Debate over FDI
Monday, 29 October 2007
Mohammad Farhad Hossen
THE issue is not foreign direct investment (FDI), but finance for development. Whether FDI is a source of development finance -- and how significant it is -- is an open question. Sometimes the issue of FDI is presented as a closed book; there is no debate on the subject. This is closed book because it is closed by the International Monetary Fund (IMF) and the World Bank (WB) while critics say the bank is inefficient and too western-dominated. Six decades after their founding in the aftermath of the World War Two, Strauss-Kahn leads an IMF struggling to justify its relevance,
The cost of investment in Bangladesh is falling, although some hidden expenses threaten to erode the country's competitiveness, a new survey reveals. The 17th survey of investment-related cost comparison said Bangladesh has emerged as "the cheapest place" in Asia in terms of nine cost components, including legal minimum wages, social security burden ratio and charges of utility services. "The relative position of Bangladesh against the components like salary of mid-level manager, legal minimum wage, rate of increase in nominal wage, telephone installation fees and call charges, mobile phone subscription fee, monthly basic mobile phone charge, cost of general use of per cubic meter gas, and cost of diesel has improved," noted the survey, conducted by the Japan External Trade Organisation (JETRO). What else FDI hosts are expecting from us. A former Minister of Finance of an African country said: "We have removed our shirt and trousers to attract FDI; what more do they expect us to do?"
There is keen competition among developed and developing countries to attract FDI. This drive to lure investment often extends to the subnational level, with different regional authorities pursuing their own strategies and assembling their own baskets of incentives to attract new investments. Various reforms and strategies have been implemented, with mixed results. Some are critical of the high costs of many of these initiatives, arguing that it would be more rewarding to improve a country's general business environment.
According to the Unctad report, the global FDI rose by 38 per cent to $1,306 billion in 2006 and the three top FDI recipient countries are the USA ($175 billion), the UK ($ 139 billion) and France ($81 billion).
In South Asian region, India received $16.9 billion, Pakistan, $4.3 billion and Sri Lanka $480 million FDI in 2006. The FDI flow to Bangladesh amounted to $792 million last year, down by 6.00 per cent against previous year's. Out of this, telecommunications' sector, received 43.8 per cent of the FDI, followed by energy and power at 26.3 per cent, trade and commerce at 16.4 per cent, and manufacturing at 13.2 per cent.
According to the report, Bangladesh's position in performance index also dropped by two steps. In 2006, Bangladesh ranked 121st which was 119th in the previous year. The reason explained, thus, by the executive chairman of Board of Investment (BoI): "The country failed to attract adequate FDI due to political unrest during the second half of the last year, indecisions about big investment proposals and investors' lack of confidence. Moreover, the Unctad collected the FDI information from the Bangladesh Bank during last year's April-May period which does not represent the actual picture at the end of the year. If the TATA proposal that has been hanging in the balances would have been added, the picture would turn somewhat different here. FDI is not only a sources of capital but also a sources of development finance and other investors are also waiting for the decision on the TATA's proposal. If that proposal would have been endorsed then others will also be induced to demand such types of unexpected conditions as TATA would like to have.
Meanwhile, the issues of corruption and governance have come to prominence from the prospective of promoting FDI flows. For sure, control of corruption and democratic governance are inherently good values. But that is not the main reason why the states in the west are pushing these in the countries of the South.
The fact of the matter is that they use these values as a stick to bring a certain amount of direct control over the conditions in the South in which their corporations can function without interference from the states of the South. If one is looking for corruption, one does not have to go farther than the USA and Europe. Italy, for example, is a state that is run openly and unchallengingly by robber barons. The seat of European bureaucracy - the EC Commission - is full of corruption and nepotism. But corruption is not the real issue. A very interesting example of this is what is called in the WTO parlance - "Transparency in Government Procurement". The matter is presented as if it is aimed to weed out corruption in the countries of the South in matters of public procurement of goods and services. When the outer cover is removed, it turns out that, in essence, it is a market question. Corruption is the stick the west uses to pry open the market of the South to procurement from the west.
