Political instability discourages FDI
Tuesday, 30 March 2010
M. Mizanur Rahman
THE lion share of the world's FDI flows benefits the United States, European Union and Japan. Developing countries also rely heavily on FDI for economic development. Trade liberalisation under the World Trade Organisation (WTO) has made global FDI flows more significant. But political stability is essential for foreign direct investment inflows.
Recent world investment trends indicate that the Muslim countries, in the developing world, are among the most unpopular destinations for foreign direct investment. This is why 57 Muslim countries received only 2.0 per cent of the world's total FDI in 2003, estimated at $735 billion.
Since 2000, global FDI inflows fell continually. According to the UN Conference on Trade and Development (UNCTAD), in 2006 out of $1,306 billion worth of FDI, $857 billion went to developed countries and $379 billion went to developing countries. The USA, UK and France were the top FDI destinations. Africa received $36 billion, Asia-Pacific region received $260 billion, including $69 billion of China and Hong Kong's $43 billion, Singapore's $24 billion and India's $17 billion. The 14 economies of the Arab world and West Asia received $60 billion. The Latin American and Caribbean region received $84 billion. Similarly, Central Asia and Eastern Europe received $69 billion.
The performance of the Muslim countries was comparatively dismal, taking their number and population into consideration. In 2006 they received 117.4 billion in FDI, the highest in a single year during 1995-2006. Since 2002, FDI flows into the Muslim countries rose each year. However, the countries together got only 9 per cent of global FDI flows compared to 29 per cent of the other developing economies.
The UNCTAD indices rank the countries according to FDI receipt compared to the size of their economies. It also calculates the ratio of a country's share in global FDI inflows in relation to its GDP. The index indicates a country's ability to attract FDI inflows. While a value below one indicates negative ability, above one indicates its higher ability. The world ranking of the Muslim economies is measured by Inward FDI Performance Index of the UNCTAD.
According to the UNCTAD index for 2007, only 9 Muslim countries were among the 39 top recipients. Among 34 countries only 15 Muslim countries had high potential. Eight of them were among 34 countries which were grouped in below-the-potential category. Of the world's 35 under-performers 15 were Muslim countries, though their performance and potential improved compared to previous years.
The matrix shows that during 1993-2002 the economies of several Muslim countries were front-runners, though the trend was downward for the rest. Compared to 2002, the Muslim countries performed better in 2005 in all the categories. But, the overall picture shows that the performance as well as the potential of these economies to attract FDI during 2003-2005 did not improve compared to the 1993-1995 level.
The question that naturally arises is: why have the Muslim country economies shown such dismal performance?
In natural resources, the Muslim world is very rich according to UNCTAD. Out of 57 countries, 10 have large petroleum reserves, 17 have high proven reserves. Many of the Sub-Saharan Muslim countries, including Sierra Leone, have huge mineral resources like gold and diamond. All the sub-Saharan Muslim countries (as well as Bangladesh, Indonesia and Malaysia) have the highest global concentration of natural rainforests, tin and rubber. So, in natural resources many of them are richer than the industrial countries.
The second plus point factor is their competitive labour cost. Traditionally, FDI favours a destination having competitive labour cost because the investors always want to cut production cost. The Muslim countries have an estimated 545.1 million labour force compared to 492.8 million in the high income countries.
However, competitive labour cost is no longer a factor for FDI inflow. Despite the high labour cost in the developed economies of the North, these economies continue to be the most popular FDI destinations. Similarly, newly developed Asian economies, like Hong Kong, Singapore, South Korea and Taiwan also continue to attract more FDI though their labour cost is higher than the Muslim countries. This is because labour is now valued more in terms of productivity, skill and innovativeness than in mere cost terms.
