
6.6
6.8
4.3
6.2
9.4
4.1
4.1
Mexico
4.1 4.1
3.2
2.8
2.9
2.7
3.2
3.9
4.9
4.6
1.8
1.3
0.9
Nigeria
3.9 8.4
5.1
3.5
2.5
2.5
1.3
1.8
NA
0.7
1.8
1.6
1.3
Peru
2.6 5.4
NA
12.7
7.9
3.0
1.5
3.6
1.0
3.4
1.6
1.4
3.4
Philippines
NA NA
NA
2.4
2.9
4.6
3.3
2.6
2.9
4.9
4.2
1.0
1.3
Venezuela
NA
0.1
NA
5.0
NA
NA
0.4
0.5
0.4
1.1
1.4
0.5
1.4
Table B-14
Key LDC Debtors: Total Savings
Total
53.0
72.5
106.3
157.6
170.9
184.0
184.0
183.3
189.3
190.4
186.6
159.2
159.4
Argentina
13.0
15.4
26.1
27.5
32.5
38.5
35.6
34.6
33.4
27.2
30.5
29.6
30.5
Brazil
14.0
16.9
25.8
55.9
58.6
59.2
58.6
62.0
66.7
61.7
66.6
53.6
51.2
Chile
1.3
2.0
2.5
3.2
2.9
3.5
4.4
5.0
6.7
7.9
4.8
5.7
5.7
Mexico
10.0
16.2
22.6
34.6
34.2
34.9
38.9
44.6
50.7
59.1
45.9
39.0
43.2
Nigeria
1.5
4.5
8.8
17.6
21.1
23.6
21.4
19.8
20.6
20.2
17.4
20.7
17.7
Peru
3.0
3.6
2.5
5.3
4.5
3.6
3.4
2.5
3.0
4.5
4.6
3.1
3.5
Philippines
1.8
2.1
3.8
7.1
8.2
8.3
9.4
10.8
11.6
12.0
13.2
13.0
10.5
Venezuela
8.6
11.8
14.3
6.5
9.0
12.3
12.4
4.1
-3.4
-2.0
3.6
-5.5
-2.8
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Table B-15
Key LDC Debtors: Domestic Savings
Total
Argentina
50.6 53.9 51.0 52.5 48.2 48.5
0.9 1.9 2.3 2.5 3.1 2.8 3.1 3.7 4.7 3.5 2.8 4.8 4.7
9.2 15.2 20.5 28.9 29.6 32.6 35.1 38.6 42.6 46.4 43.4 43.6 45.0
Nigeria 1.0 3.9 8.0 17.7 20.6 22.3 16.9 21.6 24.8 14.9 11.1 17.8 17.3
Peru 3.0 3.3 2.9 3.1 2.9 2.4 3.1 3.4 3.0 3.0 3.2 2.3 2.7
Philippines 1.8 2.4 3.7 5.8 6.7 7.3 8.0 9.1 9.6 9.9 10.3 10.6 9.3
Venezuela 9.6 11.9 14.1 9.6 9.4 8.3 5.6 4.5 1.4 1.6 -0.1 -1.2 -0.6
Table B-16
Key LDC Debtors: Share of Domestic Savings in Total Savings
Total 95.2 99.4 95.5 88.2 90.9 91.5 86.9 90.2 89.1 80.4
Argentina- 95.9 103.5 98.8 93.4 102.7 103.7 106.2 98.4 85.7 84.1 93.0 92.7 92.6
Brazil 90.4 104.0 93.7 82.2 84.9 89.0 85.8 81.5 80.8 82.6 78.9 90.0 94.9
Chile 73.0 94.8 92.9 78.0 106.9 79.7 70.9 73.9 70.6 44.9 58
7 84
4 81
2
.
.
.