It is taken as an axiomatic truth that FDI is the hen that lays the golden eggs of development. To interrogate this axiom, it is necessary first to understand what FDI really is, for there is much misunderstanding about the matter. One of the closest secrets of our times is the myth about FDI. The myth needs to be exposed before we come to a policy issue of how to deal with FDI in relation to development.
David Woodward, an erstwhile technical adviser to the British Executive Director at the IMF and the World Bank, studied the Mexican and Asian crises in some depth and drew the general conclusion that FDI has a tendency towards precipitating a crisis. David Woodard also argued that if aid created the debt crisis, FDI would create an even greater crisis of development, looming not in the too distant future. This view challenges both the reigning neo-liberal orthodoxy, and the above-stated, more qualified perspective.
The truth about FDI is more complex than made out in neo-liberal economics. It is not properly understood by those informed by neo-liberal economics that contrary to the received wisdom, it is the western economies that need to export capital for their own survival rather than the countries of the LDCs that need to import capital. This is so because the western economies continually face crisis of profitability, and one of the principal means to fight against this tendency is to export capital.
It should be clear that it is not so much the LDCs that are looking for FDI, but it is the investors from the west that go looking for investment opportunities in developing countries like China.
Even more important are the measures the western governments take to shift the burden over to the countries of the South. These measures include:
o Force the South to liberalise their trade. This is aimed to capture the markets of the South for their corporations (The main role of the WTO).
o Force the South to liberalise the flow of capital. This is aimed to capture investment opportunities in the South, especially access to natural resources (The main role of the IMF and the World Bank, and Investment and Competition issues in the WTO).
o Force the South to privatise and liberalise their public services, such as water, health, energy, education, etc., and government procurement (The main role of GATS provision of the WTO, and the so-called "new issues").
A more radical alternative view is presented in a separate SEATINI Fact Sheet (What is FDI? ). It argues that FDI, essentially, is a tool (one among many) in the economic arsenal of the developed industrialised countries in their overall strategy to control the resources and markets of the South. This control is necessary in order for western corporations to counter against the downward pressure that is continually exerted by workers on corporate profitability. FDI is a means to resolve the west's own systemic contradictions. Contrary to its claim, it is not a means to assist the developing countries. However, FDI is well marketed by the west through "development" literature and through institutions such as the IMF, the World Bank, the WTO, and even the UNCTAD.
Mexico, Thailand, Indonesia, the Philippines, Malaysia and Argentina are among the countries often cited by the World Bank, the IMF and mainstream economists as model countries that opened their doors to free trade and free flow of capital on the assumption that these would bring development to them. What has been their experience?
In 1995, Mexico faced a payments crisis, It is now facing massive deindustrialization and joblessness. Then came the 1997/8 East Asian crisis.
Financial crisis such as those of Mexico in 1994 and East Asia in 1997, like the 1980s debt crisis, arise because of capital inflows are insufficient to cover current account deficits. When this is reached, capital inflows fell sharply, compounding the problem.... (However) vulnerability to financial crisis is primarily associated with large current account deficits, the associated accumulation of foreign exchange liabilities (which in turn add to the deficits), and a resulting acute dependence on foreign capital to finance the deficits.
The truth about FDI is that, like drug addiction, it creates dependency - the more FDI a developing country secures, the more it needs to service it and keep the system going.
Woodward writes: "Simplistically, FDI flows may be seen as equivalent to borrowing at an interest rate of 16-18% p.a. for developing countries as a whole, and 24-30% in sub-Saharan Africa, so that net outward resource transfers can only be avoided by allowing inward FDI stocks to grow at this rate. This implies a rapid expansion relative to the ability to meet the foreign exchange costs."
Woodward, at the time of his study, had not considered the case of Argentina, which it turns out, proves his point. Argentina has long been modelled by the IMF/WB experts as the paragon of the Washington Consensus, an exemplary country that had abolished trade barriers, had opened itself up to the free inflow and outflow of capital, had tied its currency to the US dollar (the Currency Board Automatic Adjustment Mechanism), had privatised practically everything, from banks to malls, to attract FDI. In December 2001 the "model" collapsed like a pack of cards. The country simply disintegrated in a morass of economic, social and political chaos following the default on $155 billion of debt - the largest in history.
