Net Reverse Transfers from Latin America and The Caribbean: A Critical Note

Abstract

This paper investigates whether the surge in private capital inflows Latin America and the Caribbean (LAC) has experienced in recent decades has also been accompanied by a significant outflow of profits and interest payments to foreign companies and their respective governments. It documents that there has been a massive reverse transfer of resources from the region to the developed countries of the world, particularly during the 2015-2023 period. The amounts transferred are not only large in absolute terms, but also relative to regional gross domestic product (GDP) and gross fixed capital formation (GFCF) for several countries of the region, including Chile and Mexico. This represents foregone opportunities for domestic investment in physical and human capital and may further undermine the already strained capacity of the region to generate future income and employment opportunities for its growing population. It is beyond the scope of this short paper to address the important question of whether the financial and technological (managerial) knowhow foreign capital ostensibly brings to the region is enough to offset the negative effects emanating from the unprecedented reverse transfer of resources in recent decades. The paper is organized as follows. The first section focuses on the surge in Net Foreign Direct Investment (FDI) during the 1990-2022 period. This is followed by a discussion of the unprecedented reverse transfers the region experienced during the period, particularly 2015-2023. The third section presents results for a labor productivity growth (error correction) equation for Mexico during the 1970-2020 period and the estimates suggest that, once remittances of profits are deducted, the impact of the growth rate in the net foreign capital stock per worker on labor productivity growth is diminished significantly, ceteris paribus.  The last section is the conclusion.