FDI attraction in Chile Affected by the Country's Socio-Economical Inequality - Essay Example

?INTRODUCTION Chile officially called the Republic of Chile is a South American country. Chile is considered amongst a few of the most stable, prosperous and emerging economies. It has a high rate of human development, income per capita, economic freedom and a very low rate of corruption (Trading Economics, 2013a). In 2006, the nominal GDP per capita of Chile was recorded as the highest in Latin America. The country however is undergoing a lot of economic inequality (Trading Economics, 2013b). SOCIO-ECONOMIC INEQUALITY The socio economic inequality is the gap between the rich and the poor. The income difference of a group of individuals, society or the residents of a country is called the socio economic inequality. The economic inequality varies by the economic structures of the countries (Mankiw, 2009). INEQUALITY AND ECONOMIC GROWTH OF A COUNTRY According to several economists the inequality of the distribution of wealth is very essential. This improves competition and increases the efficiency of the individuals. The wealthier individuals tend to save more and spend more which helps the economy in growing. Inequality amongst the individual also increase the social and health related problems of the individuals. The economic growth of a society is also affected (Froyen, 2009) The social inequality has a direct impact on the social cohesion of the individuals, the population’s productivity and crime rate of the society, cultural and civic participation and economic welfare as a whole (Wessels, 2000). THE GROWING INEQUALITY IN CHILE In Chile the growth rate and the GDP ratio of the economy is very high. Still the gap between the income distributions in the economy is very wide. The analysts such as Martinez (2011) are of the view that high growth rate is no excuse for the economic inequality. According to a recent report about three million Chileans are very poor. About 500,000 of the people of the Chilean population are those who are extremely poor. The economic model of Chile and the progressive growth which the economy has shown with time is sufficiently appraisable but still the growing inequality in Chile has caught attention of various economic analysts. Chile is categorised amongst a few countries which have a worst income distribution system. The percentage of the poor population is very high in the economy (OCED, 2002a). According to OECD (2002b), Chile is a nation of population of more than 17 million people. It comes under the category of developed countries and has the worst income distribution system amongst those countries. Several economists are of the view that the economic system of Chile would not improve by the economic growth. To improve the economy’s income distribution the government would have to take decisions to redistribute the wealth of the individuals by placing higher taxes. Another economist was of the view that Chile must focus on economic growth and nothing else. The increase in the level of the per capita income of the individuals will surely increase the well being of the individuals. The person who is a resident of Chile and lives on less than $64,134 pesos (US$135) per month is considered to be poor. But a person who lives on less than $32,067 pesos (US$67) monthly is considered to be destitute, according to the official data (Martinez, 2011). A few of the economists are of the view that creating opportunities is a part of the economic growth. Those who are utilising that opportunity are competent. For the incompetency of the rest of the individuals it is unfair to impose taxes and burden those individuals who prove themselves and are the contributing factors fro the economy. ETHICAL FAMILY INCOME TO IMPROVE SOCIETY Felipe Kast, minister of planning for Chile called the ranking by the OECD (2002b) report “shameful for its levels of inequality.” He added that Chile has plans set in line to take the people out from extreme poverty. The government plans a program of IEF – Ethical Family Income which will use a series of bonds and cash incentives for the children of the poor families. This will promote education and support the people from low income groups to compete with the challenges of the economy. This program will benefit a big chunk of people of the poverty category. FOREIGN DIRECT INVESTMENTS Chile has shown increased economic growth in the past years. It has been successful in attracting the FDI. The percentage and the statistics of the FDI invested in Chile in the past years are notably high. Chile is amongst a few economies which have been successfully able to attract the FDI and have proved to give higher economic returns. Chile is an economy which has the potential to attract foreign corporations to make investments, develop new businesses and give a platform to investors to gain returns on expansions. A transparent policy framework can ensure this. Any country with a high rate of foreign direct investment can increase the financial stability of an economy and it can ensure new job creations. It brings longer term benefits and increases exports. It also improves international and domestic competition (Ferris, Thompson, and Valsan, 1994). This is why all the economies are constantly striving to increase their FDI’s. This policy of increasing the FDI’s helps in upgrading the infrastructure, strengthens the macro economic fundamentals, increases the educational standard and guarantees the law and order situation of the country (Groh, and Wich, 2012). An increase in