<incom> Gallagher & Zarsky, FDI does nothing for development

Mon Jul 3 14:34:08 CEST 2006

Sth on FDI from the PAE crowd. On FDI in an ICT context (and whether or 
not it makes sense to 'strip naked' to attract it, as Yash Tandon - now 
with the South Centre - put it), also see the factsheet at SEATINI, Soenke

<http://www.seatini.org/publications/factsheets/technology.htm>

Kevin P. Gallagher and Lyuba Zarsky, “Rethinking Foreign Investment for 
Development” post-autistic economics review, issue  no. 37, 28 April 
2006, article 2, pp.10-32, 
<http://www.paecon.net/PAEReview/issue37/GallagherZarsky37.htm>

FDI does nothing for development, report concludes

By Margaret Legum

"In the 1990s foreign direct investment (FDI) came to be seen as a
miracle drug - a jumpstart to economic growth and sustainable
industrial development, especially in developing countries. Policies
to attract FDI became the centrepiece of national development
strategies and supranational investment agreements.

"This paper examines … evidence about the impacts of FDI in
developing countries. We conclude that the purported benefits of FDI
are exaggerated and its centrality in development strategies
misplaced. Development policies should [rather] aim to promote
endogenous local capacities for sustainable production."

These are the conclusions of a longitudinal study, published this
year, by senior American economists Kevin Gallagher and Lyuba Zarsky
of Boston University.

It shows that FDI's effects are generally negative for the poorest
countries and that positive effects happen only alongside
interventionist government policies.

Even conventional economists acknowledge that participation in the
global market brings uncertainties, but it is assumed that the
benefits of growth and low consumer prices outweigh the problems.

In that equation, attracting FDI ranks high. On the one hand, a
government must jump through a lot of hoops to attract it. It must
provide obvious incentives such as low corporate tax, flexible wages,
ease of hiring and firing, and limited regulation. Pro-poor policies,
described as "populist" and "unsustainable", must be avoided, while
budget balancing and limited social expenditure, seen as "prudent
fiscal management", is essential. Only one policy direction is
tolerated by the market.

It is assumed that FDI's benefits make the sacrifices worthwhile, as
it gives us the competitive edge.

This extensive study shows that the purported advantages of FDI need
to be re-examined.

First, investment by the major FDI players, the transnational
corporations, mostly takes the form of mergers and acquisitions -
buying foreign assets. These rose from 52 percent of the total in
1987 to 83 percent in 1999, driven by the privatisations that
developing countries were exhorted to put into place in the 1980s. It
did little or nothing for growth, reduced employment and had no
developmental impact.

Second, the strongest motivation for foreign investment is market
size, not labour costs. The attraction of China, which absorbs nearly
a third of FDI for all developing countries, is based on the size of
its market.

Third, there is little or no evidence that special investor
protection measures, such as tax holidays, have much effect on the
decisions of transnationals. Macroeconomic and political stability
are important attracting factors; so a volatile exchange rate and
fluctuating trade deficits discourage FDI. These cannot be controlled
by governments committed to global openness.

Fourth, nearly three-quarters of FDI flows go from one developed
country to another, showing that the efforts of developing countries
to compete by reducing standards of living have been ineffective.

Fifth, the efficiency spillover is shown to be small and limited to a
few countries. Without a strong state that "nurtures domestic firms",
FDI can "crowd out" domestic investment, the report notes.

The report is very circumspect, but it does become clear that FDI is
contributing hardly anything to development in the poorest countries.

And when poor governments grasp that FDI is doing nothing for
development, they can choose active policies to promote the local
market.