If the developing countries do not take heed of the evidence before their very eyes, and their leaders continue to peddle the idea that somehow FDI will get their countries out of the poverty trap, then one of two conclusions follow. Either they are persuaded by the incessant misinformation by the Bretton Woods institutions and neo-liberal economists among their own ranks, or they are too desperate, and cannot think of any alternative way out of their poverty trap.
There is an argument that Bangladesh has "fallen behind" other countries because it does not have conditions adequate to attract FDI. The truth is that Bangladesh has done more to oblige overseas investors than almost any other continent, and yet investments have gone to other continents. In Africa, it has gone primarily to countries like Angola - because of its oil and in spite of over three decades of instability. Nothing has come to those countries, such as Zambia, that have almost fully liberalised their investment regimes - far more than say China or India.
Analysts such as Woodward have done good service by showing how FDI will inevitably lead to deeper crisis of development. But then development (in spite of what the leaders of Third World countries might believe) has never been FDIs' objective. Although the export of capital helps to counter the perpetually downward pressure on the rate of profits, there is a limit. It seems that with the crisis in Mexico, East Asia and now Argentina, FDI is nearing its historical limit.
FDI is falsely marketed to the developing countries as a "solution" to their underdevelopment. Development itself is a complex phenomenon. To single out FDI (as most Third World governments tend to do) as the principal means to development is reductionism pushed to its absurdity.
There is in fact no evidence that FDI brings development. There is also no evidence that FDI transfers technology. All that happens is a pseudo-transfer of technology. If anything, the evidence shows that FDI leads to increasing vulnerability to crisis, and -- like aid in the 1970s -- to increasing dependency. Why do Third World governments then seek FDI? Partly because they don't know better; partly because of the influence of International Financial Institutions (IFI); partly because their own bureaucrats are largely educated in neo-liberal economics; and partly because like a shot in the arm FDI can restore the health of a dying economy. But like drug addiction, the more you have it, the more you are in need of it.
FDI is no solution to LDCs development - except for temporary periods in some very specific situations, for example, when joint ventures bring definite and concrete gains for the country. In general, however, FDI is a problem. The issue is not FDI but finance for development. And the primary source of development finance is the savings of the people.
Furthermore, contrary to received "wisdom" of IMF/WB "experts", Bangladesh does not suffer from "low savings rate", leaving an "investment gap" that has to be filled by FDI. On the contrary, our savings rate is quite high. However, those savings are not described as "savings" in the dominant economic literature. They are described, by some accounting convention, as dividends, interest on loans, debt payments, etc.
A more qualified proposition is made (e.g. in the Oxfam Briefing paper) that "properly regulated" FDI can bring growth, jobs, technology, skills, market access and development; that its negative effects must be balanced with its good effects; or that FDI must be "sequenced", or be subject to some kind of Tobin Tax. FDI is neither good nor bad; it all depends on how you deal with it. This view is now becoming popular in many circles, including some reformed neo-liberal economists, especially after the East Asian and Argentina crises of 1997 - 2001.
FDI works best as an accelerator rather than the sole driver for economic growth in developing economies. This can be achieved through the connection of the FDI sector with the local sector of the economy through linkages and increased absorptive capacity of the local sector, as, for example, the software industry of Costa Rica. This evidence supports the integration of FDI into a wider framework for economic development that would emphasise the increase in the competitiveness of the local sector and the local education system with FDI as an accelerator.
To get actual benefit from FDI, we have to have established a taskforce to examine pinpoint of every FDI proposal that reports to the board within a stipulated time frame and the board will open it to the governing body and other stake holders after primary approval. The stack holder will return it within 10 days with their recommendation. The proposal will be approved or rejected within a time frame. The taskforce will be financed and operated by the business personnel. This taskforce will retain a bird's eye view to the multinational corporations (MNCs) so that MNCs cannot earn not more than unexpected or 200% total profit of their investment from the home country after that the capital will be the govt. properties. Lately FDI was widely discussed and criticised in various aspects of the government and policymakers. But the development issue was totally ignored. Simply, add to 20% facility for the home investor and see the development level what our investors do.