the FDI’s is favorable for a country to improve its education system and the welfare of the individuals. The increased FDI results in the economic stability of the country. The increase of the investment also insures collaboration, mergers and acquisitions of the companies (Hussein, 2009). This will result in the increase of the returns and will open new job opportunities. Economic growth can be attained by attracting FDI’s in various different sectors of the economy. This will ensure the increased stability of the economy (Moran, 2003). By the FDI’s new programs for the betterment of the locals of the society can be planned to improve the standard of living of the individuals. This will also improve the standard of education which is given to the individuals. The increase in the educated class in the society will increase competition and will result in the increase of the growth of the society (Murat, and Priotti, 2010). The reason for inequality and income differences in Chile is lack of education. The individuals of the economy are very poor. More than 500,000 of the Chilean population fall below the poverty line and are categorised amongst the extremely poor class. If a country succeeds in attaining high amounts of FDI, that particular economy can flourish and it can invest more on the education of the individuals. Increase in education and literacy can help the students in attaining a competitive edge and can motivate them towards competition. More economic growth will ensure stability in the economy. EDUCATION The economy of Chile is a living proof towards showing that the economy has attracted more foreign investors by offering sound fundamentals and not giving any sort of incentives. According to a research conducted by Borensztein, Gregorio, and Lee, (1998) showed that the FDI and the incentives offered has a direct relation with the incentives which the company offered. But according to another research by the same researchers it was found that the strong fundamentals of the economy proved to be more effective in attracting the FDI’s. The study of the researchers was also showing that with such investments injected in the economy the system of education and the internal infrastructure of the economy improve drastically (Balasubramanyam, Salisu, and Sapsford, 1996). This shows significance that the economy can benefit in terms of education from the induction of the FDI’s. A higher benefit towards the education of the economy increases the benefits which the economy derives and increases the economic growth. The economy in which the crime rate is low and the individuals yet sustain to the adverse circumstances of the society, the government in returns cares back for such an economy and ensures the stable growth. Such an economy will take investment on education in a positive way and will ensure future growth and stability at a fast growing pace (Athukorala, 2003). DETERMINANTS OF FDI’S IN CHILE Chile is known in Latin America as an economy which is favoring the FDI. Such a climate which can attract so many individuals and provide the best economic climate for the investors are the Macroeconomic environments, international integration, Institutions and Governance as well as for the society. COHESION AND INFRASTRUCTURE The main factors which need to be discussed are the social cohesion issues. The social issues do not impact on the FDI’s but the result of the returns of the FDI’s can be a direct result on the social issues of an economy. The investors are more of the view of the political and the institutional stability. The increase of the FDI’s has a direct impact on the improvement of the social conditions and in the reduction of the poverty. The topic above highlighted the question whether the FDI’s which are invested in the economy is a result of the social issues of the society. This answers the question that the socio-economic issues or the income inequality issues do not effect on the investment of the investors. Chile is also considered as a good place for investment because the operating cost is relatively economical. The economy has low taxes and has less labor cost so it is beneficial for production. The overall infrastructure of Chile is suitable for the investors. The roads and airport are also at good locations and well managed and attract the investors by the most favourable conditions offered. SPECULATION OF CHILES ECONOMIC GROWTH FOR 2013 Chile’s economic growth is likely to grow and hold its position for the year 2013. Chile’s economy has shown great performance indicators in the previous years. The current position is expected to grow at a constant rate. The economy is showing that the domestic growth is increasing on a gradual scale due to increased employability and jobs in the country. The inflation of the currency is on a downward trend and the quantity of the exports is expected to grow. The rise in the private consumption and the growth of the economy domestically will help the economy in growing at a consistent pace (Trading Economics, 2013b). The GDP growth of the country is shown in the figure 1 in the appendix section. In the fourth quarter of 2012, the growth of GDP was recorded as 5.7 percent, driven by a 18.1 percent increase in investment and a 7.3 percent growth in private consumption of the individuals as shown in the figure 2 in the appendix. In February, the retail sales of the economy increased by 7.4 % as shown in the figure 2 in the appendix. This was mostly driven by a rise in the sales of motor vehicles and textiles (Trading Economics, 2013b). In March the