What do the negative FDI mean

Latin America Institute (LAI)

Argentina and the effects of the 2001/2002 crisis

Foreign direct investment serves as an indicator of the financial integration of a country in the world market. Direct investment is the inflow of foreign capital to acquire means of production or to participate in companies. The investor thus buys assets in an amount that authorizes him to exert an influence on the operational business.

In Argentina, direct investment rose sharply at the beginning of the 1990s, made possible, among other things, by the liberalization of the economy in South America at that time. As can be seen from the graph, direct investment peaked in 2000/2001 just before the crisis. Much of this direct investment resulted from the privatization of state-owned companies, particularly in the telecommunications and energy sectors.2

In 2000/2001, the so-called “Argentina Crisis” occurred due to, among other things, a currency that was overvalued in real terms (the Argentine peso was nominally pegged to the US $, see exchange rate systems) and a long-lasting trade deficit. This was initially characterized by a massive real appreciation of the Argentine peso and the associated loss of competitiveness of the Argentine export sector. Of the Argentine peso and the associated loss of competitiveness of the Argentine export sector. With the outbreak of the crisis and the debt moratorium (a debt moratorium is a temporary interruption in the payment of interest and / or amortization) by the Argentine government, Argentina lost foreign investments. To date, direct investment has not reached the pre-crisis level.

How did the trade deficit come about? The Argentine peso was nominally pegged to the US dollar in a currency board system. Therefore, the Argentine peso nominally followed the development of the US dollar. So the Argentine products on the world market with the US dollar exchange rate were relatively too expensive to find buyers, so that the demand for these products continuously decreased. The trade deficit increased because, from the point of view of the Argentine consumers, the foreign products appeared extremely cheap. So Argentina was importing more and more while exporting less and less.

This situation changed with the release of the Argentine peso and the resulting nominal devaluation. The consequence of this was that the Argentine products were significantly cheaper again in relation to other goods and, as a result, there was again greater demand on the world market. Exports rose rapidly and the Argentine trade deficit turned into a surplus.

Current account balance and FDI (Argentina 1980-2010, in billion US dollars)

Source: World Bank WDI