The writer can be reached at e-mail: [email protected]
THE issue is not foreign direct investment (FDI), but finance for development. Whether FDI is a source of development finance -- and how significant it is -- is an open question. Sometimes the issue of FDI is presented as a closed book; there is no debate on the subject. This is closed book because it is closed by the International Monetary Fund (IMF) and the World Bank (WB) while critics say the bank is inefficient and too western-dominated. Six decades after their founding in the aftermath of the World War Two, Strauss-Kahn leads an IMF struggling to justify its relevance,
The cost of investment in Bangladesh is falling, although some hidden expenses threaten to erode the country's competitiveness, a new survey reveals. The 17th survey of investment-related cost comparison said Bangladesh has emerged as "the cheapest place" in Asia in terms of nine cost components, including legal minimum wages, social security burden ratio and charges of utility services. "The relative position of Bangladesh against the components like salary of mid-level manager, legal minimum wage, rate of increase in nominal wage, telephone installation fees and call charges, mobile phone subscription fee, monthly basic mobile phone charge, cost of general use of per cubic meter gas, and cost of diesel has improved," noted the survey, conducted by the Japan External Trade Organisation (JETRO). What else FDI hosts are expecting from us. A former Minister of Finance of an African country said: "We have removed our shirt and trousers to attract FDI; what more do they expect us to do?"
There is keen competition among developed and developing countries to attract FDI. This drive to lure investment often extends to the subnational level, with different regional authorities pursuing their own strategies and assembling their own baskets of incentives to attract new investments. Various reforms and strategies have been implemented, with mixed results. Some are critical of the high costs of many of these initiatives, arguing that it would be more rewarding to improve a country's general business environment.
According to the Unctad report, the global FDI rose by 38 per cent to $1,306 billion in 2006 and the three top FDI recipient countries are the USA ($175 billion), the UK ($ 139 billion) and France ($81 billion).
In South Asian region, India received $16.9 billion, Pakistan, $4.3 billion and Sri Lanka $480 million FDI in 2006. The FDI flow to Bangladesh amounted to $792 million last year, down by 6.00 per cent against previous year's. Out of this, telecommunications' sector, received 43.8 per cent of the FDI, followed by energy and power at 26.3 per cent, trade and commerce at 16.4 per cent, and manufacturing at 13.2 per cent.
According to the report, Bangladesh's position in performance index also dropped by two steps. In 2006, Bangladesh ranked 121st which was 119th in the previous year. The reason explained, thus, by the executive chairman of Board of Investment (BoI): "The country failed to attract adequate FDI due to political unrest during the second half of the last year, indecisions about big investment proposals and investors' lack of confidence. Moreover, the Unctad collected the FDI information from the Bangladesh Bank during last year's April-May period which does not represent the actual picture at the end of the year. If the TATA proposal that has been hanging in the balances would have been added, the picture would turn somewhat different here. FDI is not only a sources of capital but also a sources of development finance and other investors are also waiting for the decision on the TATA's proposal. If that proposal would have been endorsed then others will also be induced to demand such types of unexpected conditions as TATA would like to have.
Meanwhile, the issues of corruption and governance have come to prominence from the prospective of promoting FDI flows. For sure, control of corruption and democratic governance are inherently good values. But that is not the main reason why the states in the west are pushing these in the countries of the South.
The fact of the matter is that they use these values as a stick to bring a certain amount of direct control over the conditions in the South in which their corporations can function without interference from the states of the South. If one is looking for corruption, one does not have to go farther than the USA and Europe. Italy, for example, is a state that is run openly and unchallengingly by robber barons. The seat of European bureaucracy - the EC Commission - is full of corruption and nepotism. But corruption is not the real issue. A very interesting example of this is what is called in the WTO parlance - "Transparency in Government Procurement". The matter is presented as if it is aimed to weed out corruption in the countries of the South in matters of public procurement of goods and services. When the outer cover is removed, it turns out that, in essence, it is a market question. Corruption is the stick the west uses to pry open the market of the South to procurement from the west.
