Deciphering the FDI figures

26 September 2003
Few sets of data can be relied on to provoke almost exactly the same reaction on their publication each year. Regular as clockwork, the United Nations Conference on Trade and Development (UNCTAD) produces its figures for foreign direct investment (FDI) and the reaction of macroeconomists and policy-makers is the same: hands are thrown up in horror at the disappointing manner in which the Middle East and North Africa (MENA) region is being left behind, and the cries go out for economic reforms to be initiated in the hope of attracting a greater slice of the FDI pie into the region.

This year proved no exception, when the latest FDI data was published by UNCTAD in early September. Once again, the MENA region lagged behind other parts of the developing world, and once again the figures were used to support arguments for radical reform.

Superficially, this argument is sound: the data does make depressing reading. As figure 1 shows, more than half the region's countries recorded declining FDI and, on an aggregated basis, investment into the MENA region in 2002 fell by 35 per cent to $4,800 million.

Of course, the impact of FDI, and the reliance on it for economic growth, differs throughout the region. For all, it is a driver of job creation, current and capital account management and infrastructure development. For some, it plays a role in exchange rate policy, for others it shapes economic diversification and the acquisition of new technologies and services.

And so the argument runs that weak FDI is a bad thing. It has been accepted to varying extents by regional governments. Offset programmes linked to arms sales have been established in a number of markets, though their success in attracting meaningful investment and building healthy local enterprises has been limited. Some governments have gone further. The Saudi Arabian General Investment Authority (SAGIA) started operations in 2000 with the specific aim of easing the flow of FDI into the kingdom. Other reforms targeted at opening up the Saudi market to foreign investment have attracted high publicity, such as the negative list and the capital markets law. However, Saudi Arabia - by far the largest regional economy - had, in 2002, its third year of negative FDI out of four.

Certainly, some countries have been more dependent on their foreign fix than others. A predictable chain of cause and effect is illustrated by the accumulated FDI stock data (see figure 2). The stronger the domestic economy and the greater the robustness of government finances, the lower the need for FDI. As a result, the governments of these countries have come under less pressure to attract FDI and have been able to maintain effective barriers and nurture domestic enterprise: Kuwait and the UAE have the lowest levels of FDI as proportions of gross domestic product (GDP) in the MENA region. The corollary is also true and Egypt, Jordan, Morocco and Tunisia lie at the other extreme. There are exceptions: Bahrain, for example, is particularly open and has been adept at attracting sizeable FDI - much of it from neighbouring states - despite, or rather, because of its comparatively stable economic position and its proximity to markets more difficult to access.

There are two lessons to be learned. First, that necessity is the mother of invention (and the father of economic reform): those countries most needing FDI will find the political will to best prepare their markets to attract it.

Second, that there are a number of MENA countries that might benefit from rethinking their approach to attracting investment. Estimates of the value of the private and institutional Arab wealth invested offshore vary wildly from $800,000 million at the low end to $2,000,000 million at the high. The repatriation of only a fraction of this would have a dramatic impact on the annual statistics and the regional economies. Perhaps the focus on the foreign part of FDI is the most misleading.

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