A large population size does not necessarily mean a large market for the investors. The ten most densely populated Muslim countries are among the least developed in the world. These countries are backward, with low per capita income. The total Gross National Income (GNI) of the Muslim countries was US$2,352.2 billion in 2005 compared to US$34,523.8 billion of the high income countries. The average per capita income of 57 Muslim countries was US$1,670 compared to US$35,131 of the OECD countries. According to an estimate, an average person in a developed country earned 11.5 times more than a person in a developing country in 1990. The income difference increased to 21.5 times in 2003. For the OIC countries the difference grew from 14 to 23 times during the period. Low per capita income means low purchasing power and the consequent less consumption. Therefore, despite the Muslim countries' huge population, their domestic consumer market is relatively small.
In contrast, the developed countries of the North and the Asian tigers have huge domestic markets because of the high purchasing power as well as consumption of the people in these countries. It makes investment more profitable in these countries.
Foreign investors look for easy terms in starting a business, for licencing as well as property registration, investment protection, simpler tax procedures, contracts as well as dispute settlement. They also look for lower transaction costs and skilled work force. They look for easier and smoother business environment in a country before choosing it as an investment destination. The Muslim countries hardly offer these opportunities.
The political environment of the host is equally important. Usually, a country with political stability and good business environment attracts FDI. Political instability in many Muslim countries make them unattractive for FDI.
Political instability in a number of Muslim countries has increased sharply after 9/11. Afghanistan, Iraq, Sudan, Pakistan and Lebanon are glaring examples. According to the 2007 Global Report on Conflict, Governance and State Fragility, civil wars of various intensity trouble Afghanistan, Chad, Iraq, Palestine, Nigeria, Pakistan, Somalia, Sudan, Turkey, Uganda, and Yemen. Malaysia is the only Muslim country, besides the UAE, which consistently attracted high FDI inflows over the decades due to political stability, steady industrial growth as well as its positive business environment. So it is obvious that the traditional factors like natural resources and cheap labour cost do not any more determine FDI. Political instability also contributes to weak business environment that can in no way attract FDI.
...................................................
Dr. M. Mizanur Rahman is an economist and researcher. e-mail: mizan12bd@yahoo.com
THE lion share of the world's FDI flows benefits the United States, European Union and Japan. Developing countries also rely heavily on FDI for economic development. Trade liberalisation under the World Trade Organisation (WTO) has made global FDI flows more significant. But political stability is essential for foreign direct investment inflows.
Recent world investment trends indicate that the Muslim countries, in the developing world, are among the most unpopular destinations for foreign direct investment. This is why 57 Muslim countries received only 2.0 per cent of the world's total FDI in 2003, estimated at $735 billion.
Since 2000, global FDI inflows fell continually. According to the UN Conference on Trade and Development (UNCTAD), in 2006 out of $1,306 billion worth of FDI, $857 billion went to developed countries and $379 billion went to developing countries. The USA, UK and France were the top FDI destinations. Africa received $36 billion, Asia-Pacific region received $260 billion, including $69 billion of China and Hong Kong's $43 billion, Singapore's $24 billion and India's $17 billion. The 14 economies of the Arab world and West Asia received $60 billion. The Latin American and Caribbean region received $84 billion. Similarly, Central Asia and Eastern Europe received $69 billion.
The performance of the Muslim countries was comparatively dismal, taking their number and population into consideration. In 2006 they received 117.4 billion in FDI, the highest in a single year during 1995-2006. Since 2002, FDI flows into the Muslim countries rose each year. However, the countries together got only 9 per cent of global FDI flows compared to 29 per cent of the other developing economies.
The UNCTAD indices rank the countries according to FDI receipt compared to the size of their economies. It also calculates the ratio of a country's share in global FDI inflows in relation to its GDP. The index indicates a country's ability to attract FDI inflows. While a value below one indicates negative ability, above one indicates its higher ability. The world ranking of the Muslim economies is measured by Inward FDI Performance Index of the UNCTAD.
