Latin America: Yanqui Goes Home

Among U.S. investors in Latin America, Kaiser has long had an enviable record of readiness to make big commitments, willingness to take in local investors as partners, and consideration for local political sensitivities. But in Córdoba, Argentina, two weeks ago, when Kaiser reluctantly called a ten-day shutdown of its auto assembly lines in order to work off a prohibitively large backlog of unsold cars, hundreds of workers seized 50 supervisors, locked them in a paint shop, and held them hostage until local Kaiser Boss James McCloud agreed to keep the plant in operation.

Kaiser’s trouble at Córdoba was symptomatic of what makes U.S. investors nervous about Latin America. Country after country is troubled by rampant inflation and other economic ills. But in dustry cannot pare its production or its heavily-featherbedded payrolls because left-leaning unions forbid it, and floundering local governments do not dare object because they need union support to stay in office. The result has been a radical cutback of investment in Latin America at a time when the Kennedy Administration urges an Alliance for Progress in the two continents. Where their net investment averaged $300 million a year during the 1950s, U.S. companies last year withdrew from Latin America enough money to offset all new U.S. investment there.

Discouraging Return. Some Latin American nations are bucking this trend. Two years ago, U.S. business was leary of unsettled Venezuela; now, thanks to President Rómulo Betancourt’s success at holding price increases to an average 2% last year, new U.S. money is beginning to move into Venezuela again. Much the same is true of Colombia and Peru.

But in Latin America’s biggest nations, the prospects for foreign investors are steadily deteriorating. In Chile, where strikes in the U.S.-owned copper mines have become an annual rite, and taxes run as high as 81% of profits, Anaconda and Kennecott have scrapped expansion programs totaling $325 million. In Argentina, where the gross national product actually dropped 10% last year, some 35 U.S. companies have recently canceled investment plans. New investment in Brazil has been discouraged by a law that prohibits foreign companies from withdrawing any profits above 10% of invested capital and by expropriation of an International Telephone & Telegraph facility in Rio Grande do Sul.

Off to Switzerland. U.S. businessmen have long been mindful of the danger of expropriation in Latin America, but willing to risk it so long as profits were high enough. To be lured into the more unstable Latin American countries, says Homestake Mining President John K. Gustafson, “a company has to see an awfully quick payout with about a three-year ceiling”—that is, a return of 337% on invested capital. But in recent years, the average return achieved by U.S.-owned companies in Latin America has dwindled to 9% v. 15% in Europe. Prime reason for this is inflation: Argentina’s peso is now worth only one-eighth what it was five years ago, and Brazil’s cruzeiro has dropped by two-thirds in less than two years. This means that companies must earn almost astronomical sums in present-day money to cover the real costs of their original investment.

Most of the inflation in Latin America results from the same thing that caused the incident at Córdoba: unwillingness to face economic realities. When the world wide glut of coffee, cocoa, copper and other commodities cut into their export earnings, too many Latin governments responded by printing more paper currency and borrowing heavily abroad. Latin America’s rich have also contributed to the weakening of their nations’ currencies and economies by prudently squirreling away huge sums—estimated at $10 billion to $15 billion—in Miami real estate, foreign securities and Swiss bank accounts. In Argentina alone the capital flight amounted to $650 million last year.

Hard to Justify. Partly to get rid of local currency before it depreciates any more, and partly because they are already too deeply committed to back out, some U.S. companies are continuing to expand in Latin America’s economic trouble spots. California’s FMC Corp. recently completed a food machinery plant in Argentina—but is operating it at only a fraction of capacity. Other U.S. companies are holding on in the hope that the business climate in Latin America will eventually improve. In the meantime, notes Chase Manhattan Bank Economist William Butler, “it is difficult for an American firm to justify sending new capital there.”