It is taken as an axiomatic truth that FDI is the hen that lays the golden eggs of development. To interrogate this axiom, it is necessary first to understand what FDI really is, for there is much misunderstanding about the matter. One of the closest secrets of our times is the myth about FDI. The myth needs to be exposed before we come to a policy issue of how to deal with FDI in relation to development.
David Woodward, an erstwhile technical adviser to the British Executive Director at the IMF and the World Bank, studied the Mexican and Asian crises in some depth and drew the general conclusion that FDI has a tendency towards precipitating a crisis. David Woodard also argued that if aid created the debt crisis, FDI would create an even greater crisis of development, looming not in the too distant future. This view challenges both the reigning neo-liberal orthodoxy, and the above-stated, more qualified perspective.
The truth about FDI is more complex than made out in neo-liberal economics. It is not properly understood by those informed by neo-liberal economics that contrary to the received wisdom, it is the western economies that need to export capital for their own survival rather than the countries of the LDCs that need to import capital. This is so because the western economies continually face crisis of profitability, and one of the principal means to fight against this tendency is to export capital.
It should be clear that it is not so much the LDCs that are looking for FDI, but it is the investors from the west that go looking for investment opportunities in developing countries like China.
Even more important are the measures the western governments take to shift the burden over to the countries of the South. These measures include:
o Force the South to liberalise their trade. This is aimed to capture the markets of the South for their corporations (The main role of the WTO).
o Force the South to liberalise the flow of capital. This is aimed to capture investment opportunities in the South, especially access to natural resources (The main role of the IMF and the World Bank, and Investment and Competition issues in the WTO).
o Force the South to privatise and liberalise their public services, such as water, health, energy, education, etc., and government procurement (The main role of GATS provision of the WTO, and the so-called "new issues").
A more radical alternative view is presented in a separate SEATINI Fact Sheet (What is FDI? ). It argues that FDI, essentially, is a tool (one among many) in the economic arsenal of the developed industrialised countries in their overall strategy to control the resources and markets of the South. This control is necessary in order for western corporations to counter against the downward pressure that is continually exerted by workers on corporate profitability. FDI is a means to resolve the west's own systemic contradictions. Contrary to its claim, it is not a means to assist the developing countries. However, FDI is well marketed by the west through "development" literature and through institutions such as the IMF, the World Bank, the WTO, and even the UNCTAD.
Mexico, Thailand, Indonesia, the Philippines, Malaysia and Argentina are among the countries often cited by the World Bank, the IMF and mainstream economists as model countries that opened their doors to free trade and free flow of capital on the assumption that these would bring development to them. What has been their experience?
In 1995, Mexico faced a payments crisis, It is now facing massive deindustrialization and joblessness. Then came the 1997/8 East Asian crisis.
Financial crisis such as those of Mexico in 1994 and East Asia in 1997, like the 1980s debt crisis, arise because of capital inflows are insufficient to cover current account deficits. When this is reached, capital inflows fell sharply, compounding the problem.... (However) vulnerability to financial crisis is primarily associated with large current account deficits, the associated accumulation of foreign exchange liabilities (which in turn add to the deficits), and a resulting acute dependence on foreign capital to finance the deficits.
The truth about FDI is that, like drug addiction, it creates dependency - the more FDI a developing country secures, the more it needs to service it and keep the system going.
Woodward writes: "Simplistically, FDI flows may be seen as equivalent to borrowing at an interest rate of 16-18% p.a. for developing countries as a whole, and 24-30% in sub-Saharan Africa, so that net outward resource transfers can only be avoided by allowing inward FDI stocks to grow at this rate. This implies a rapid expansion relative to the ability to meet the foreign exchange costs."
Woodward, at the time of his study, had not considered the case of Argentina, which it turns out, proves his point. Argentina has long been modelled by the IMF/WB experts as the paragon of the Washington Consensus, an exemplary country that had abolished trade barriers, had opened itself up to the free inflow and outflow of capital, had tied its currency to the US dollar (the Currency Board Automatic Adjustment Mechanism), had privatised practically everything, from banks to malls, to attract FDI. In December 2001 the "model" collapsed like a pack of cards. The country simply disintegrated in a morass of economic, social and political chaos following the default on $155 billion of debt - the largest in history.
