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1、CGD NOTE | NOVEMBER 2022Spain and Latin America:Why Investment and Aid Ties Need New Strategies NowAlejandro Fiorito and Amanda GlassmanOver the past few decades, Spains engagement with Latin America1 has been inconsistent andimprovised, characterized by fluctuating investments, waxing and waning ge
2、opolitical ties, shifting aid priorities, abrupt exits, and polemic debates. But the relationship between Spain and Latin America has also been substantial and even prosperous; shaped by the many changes in the 1990s, when the region started to move away from authoritarian regimes and experienced a
3、broad push towards privatization while Spain accelerated its international outreach and the European Union (EU) became a key actor.Despite ups and downs, Latin America is both a systemic risk and a boon to the Spanish economy.2 In 2018, a quarter of IBEX 353 companies revenue came from Latin America
4、, and a significant portion of the banking systems earnings are tied to the region. In 2021, a third of Banco Santanders revenue and half of BBVAs originated in Latin America.4 A potential recession in major Latin American markets would be severely damaging for Spains financial system. While these c
5、oncerns are not currently materializing, a further worsening of external conditionsi.e., a significant contraction in advanced economies and/or Chinaor internal featuresi.e., losing inflation expectation anchors and/or sociopolitical turmoilcould trigger new crises in the region.1 While acknowledgin
6、g the regions diversity, the note broadly refers to Latin America and the Caribbean. Spains engage-mentin terms of foreign direct investment, aid, and political tieshas been focused on the larger countries, particularly Argentina, Brazil, and Mexico, which is potentially part of the problem. Expandi
7、ng the outreach to other countries, recog-nizing the regions diversity, and developing sustainable ties would be crucial to improve current relations along the lines suggested in this note.2Indeed Latin America is the only region for which the central bank of Spain publishes biannual reports on the
8、economic situation.3Spains main stock market, composed of its 35 largest companies.4 31 percent in South America and 3 percent in Mexico for Santander; and 45.6 percent in Mexico and 8.7 percent in South America for.In Latin America, challenges loom. The COVID pandemic was a massive human and econom
9、ic hit that highlighted structural deficiencies and set back poverty and education. Firms have substantially decreased investment, and while debt overhang has not been as problematic as many expected, businesses in the region face an accelerated need to digitize, reallocate resources, and recover em
10、ployment (for a detailed account of firms and labor markets situation and recommendations for policymakers see this recent CGD-IDB report). Increased poverty has erased the gains of the last12 years, taking the region back to 2010 levels (32 percent of people live now in poverty), and extreme povert
11、y has risen to mid-1990s levels. Inequality is also increasingon average, Latin American children have lost 1.5 years of education, according to a World Bank and UNICEF report. Moreover, a FAO analysis found that hunger has increased by 4 million people since the onset of the pandemic and has double
12、d since 2015 and an ECLAC study showed that Latin Americans have lost three years of life expectancy due to the pandemic.Already sluggish growth prospects have deteriorated further, and the IMF now forecasts 2.3 percent average growth for the next 5 years (20232027), the lowest amongst emerging and
13、developing regions by at least 1.3 percentage points (with the exception of war-impacted Europe). Productivity challenges have been exacerbated by the pandemic, as firms have decreased in size, investment dropped, human capital was lost, and informality rose.On the upside, the commodities boom is a
14、positive shock to the region as most countries are net commodity exporters and their external financing needs are low, for now.5 While the impact will be heterogeneous, and recent experiences suggest that boons are sometimes wasted in Latin America, many countries will still benefit.In recent times,
15、 the relationship between Spain and Latin Americaa strong bilateral foreign direct investment-led relationship complemented by multifaceted cultural, migratory, and political ties has also changed substantially. Shifting geopolitical alliances, the ongoing energy crisis, and the reshaping of global
16、value chains post-COVID only emphasize more the intricacy and importance of Latin America for Spain (and Europe). Further, Spain is leading the preparation of a EU-Latin America summit in the second half of 2023, when it will hold the Presidency of the Council of the EU and hopes to revive stagnant
