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FDI and income inequality in LA

by Portal Web Editor last modified Jan 10, 2013 11:27 AM
Contributors: Dirk Willem te Velde

While there is evidence that FDI may have been good for development, more can be done to improve its impact on income distribution and the poor in Latin America, either through appropriate government policies in the area of education, training and infrastructure (i.e. a general development policy), or through working directly with TNCs through incentives or partnerships. Income inequality is persistently and relatively high in almost all Latin American countries. Income inequality can be determined by at least three factors: the distribution of factors of production, the demand for those factors, and the supply. Labour or human capital, i.e., the distribution of education and the returns to skill, are the factors of production that are driving income inequality. FDI may have been good for development but different countries with different policies and economic factors tend to derive different benefits and costs of FDI. In addition, not all types of workers necessarily gain from FDI to the same extent. The reasons for this include: FDI induces skill-specific technological change; it can be associated with skill-specific wage bargaining; it may locate in skill-intensive sectors; and it provides more training to skilled than unskilled workers. FDI is likely to perpetuate inequalities, which contrasts to what traditional trade and FDI theories would predict. There are areas in which both a business and development case can be made for improving the social impact of FDI, and hence where co-ordination is required to realise win-win situations.

Author(s): Dirk Willem te Velde

Publication Date: 2003

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