Mexico 91.6 94.0 90.8 83.4 86.6 93.2 90.3 86.6 83.9 78.5 94.5 111.8 104.0
Nigeria 65.4 86.8 91.8 100.3 97.7 94.5 79.0 109.2 120.7 73.9 63.8 86.0 98.2
Peru , 100.7 90.2 115.7 58.7 64.4 66.9 93.2 134.1 102.1 66.3 69.0 75.3 75.9
Philippines
Venezuela
81.6 81.8 87.5 85.3 84.2 82.5 82.5 78.1 81.7 88.5
NA NA 21.6 22.1
81.2 96.5 97.2
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 Sanitized Copy Approved for Release 2010/12/14: CIA-RDP97R00694R000500150001-9
Confidential
Table B-17
Key LDC Debtors: Foreign Savings
Total
2.5
0.4
4.8
18.6
15.6 15.7
24.1
17.9
20.7
37.3
35.0
5.6
4.4
Argentina
0.5
-0.5
0.3
1.8
-0.9 -1.4
-2.2
0.6
4.8
4.3
2.1
2.2
2.3
Brazil
1.3
-0.7
1.6
9.9
8.8 6.5
8.3
11.4
12.8
10.7
14.1
5.4
2.6
Chile
0.3
0.1
0.2
0.7
-0.2------0.7
1.3
1.3
2.0
4.3
2.0
0.9
1.1
Mexico
0.8
1.0
2.1
5.7
4.6 2.4
3.8
6.0
8.2
12.7
2.5
-4.6
-1.7
Nigeria
0.5
0.6
0.7
-0.1
0.5 1.3
4.5
-1.8
-4.2
5.3
6.3
2.9
0.3
Peru
0
0.4
-0.4
2.2
1.6 1.2
0.2
-0.9
-0.1
1.5
1.4
0.8
0.9
Philippines
0
0.3
0.1
1.3
1.5 1.0
1.4
1.7
2.0
2.1
2.9
2.4
1.2
Venezuela
-1.0
0.1
0.2
-3.1
-0.3 4.0
6.8
-0.4
-4.7
-3.7
3.7
-4.3
-2.2
Table B-18
Key LDC Debtors:
Foreign Savings as a Share of Total Savings
Total
4.8
0.6
4.5
11.8
9.1
8.5
13.1
9.8
10.9
19.6
18.8
3.5
2.8
Argentina
4.1
NA
1.2
6.6
NA
NA
NA
1.6
14.3
15.9
7.0
7.3
7.4
Brazil
9.6
NA
6.3
17.8
15.1
11.0
14.2
18.5
19.2
17.4
21.1
10.0
5.1
Chile
27.0
5.2
7.1
22.0
NA
20.3
29.1
26.1
29.4
55.1
41.3
15.6
18.8
Mexico
8.4
6.0
9.2
16.6
13.4
6.8
9.7
13.4
16.1
21.5
5.5
NA
NA
Nigeria
34.6
13.2
8.2
NA
2.3
5.5
21.0
NA
NA
26.1
36.2
14.0
1.8
Peru
NA
9.8
NA
41.3
35.6
33.1
6.8
NA
NA
33.7
31.0
24.7
24.1
Philippines
0.6
NA
2.5
18.4
18.2
12.5
14.7
15.8 17.5
17.5
21.9
18.3
11.5
Venezuela
NA
NA
1.4
NA
NA
32.9
54.8
NA 140.2
178.6
102.6
78.4
77.9
Sanitized Copy Approved for Release 2010/12/14: CIA-RDP97R00694R000500150001-9
 Sanitized Copy Approved for Release 2010/12/14: CIA-RDP97R00694R000500150001-9
Table B-19
Key LDC Debtors: Gross Domestic Product
Total
264.2 341.0
472.2
631.8
668.3
705.3
722.8
770.4
807.8
807.9
798.4
777.0
783.2
Argentina
78.9 97.7
120.4
138.7
138.0
146.9
141.9
151.0
152.2
142.7
135.1
138.9
141.7
Brazil
59.6 74.3
108.4
177.9
195.2
205.8
215.7
230.1
248.2
243.4
246.8
239.0
240.2
Chile
14.2 17.1
21.5
19.2
19.9
21.8
23.6
25.6
27.6
29.1
25.0
24.8
25.9
Mexico
49.9 70.4
98.3
135.0
140.7
145.6
157.6
172.0
186.3
201.1
200.1
190.7
194.7
Nigeria
18.7 24.2
50.2
66.8
73.9
78.9
74.4
78.8
79.2
75.0
73.4
70.1
69.4
Peru
8.7 11.8
14.2
17.7
18.1
18.1
18.0
18.7
19.4
20.2
20.3
17.9
18.0
Philippines
11.8 15.2
19.5
26.1
27.9
29.8
31.6
33.7
35.4
36.7
37.6
38.2
36.2
Venezuela
22.4 3
0.3
39.7
50.4
54.6
58.4
60.0
60.5
59.5
59.7
60.1
57.4
57
1
.
Table B-20
Key LDC Debtors: Average Annual Growth Rate of
Real Gross Domestic Product
1965
1970
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
Total
5.7
9.0
2.6
5.8
5.5
2.5
6.6
4.9
0
- 1.2
- 2.7
0.8
Argentina
9.2
5.3
-0.8
-0.5
6.4
-3.4
6.4
0.8
-6.2
-5.3
2.8
2.0
Brazil
3.1
9.7
5.6
9.7
5.4
4.8
6.7
7.9
-1.9
1.4
-3.2
0.5
1.2
2.4
-12.7
3.6
9.5
8.3
8.5
7.8
5.4
-14.1
-0.8
4.4
2.5
29.7
-2.5
10.6
6.8
-5.7
5.9
0.5
-5.3
-2.1
-4.5
-1.0
Peru
5.4
6.0
4.7
2.3
0
-0.6
3.9
3.7
_
4.1
0.5
-11.8
0.6
Philippines
5.6
4.8
6.5
6.9
6.8
6.0
6.6
5.0
3.7
2.5
1.6
-5.2
Venezuela
5.2
8.8
6.1
8.3
7.0
2.7
0.8
-1.7
0.3
0.7
-4.5
-0.5
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 Sanitized Copy Approved for Release 2010/12/14: CIA-RDP97R00694R000500150001-9
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Confidential
Sanitized Copy Approved for Release 2010/12/14: CIA-RDP97R00694R000500150001-9