According to the UNCTAD index for 2007, only 9 Muslim countries were among the 39 top recipients. Among 34 countries only 15 Muslim countries had high potential. Eight of them were among 34 countries which were grouped in below-the-potential category. Of the world's 35 under-performers 15 were Muslim countries, though their performance and potential improved compared to previous years.
The matrix shows that during 1993-2002 the economies of several Muslim countries were front-runners, though the trend was downward for the rest. Compared to 2002, the Muslim countries performed better in 2005 in all the categories. But, the overall picture shows that the performance as well as the potential of these economies to attract FDI during 2003-2005 did not improve compared to the 1993-1995 level.
The question that naturally arises is: why have the Muslim country economies shown such dismal performance?
In natural resources, the Muslim world is very rich according to UNCTAD. Out of 57 countries, 10 have large petroleum reserves, 17 have high proven reserves. Many of the Sub-Saharan Muslim countries, including Sierra Leone, have huge mineral resources like gold and diamond. All the sub-Saharan Muslim countries (as well as Bangladesh, Indonesia and Malaysia) have the highest global concentration of natural rainforests, tin and rubber. So, in natural resources many of them are richer than the industrial countries.
The second plus point factor is their competitive labour cost. Traditionally, FDI favours a destination having competitive labour cost because the investors always want to cut production cost. The Muslim countries have an estimated 545.1 million labour force compared to 492.8 million in the high income countries.
However, competitive labour cost is no longer a factor for FDI inflow. Despite the high labour cost in the developed economies of the North, these economies continue to be the most popular FDI destinations. Similarly, newly developed Asian economies, like Hong Kong, Singapore, South Korea and Taiwan also continue to attract more FDI though their labour cost is higher than the Muslim countries. This is because labour is now valued more in terms of productivity, skill and innovativeness than in mere cost terms.
A large population size does not necessarily mean a large market for the investors. The ten most densely populated Muslim countries are among the least developed in the world. These countries are backward, with low per capita income. The total Gross National Income (GNI) of the Muslim countries was US$2,352.2 billion in 2005 compared to US$34,523.8 billion of the high income countries. The average per capita income of 57 Muslim countries was US$1,670 compared to US$35,131 of the OECD countries. According to an estimate, an average person in a developed country earned 11.5 times more than a person in a developing country in 1990. The income difference increased to 21.5 times in 2003. For the OIC countries the difference grew from 14 to 23 times during the period. Low per capita income means low purchasing power and the consequent less consumption. Therefore, despite the Muslim countries' huge population, their domestic consumer market is relatively small.
In contrast, the developed countries of the North and the Asian tigers have huge domestic markets because of the high purchasing power as well as consumption of the people in these countries. It makes investment more profitable in these countries.
Foreign investors look for easy terms in starting a business, for licencing as well as property registration, investment protection, simpler tax procedures, contracts as well as dispute settlement. They also look for lower transaction costs and skilled work force. They look for easier and smoother business environment in a country before choosing it as an investment destination. The Muslim countries hardly offer these opportunities.
The political environment of the host is equally important. Usually, a country with political stability and good business environment attracts FDI. Political instability in many Muslim countries make them unattractive for FDI.
Political instability in a number of Muslim countries has increased sharply after 9/11. Afghanistan, Iraq, Sudan, Pakistan and Lebanon are glaring examples. According to the 2007 Global Report on Conflict, Governance and State Fragility, civil wars of various intensity trouble Afghanistan, Chad, Iraq, Palestine, Nigeria, Pakistan, Somalia, Sudan, Turkey, Uganda, and Yemen. Malaysia is the only Muslim country, besides the UAE, which consistently attracted high FDI inflows over the decades due to political stability, steady industrial growth as well as its positive business environment. So it is obvious that the traditional factors like natural resources and cheap labour cost do not any more determine FDI. Political instability also contributes to weak business environment that can in no way attract FDI.
...................................................
Dr. M. Mizanur Rahman is an economist and researcher. e-mail: mizan12bd@yahoo.com