If the developing countries do not take heed of the evidence before their very eyes, and their leaders continue to peddle the idea that somehow FDI will get their countries out of the poverty trap, then one of two conclusions follow. Either they are persuaded by the incessant misinformation by the Bretton Woods institutions and neo-liberal economists among their own ranks, or they are too desperate, and cannot think of any alternative way out of their poverty trap.
There is an argument that Bangladesh has "fallen behind" other countries because it does not have conditions adequate to attract FDI. The truth is that Bangladesh has done more to oblige overseas investors than almost any other continent, and yet investments have gone to other continents. In Africa, it has gone primarily to countries like Angola - because of its oil and in spite of over three decades of instability. Nothing has come to those countries, such as Zambia, that have almost fully liberalised their investment regimes - far more than say China or India.
Analysts such as Woodward have done good service by showing how FDI will inevitably lead to deeper crisis of development. But then development (in spite of what the leaders of Third World countries might believe) has never been FDIs' objective. Although the export of capital helps to counter the perpetually downward pressure on the rate of profits, there is a limit. It seems that with the crisis in Mexico, East Asia and now Argentina, FDI is nearing its historical limit.
FDI is falsely marketed to the developing countries as a "solution" to their underdevelopment. Development itself is a complex phenomenon. To single out FDI (as most Third World governments tend to do) as the principal means to development is reductionism pushed to its absurdity.
There is in fact no evidence that FDI brings development. There is also no evidence that FDI transfers technology. All that happens is a pseudo-transfer of technology. If anything, the evidence shows that FDI leads to increasing vulnerability to crisis, and -- like aid in the 1970s -- to increasing dependency. Why do Third World governments then seek FDI? Partly because they don't know better; partly because of the influence of International Financial Institutions (IFI); partly because their own bureaucrats are largely educated in neo-liberal economics; and partly because like a shot in the arm FDI can restore the health of a dying economy. But like drug addiction, the more you have it, the more you are in need of it.
FDI is no solution to LDCs development - except for temporary periods in some very specific situations, for example, when joint ventures bring definite and concrete gains for the country. In general, however, FDI is a problem. The issue is not FDI but finance for development. And the primary source of development finance is the savings of the people.
Furthermore, contrary to received "wisdom" of IMF/WB "experts", Bangladesh does not suffer from "low savings rate", leaving an "investment gap" that has to be filled by FDI. On the contrary, our savings rate is quite high. However, those savings are not described as "savings" in the dominant economic literature. They are described, by some accounting convention, as dividends, interest on loans, debt payments, etc.
A more qualified proposition is made (e.g. in the Oxfam Briefing paper) that "properly regulated" FDI can bring growth, jobs, technology, skills, market access and development; that its negative effects must be balanced with its good effects; or that FDI must be "sequenced", or be subject to some kind of Tobin Tax. FDI is neither good nor bad; it all depends on how you deal with it. This view is now becoming popular in many circles, including some reformed neo-liberal economists, especially after the East Asian and Argentina crises of 1997 - 2001.
FDI works best as an accelerator rather than the sole driver for economic growth in developing economies. This can be achieved through the connection of the FDI sector with the local sector of the economy through linkages and increased absorptive capacity of the local sector, as, for example, the software industry of Costa Rica. This evidence supports the integration of FDI into a wider framework for economic development that would emphasise the increase in the competitiveness of the local sector and the local education system with FDI as an accelerator.
To get actual benefit from FDI, we have to have established a taskforce to examine pinpoint of every FDI proposal that reports to the board within a stipulated time frame and the board will open it to the governing body and other stake holders after primary approval. The stack holder will return it within 10 days with their recommendation. The proposal will be approved or rejected within a time frame. The taskforce will be financed and operated by the business personnel. This taskforce will retain a bird's eye view to the multinational corporations (MNCs) so that MNCs cannot earn not more than unexpected or 200% total profit of their investment from the home country after that the capital will be the govt. properties. Lately FDI was widely discussed and criticised in various aspects of the government and policymakers. But the development issue was totally ignored. Simply, add to 20% facility for the home investor and see the development level what our investors do.
The writer can be reached at e-mail: [email protected]