Foreign Direct Investment

Foreign Direct Investment has flooded Costa Rica. Discuss the impact the flood of money has on an emerging country like Costa Rica.

Costa Rica, one of the emerging countries, is popularly recognized for its workforce quality, the sustainability of its economy, and its long history of democracy. Multinational companies have increased job opportunities in the country. Although Foreign investment is advantageous, the implication can be very severe to a country’s economic growth (MacGraw-Hill, 2021). It can manipulate the cash rate of developing countries like Costa Rica, reducing financial support from the World Bank. Flooding of money by foreign investors into a country’s economy means the government has to pay more debt than buying assets for local industries hence dwindling the economic growth (“The Foreign Direct Investment in Emerging Countries,” 2012). Another impact of flood money on the economy of Costa Rica is a trade deficit. The unprecedented spending can result in a deficit to a level the government cannot sustain debt. For instance, in Costa Rica, a low-income country that depends on foreign borrowing for its budget, much borrowing leaves the country in a position where it cannot pay the debt for years. The interest value keeps on accumulating as foreign exchange rates fluctuate.

The emergence of the Covid-19 pandemic has a profound impact on the global economy. The interest rate grows nearly to zero. The monetary policy will be relatively ineffective. The power to print money is not unlimited. At some stage, the extra cash will overwhelm the economy’s productive capacity, or foreign investors will lose faith in the currency (MacGraw-Hill, 2021). Costa Rica is a developing country endowed with various resources that allow too much cash flow through foreign investment. More production and local product prices will reduce, leading to inflation in costs, which can negatively impact economic development (“The Foreign Direct Investment in Emerging Countries,” 2012). Countries like Costa Rica have flexible exchange rates and do not have a prolific central bank to carry out monetary policy.

Therefore, if a rapid-growing country has a huge current account balance, this can lead to a substantial depreciation in the exchange rate. This effect is a big jump in the prices of essential imports such as foodstuffs and energy, mostly imported.

References

McGraw-Hill. (2021). Costa Rica Gold or Green [Image]. Retrieved 13 February 2021. https://www.viddler.com/embed/1dc3fdcc/?f=1&autoplay=0&player=full&disablebranding=0

The Foreign Direct Investment in Emerging Countries. (2012), 11(10). https://doi.org/10.17265/1537-1514/2012.10.001

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