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FDI and Inequality in Latin American Middle-Income Economies
Unformatted Document Text:  4 and resource endowments are key aspects in terms of FDI allocation decision (Grossman and Helpman 1991, de Mello Jr. 1999, Barrel and Pain 1999, Jensen 2003). Technological diffusion and the relative skilled labor abundance will make middle income countries more attractive to high-tech FDI. However, while firms near the technological frontier would be less labor intensive, it is more likely that less technologically advanced FDI would be more effective in reducing inequality by employing a greater proportion of less-skilled workers. The cost of labor is other important FDI selection factor, but the relationship is not a direct one: on the one hand, when FDI seeks low cost and efficiency goals, an inexpensive labour force is preferred; on the other hand, when FDI seeks skilled labor, labour cost becomes less decisive. FDI AND INEQUALITY: CAUSAL LINKAGES The magnitude of income inequality in Latin America has been hypothesized to have a severe impact in the ability to reduce poverty and transform economic growth into an improvement of living conditions of the population (Londoño and Székely 1997, Berry 1997, ECLAC 2000). In spite of the fact that the level of industrialization in Latin America was never comparable to the one of the advanced capitalist economies, the industrial sector employment has been in decline in the region since the late 1970s, in what is known as the deindustrialization process (Iversen 2005). This process was accelerated in Latin America because of the opening of the import market. As a consequence of that and the lack of competitiveness in the domestic industrial sector, unemployment rates grew and contributed to a dramatic increase in size of the informal sector. International Labour Organization (ILO) data from “Labor Overview” 2 estimates that between 40 and 50 percent of the total non-agricultural employment is in the sector of independent workers, domestic service and micro-enterprises. 3 Portes and Hoffman (2003) estimate that in 1998 approximately 47.8 percent of the region’s economically 2 ILO Labour Overview 2004, estimates based on country data for years 1990, 1995, 2000, 2002 and 2003. 3 Refers to employed persons working in establishment with a maximum of 5 workers.

Authors: Bogliaccini, Juan.
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4
and resource endowments are key aspects in terms of FDI allocation decision (Grossman
and Helpman 1991, de Mello Jr. 1999, Barrel and Pain 1999, Jensen 2003).
Technological diffusion and the relative skilled labor abundance will make middle
income countries more attractive to high-tech FDI. However, while firms near the
technological frontier would be less labor intensive, it is more likely that less
technologically advanced FDI would be more effective in reducing inequality by
employing a greater proportion of less-skilled workers.
The cost of labor is other important FDI selection factor, but the relationship is not a
direct one: on the one hand, when FDI seeks low cost and efficiency goals, an
inexpensive labour force is preferred; on the other hand, when FDI seeks skilled labor,
labour cost becomes less decisive.
FDI AND INEQUALITY: CAUSAL LINKAGES
The magnitude of income inequality in Latin America has been hypothesized to have a
severe impact in the ability to reduce poverty and transform economic growth into an
improvement of living conditions of the population (Londoño and Székely 1997, Berry
1997, ECLAC 2000). In spite of the fact that the level of industrialization in Latin
America was never comparable to the one of the advanced capitalist economies, the
industrial sector employment has been in decline in the region since the late 1970s, in
what is known as the deindustrialization process (Iversen 2005). This process was
accelerated in Latin America because of the opening of the import market. As a
consequence of that and the lack of competitiveness in the domestic industrial sector,
unemployment rates grew and contributed to a dramatic increase in size of the informal
sector. International Labour Organization (ILO) data from “Labor Overview”
2
estimates
that between 40 and 50 percent of the total non-agricultural employment is in the sector
of independent workers, domestic service and micro-enterprises.
3
Portes and Hoffman
(2003) estimate that in 1998 approximately 47.8 percent of the region’s economically
2
ILO Labour Overview 2004, estimates based on country data for years 1990, 1995, 2000, 2002 and 2003.
3
Refers to employed persons working in establishment with a maximum of 5 workers.


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