I don't want to be a party pooper, but I'm not convinced by the latest headlines projecting that foreign investments in Latin America will soar by up to 50 percent this year.

If you read behind the headlines, you may reach a more sobering conclusion.

In its annual foreign investment forecast released Wednesday, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) projected that foreign direct investments in the region will surpass $100 billion this year, or between 40 percent and 50 percent more than last year.

That would allow the region to return to its record foreign investment levels of before the 2008 global crisis, and would become a major engine of economic growth. Immediately, there were jubilant headlines throughout the region anticipating a major influx of foreign money.

But, at the very same time as the U.N. economic think tank was unveiling its report, news of violent street protests in financially crippled Greece shook world markets. The riots, which left three dead, sparked fears that Greece's debt crisis would spill over to Portugal, Ireland, Spain and Italy.

That night, I called ECLAC's director Mario Cimoli, the lead author of the report, and asked whether he stood by his projections.

He readily conceded that his forecast could be affected by the new developments.

"If this problem remains restricted to Greece, our forecast for Latin America stands," Cimoli said. "But if it spreads to other European countries, especially Spain, it's a different story."

Indeed, Latin America -- and especially South America -- could be badly hurt by a European crisis. South America relies on Europe for nearly 50 percent of its foreign investments, and for almost 20 percent of its exports, according to ECLAC's figures.

The crisis is expected to further weaken the European currency, the euro. On the trade side, that will make it more expensive for European countries to buy Latin American goods. On the investment side, European banks -- especially Spanish banks, which are among the biggest foreign investors in Latin America -- may retrench from the region.

"If the crisis touches Spain, the head offices of Spanish banks will start repatriating funds from Latin America, because they will need to increase their cash-flow at home," Cimoli said.

But even if there is no Greek contagion effect in Latin America, Cimoli alerted me to a little-noticed detail within ECLAC's report that should be a major cause of concern for Latin America.

Only 8 percent of all foreign investment to the region is going to high-tech industries, such as aircraft assembly plants, while 16 percent goes to medium high-tech industries such as car-part factories, and 76 percent is going to medium-low and low-tech industries, such as food, beverage or textile industries, the report says.

In other words, most foreign investments to Latin America are going to industries that produce basic goods, in a global economy where, increasingly, countries need to export high value-added goods to grow faster.

While China, India and other Asian countries are increasingly receiving foreign investments to produce computer chips and other high-tech goods, most of the foreign money flowing to Latin America is going to grow food or extract minerals.

My opinion: The Greek crisis will come and go. Just as the 2008 collapse of Lehman Brothers caused a global slump but didn't bring about the end of the world, this one won't either. Most likely, the euro will be a little weaker, the pace of the world economic recovery will slow somewhat, and Latin America will suffer moderate -- but not catastrophic -- effects.

But what's most worrisome about the U.N. economic report's forecasts is that most Latin American countries are not creating -- like Asian countries -- a technological investment climate that encourages foreign companies to put their money in the region's high-tech industries.

Latin American countries should, among other things, fund university research projects with commercial potential, give tax incentives to private firms to come up with new products, and carry out a drastic modernization of their education systems.

Without that, the recent investment growth projections won't make a huge difference, even if they come true.

 

 

 

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