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FDI and Inequality in Latin American Middle-Income Economies
Unformatted Document Text:  6 (Jensen 2003). New investments would compete with extant firms and either substitute less-efficient domestically owned investments –usually more labor intensive– or complement the offer side of the market if other investments are similarly efficient. In the latter case it is more likely that the labor force level will increase (or at least maintain) instead of the diminishing consequences of the substitutive process. The extractive sector, either foreign or domestic owned, is likely to be capital intensive and not very labour intensive, playing a substitutive or complementing role depending on the case. If FDI operates to augment the employment level, then it is expected to reduce inequality by reducing unemployment and the informal sector. If, on the contrary, FDI effect on the labor force level is a decreasing one, then better salaries and higher skills requirements for the labor force should be expected, skewing the income distribution and augmenting inequality. The significance of these different possible effects would depend on the magnitude of the change in the labor force requirement for a given economic sector. [TABLE 1 - HERE] In the industrial sector the deindustrialization phenomenon caused formal employment to decline globally and in Latin America since the late 1970s (Iversen 2005). In Latin America employment in industry dropped from an average of 26% to 21% in the period (WDI), and the role that technology improvement plays in the sector suggests a conditional effect of FDI on inequality. The substitution effect that accompanied the deindustrialization process in the region means that FDI in the industrial sector substitutes previous technologically less advanced and unskilled labor intensive investments. Technological improvements by FDI in this sector reduce labour demand. The service sector has significantly grown in Latin America during 1990s: employment in service grew from an average of 58% to 68% (WDI). The wholesale trade sector comprises firms engaged in wholesaling merchandise and is a relatively low-pay sector with high labour share but with low productivity. The sector’s price competition tends to be fierce and its capability to move labour force from the informal economy to the formal

Authors: Bogliaccini, Juan.
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(Jensen 2003). New investments would compete with extant firms and either substitute
less-efficient domestically owned investments –usually more labor intensive– or
complement the offer side of the market if other investments are similarly efficient. In the
latter case it is more likely that the labor force level will increase (or at least maintain)
instead of the diminishing consequences of the substitutive process. The extractive sector,
either foreign or domestic owned, is likely to be capital intensive and not very labour
intensive, playing a substitutive or complementing role depending on the case.
If FDI operates to augment the employment level, then it is expected to reduce inequality
by reducing unemployment and the informal sector. If, on the contrary, FDI effect on the
labor force level is a decreasing one, then better salaries and higher skills requirements
for the labor force should be expected, skewing the income distribution and augmenting
inequality. The significance of these different possible effects would depend on the
magnitude of the change in the labor force requirement for a given economic sector.
[TABLE 1 - HERE]
In the industrial sector the deindustrialization phenomenon caused formal employment to
decline globally and in Latin America since the late 1970s (Iversen 2005). In Latin
America employment in industry dropped from an average of 26% to 21% in the period
(WDI), and the role that technology improvement plays in the sector suggests a
conditional effect of FDI on inequality. The substitution effect that accompanied the
deindustrialization process in the region means that FDI in the industrial sector
substitutes previous technologically less advanced and unskilled labor intensive
investments. Technological improvements by FDI in this sector reduce labour demand.
The service sector has significantly grown in Latin America during 1990s: employment
in service grew from an average of 58% to 68% (WDI). The wholesale trade sector
comprises firms engaged in wholesaling merchandise and is a relatively low-pay sector
with high labour share but with low productivity. The sector’s price competition tends to
be fierce and its capability to move labour force from the informal economy to the formal


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