inflation rate of the economy rose to 1.5 percent. On April 11th, the Central Bank of Chile decided to maintain the inflation rate and the interest rate of the economy as shown in the figure 3 in the appendix (Trading Economics, 2013b). In March the exports of the economy decreased by 2.3 % to $6.882 million from $7.044 million registered in the same month of the previous year. Nevertheless, in the same period, trade surplus increased 9.2 % from the previous year as presented in figure 4 in the appendix (Trading Economics, 2013b). REFLECTION While preparing this report I got the understanding that the economic growth of an economy is independent of the socio-economic factors of the society. I also developed an understanding that the Foreign Direct Investment which is invested in an economy is not of the view of the socio economic factors of that economy. The economic growth of a country can ensure that in the future the obstacles which the economy has can be overcome. The study of Chile as an economy is a live example of the above mentioned statement. The economy has serious issues with the differences of the income distribution amongst the individuals. The poor are very poor and the rich are very rich. The economy is still showing rapid growth. The economy has a high growth rate in the category of developed countries but the income distribution differences is taking toll and has attracted various economic analyst to comment on the present situation o the economy. The inequality in Chile is a result of the lack of education and unfair distribution of resources. To overcome this, the government has made several policies and has attracted the individuals towards it. The economy has a low crime rate. This shows that the individuals are motivated to enhance themselves and are not getting indulged into wrong doings. This is a positive sign which has motivated the government to promote education so the poor class people can compete and the income distribution differences can be reduced. The FDI’s in an economy is not concerned to the social factors of the society. If the conditions are favourable for the investors which provide them with a business climate they invest. If the socio factors of an economy create unfavourable conditions for the business then the investors retreat. So it can be concluded that the FDI’s are not affected by the socio-economic factors of a society and this is the most important lesson that I have learnt. References Athukorala, W. (2003). The Impact of Foreign Direct Investment for Economic Growth: A Case Study in Sri Lanka. 9th International conference on Sri Lanka Studies. Available at http://www.slageconr.net/slsnet/9thicsls/fullpapers/fullp092.pdf [Accessed 26 April, 2013] Balasubramanyam, V., Salisu, M., and Sapsford, D. (1996). Foreign Direct Investment and Growth in EP and IS countries. Economic Journal, vol. 106, pp. 92-105. Borensztein, E., Gregorio, J. and Lee, J. (1998). How does foreign direct investment affect economic growth?. Journal of International Economics, vol. 45, no. 1, pp. 115–135. Ferris, S., Thompson, G., and Valsan, C. (1994). Foreign Direct Investment in emerging market economy: the case of Romania. Eastern European Economics, vol. 32, no. 4, pp. 81-95. Froyen, R. (2009). Macroeconomics: Theories and Policies, (ninth edition). New York: Pearson. Groh, A., and Wich, M. (2012). Emerging economies’ attraction of foreign direct investment. Emerging Market Review, vol. 13, no. 2, pp. 210-229. Hussein, M. (2009). Impact of Foreign Direct Investment on economic growth in the Gulf Cooperation Council (GCC) countries. International Review of Business Research Papers, vol. 5, no. 3, pp. 362-376. Index Mundi. (2013). Chile - Foreign direct investment. Available at http://www.indexmundi.com/facts/chile/foreign-direct-investment [Accessed 26 April, 2013] Mankiw, G. (2009). Principles of Economics. Mason, OH: South-Western Cengage Learning. Martinez, A. (2011). Chile: Economy, income inequality growing. Infosurhoy, Available at http://infosurhoy.com/cocoon/saii/xhtml/en_GB/features/saii/features/economy/2011/04/26/feature-02 [Accessed 26 April, 2013] Moran, T. (2003). FDI and development: what is the role of international rules and regulations?. Transnational Corporations, vol. 12, no. 2, pp. 1-44. Murat, M., and Priotti, T. (2010). The attractiveness of countries for FDI: a fuzzy approach. Working paper series, working paper 55, Recent centre for economic research, Italy. OECD (2002b). Global Forum On International Investment. Available at http://www.oecd.org/daf/inv/investmentfordevelopment/2764423.pdf [Accessed 26 April, 2013] OECD. (2002a). Foreign direct investment for development: Maximising benefit Organisation for Economic Co-operation and Development. Paris [Online]. Available at http://www.oecd.org/dataoecd/47/51/1959815.pdf [Accessed 26 April, 2013] Trading Economics. (2013a). Foreign Direct Investment; Net Outflows (% Of GDP) In Chile. Available at http://www.tradingeconomics.com/chile/foreign-direct-investment-net-outflows-percent-of-gdp-wb-data.html [Accessed 26 April, 2013] Trading Economics. (2013b). Chile - National Statistics. Available at http://www.tradingeconomics.com/chile/indicators [Accessed 26 April, 2013] Wessels, W. (2000). Economics. New York: Barron’s Educational Series. Appendix Figure 1: GDP Growth (Trading Economics, 2013b) Figure 2: Consumer Confidence and retail sales (Trading Economics, 2013b) Figure 3: Inflation rate and interest rate (Trading Economics, 2013b) Figure 4: Exports and Trade Balance (Trading Economics, 2013b) Read More