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Thursday, October 13, 2011

Central America has the right approach to foreign investment.

Central America gets a lot of economics wrong.
But the region can give many rich countries a lesson, when it comes to welcoming foreign investment.
Recent high-profile takeovers by outsiders have been the subject of debate and even hostility in other countries.
But almost no one objected when, during the past two years, HSBC bought Central America’s biggest bank, Citi acquired two leading Central American financial institutions, and Wal-Mart bought the region’s biggest retailer, among other acquisitions by foreign multinationals.
The region’s rich people didn’t complain, even though few of them got a share of the profits when local businesses were sold.
Neither did Central Americans, nor the region’s left-wing political parties, which understood the real economics behind the takeovers.
In the first place, each of these transactions involves the sale of a private company.
Selling such a company is the same thing as selling a house, car or other private property.
If the state has no objection to people selling their houses, it can’t object when shareholders sell their companies.
The left’s other big conclusion was that the devil it knows isn’t better than the devil it doesn’t know.
The owners of multinationals may pay the lowest taxes they can legally get away with, and the lowest salaries that the law and the market allow.
But local owners do exactly the same thing.
In this case, Central America’s left can concentrate on political issues, such as fighting for the right to raise taxes and transfer money to poor people from rich people, without worrying about the nationality of rich people – and without interfering with correct economic decisions.
Foreign investment may be a problem, if national security risks are involved.
A country which has conflicts with other nations understandably won’t let companies from those nations buy its weapons suppliers.
But most objections to foreign investment don’t make much sense.
Some nationalists worry that foreigners will control so-called strategic businesses, such as telecommunications companies.
But there is nothing terribly strategic about these businesses, which basically own chips, cables and antennas, over which people send messages.
In the most extreme case – a war against the telco’s home state – the local government sends in technicians to operate the servers, local people talk on the phone and check their mail just as they did before, and (unless it loses the war) the country gets a free telecommunications company.
Another sensitive issue involves the takeover of media by foreigners, on the theory that the new owners could publish or broadcast information, which change the way local people think.
But no country has a national way of thinking.
Some local people oppose taxes, public services, abortion and homosexual marriage. Others support all those things.
Likewise, media owners have different opinions about how things should be run, regardless of where they come from.
In this case, a foreign media owner is no more likely than a local one to advocate soaking the rich or cutting public health services.
Some people complain that foreigners are buying national champions – whatever that means.
But famous companies constantly disappear, while others take their place.
Twenty years ago, Pan Am was the world’s best-known airline, and CDs and DVDs were cutting-edge media
Meanwhile, few people drank Starbucks coffee and no one googled.
The fact that foreigners are mainly interested in buying big businesses is another benefit for the economy in which the investment takes place.
In most countries, mid-size companies grow faster and create more jobs than big ones.
Since foreigners give owners the highest possible price for their companies (if not, they would sell to a local buyer), sellers have more money to invest in these dynamic businesses.
One of Central America’s problems is that it has no venture capital market, where young companies can raise money.
Because the region’s economies are small and tend to grow slowly, it’s hard for sellers of companies to find a market for new businesses, which they could start, using the money they got for selling the old ones.
But Central Americans understand that developing new businesses slowly is better than not starting them at all, which is what would happen if foreigners were prevented from buying local companies.
Rich countries can learn a few things from Central America.
If they did, they’d be richer.

Fred Blaser
Republica Media Group