17、free trade agreementsparticularly with Mercosurand refresh the relationship between the regions.Given these prospects and the direct importance of Latin America for Spains own economy,it is the ideal time for Spain to develop a new approach across global development tools, i.e., foreign direct inves
18、tment (FDI), foreign aid, and multilateral engagement and cooperation. LatinAmerican policymakers, after a wave of discontent and elections, have renewed mandates; and the lack of leadership of the US in the region (too focused on specific topics and with little capacity to successfully convene deci
19、sionmakers and achieve substantial commitments) has created a void.5 With some exceptions like El Salvador.SPAIN AND L ATIN A MERIC A : WHY INVESTMENT AND AID TIES NEED NE W STR ATEGIES NOW2Stability and growth in Latin America are in Spains national interest, and relevant for the EU as a wholenew s
20、trategies that go beyond historic ties and good intentions can be a win-win in both geographies. This note lays out a brief history of investment and aid flows and suggests new directions for Spain in the coming years.Spanish direct investment in Latin America:Essential but volatileNot surprisingly,
21、 given the regions history of capital outflows and sudden stops, Spanish FDI has fluctuated substantially over time. Figure 1 shows the 3-year moving averages of Spanish FDI in Latin America (as percentage of total Spanish FDI) and the regions GDP growth since 1993. In the last 30 years, there is no
22、 clear correlation between the proportion of Spanish FDI and the growth rates in the region. If anything, Spanish FDI has been procyclical with a certain lag, especially in recent years, moving in the same direction as Latin Americasand SpainsGDP growth.Figure 1. Latin Americas GDP growth and Spanis
23、h FDI to Latin America (3-year moving averages; 19932021)GDP growth (percent change)6.04.53.01.50-1.56555America45toLatin3525FDI1551993 1995 1997 1999 2001 2003 2005 2007 2009 201120132015 20172019 2021GDP growth in Latin America (3-year moving average)FDI to Latin America as percent of total FDI (3
24、-year moving average)RHS(percent of total FDI)Source: IMF (October 2022 World Economic Outlook) and Spains Ministry of Industry, Trade and Tourism (DataInvex).On average, over 60 percent of Spanish FDI went to Latin America between 1996 and 2000, which is largely but not entirely driven by Repsols p
25、urchase of YPF in Argentina in 1999 for 16 billion dollars, but only 15 percent of FDI went to the region between 2003 and 2007. Volatility continued during the commodities boom and a decreasing trend started after a second peak over 40 percent in 2014. In 2021, a mere 14 percent of Spanish FDI went
26、 to Latin America.SPAIN AND L ATIN A MERIC A : WHY INVESTMENT AND AID TIES NEED NE W STR ATEGIES NOW3Despite these major oscillations, Spains FDI has been significant in the region. In the 1990s, withthe expansion and consolidation of democracy and the push for privatization in many countries,large
27、Spanish firms expanded to the regionand most became multinationals in Latin America.6By the late 1990s, Spain was the largest investor in the region and between 2005 and 2020, it has consistently been the second largest country of origin of FDI for the region, behind the US.Currently, Spanish compan
28、ies have significant investments in the hospitality business and in the banking sector, where three Spanish banks subsidiaries are amongst the ten largest banks in Latin America. Moreover, this relationship goes both ways, as Latin Americas “multilatinas”7 are also investing heavily in Spain, their
29、preferred destination behind the US.The expansion of Spanish investment was natural, but quickly became a bumpy road. The much-discussed Repsol-YPF case in Argentina is paradigmatic. In 2012, after being majority holder for13 years, Repsol, which had become one of the ten largest oil producers in th
30、e world, lost control of YPFa previously publicly owned companywhen the Argentine government nationalized it amidst claims of lack of investment. In 2014 Repsol and the Argentine government reached an agreement, and Repsol received 5 billion dollars in compensation. The most ambitious expansion by a
31、 Spanish company ever almost ended with a diplomatic crisis and a huge shock to the second-largest non-financial corporation in Spain by revenue.While the Repsol-YPF story is the most well-known, it is not an exception. Iberia also invested heavily in Argentina in the 1990s, buying the main national
32、 airline, Aerolneas Argentinas, only to sell it shortly after to the Spanish Group Marsans. The Argentine government then expropriated Aerolneas Argentinas, and, as in the YPF case, was ordered to pay compensation in 2019. Telefnica (the largest phone, internet, and TV provider in Spain) sold most o
