Foreign investment in Brazil and the International Financial Markets

Introduction

As in several other developing economies, foreign investment has reached historically high record levels in recent years in Brazil, both as direct and as portfolio investment. The Brazilian case is particularly remarkable because in comparison to other developing economies the country was the major absorber of foreign resources until the late 1970s and presents perhaps the largest stock of foreign-owned capital. In spite of these credentials, Brazilian access to international capital markets remained rather limited for more than a decade.

Reasons for these recent changes are to be found in the favorable international scenario as well as in the various policy measures implemented since the late 1980s but more intensely after 1991 (mostly portfolio) and 1994 (direct investment). Easier access to capital flows had remarkable effects on the Brazilian economy by reducing the financing cost of economic agents, financing current account imbalances, helping domestic price stabilization and fostering growth, among other benefits. But as most policy strategies, reliance on external financing has provoked sharp domestic criticism, in particular from those who fear the vulnerability associated with an increasing exposure to the variability of the international capital market.

Forecasts regarding the near future are hence not clear. Optimists tend to stress the attractiveness of an economy that offers expressive opportunities for investors, whereas pessimists put emphasis in the likely effects of the recent Asian crisis and on the weaknesses of the international monetary system as a whole.

This paper aims at discussing these points. Next section presents some basic characteristics of recent trends of investment in developing economies in general and the third section discusses the major characteristics of foreign investment in Brazil, the fourth section presents the major pessimistic and optimistic views with regard to investment (actually, access to capital markets as a whole) in the coming years and the fifth section presents some final remarks. The paper contains also an Annex with recent Brazilian policies towards foreign investment.

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* UN/ECLAC and Universidade de Brasilia. Paper prepared for presentation at the Conference Brazil in the World Context (London, February 1998). Comments by Ricardo Bielschowsky and Carlos Mussi were very helpful in improving a preliminary version of this paper. Opinions herein are my own and do not necessarily correspond to any institutional position.