33、f its business in the region in 2019, keeping a significant presence only in its main market, Brazil. Recently, Iberdrola (the third-largest energy company in Spain) has been facing major pressure from the Mexican government, finding itself in the middle of a controversial energy reform.8 Spanish co
34、nstruction firms have been involved in large infrastructure projectsmost notably, the expansion of the Panama Canal or the subway in Limathat, as of 2021, had resulted in arbitrage litigations for 4.8 billion dollars.9 Moreover, the fact that six Spanish firms, more than any other OECD country, are
35、“black-listed” by the World Bank for corrupt practices is not particularly encouraging.Traditionally, international firms in Latin America have been impacted by severe currency depreciations, political instability, and/or lack of judicial safetya recent paper shows how economic policy uncertainty in
36、 Latin America hurts commercial ties and decreases exports and FDI. Now,6 And some firms involvement started considerably earlierIberias first flight to Buenos Aires was in 1946, and MAPFRE, the largest Spanish insurer, started its internationalization in Colombia in 1984.7 Companies that operate in
37、 multiple Latin American countries.8 Spanish firms, like Fenosa in Dominican Republic in the early 2000s, faced complicated exits from the local electricity sector.9 Spanish construction firms had around 30 percent of the market share in the region and almost 50 percent of their inter-national reven
38、ue come from Latin America in 2019 and 2020.SPAIN AND L ATIN A MERIC A : WHY INVESTMENT AND AID TIES NEED NE W STR ATEGIES NOW4the pandemic has accelerated a retreat in FDI (Figure 1) and the mismanagement of the multiple resulting crisis has not made the business environment more attractive, despit
39、e the unusual appreciation of many Latin American currencies in 2022. Yet, Spains presence in Latin Americaremains significant, and opportunities abound as economic activity recovers post-pandemic, digitalization efforts foster financial inclusion, and the tourism industry picks up strongly. Further
40、 policy action to improve business climate and reduce risks would be welcomed by both governments and private firms.Spanish aid in Latin America:An odd and old special relationshipOfficial development assistance (ODA) provided by Spain has not been as volatile as FDI, at least when measured in terms
41、 of the proportion destined to Latin America relative to other regions, but the lackof a clear strategy and a significant budgetary reduction post 2008 crisis (Figure 2) have stifledSpains public involvement in the region. The fluctuations in absolute terms are considerable and suggest deeper struct
42、ural issues with the way aid is managed in Spain. In relative terms, the country has been historically among the last in Europe in aid provision as a percentage of GDPand ODA almost disappeared during the Global Financial Crisis.Figure 2. Spains gross ODA disbursements to Latin America (19902020)Per
43、cent of total gross ODA1002,500802,000601,500401,00020500001990 19921994 1996 1998 2000 2002 2004 2006 2008 20102012201420162018 2020Gross ODA disbursements to Latin America as percent of total gross ODA Gross ODA disbursements to Latin America in constant 2020 USD millionsRHSUSD millionSource: OECD
44、 (International Development Statistics).Note: 2016 is such an extreme outlier because of a 1.5 USD billion debt relief operation in Cuba.SPAIN AND L ATIN A MERIC A : WHY INVESTMENT AND AID TIES NEED NE W STR ATEGIES NOW5In addition, priorities and the way in which aid is disbursed have changed. A re
45、port by the Real Instituto El Cano discusses a renewed emphasis on northern Africa, the increase in ODA channeled through the European Union (EU), and new areas of focus like security. Indeed, when including Spanish aid that is channeled through and managed by EU institutions into the calculation, L
46、atin America only received 23 percent of total aid in 2019 (compared to the 47 percent of the total disbursed through Spanish institutions).However, the ties remain relevant and Spains cooperation with Latin America has a historic basis. Out of the ten countries that received the most Spanish aid in
47、 2020, six were Latin American (Colombia, Venezuela, El Salvador, Peru, Guatemala, and Honduras) and Spanish cooperation in the region even precedes the establishment of a dedicated global aid agency. The origin of this relationship shows how Spanish international cooperation and development aid are intrinsically linked to Latin America. The history of international development in democratic Spain dates to 1977 when the current Spanish Agency for International C