Foreign Direct Investment is Impoverishing the South

Foreign Direct Investment is Impoverishing the South
http://allafrica.com/stories/200212040462.html

By: Yash Tandon
December 4, 2002

One of the central assumptions of neo-liberal economics is that the 
liberalisation of the investment regime is a necessary condition for 
growth. But is this really true? Does investment liberalisation really 
bring growth and development?

Investment, to be sure, is an essential ingredient of growth. That is a 
truism as old as the mountains. One does not have to be an economist to 
know this. As soon as agriculture became the basis for human development 
around 800 BC, the homo erectus knew that she had to save the seeds from 
the previous season as investment for the next. That is age-old 
conventional wisdom.

But can we say that investment from outside, foreign investment, is an 
essential ingredient of growth? Is there really a good case for opening up 
the doors to foreign capital without controls? Is there an unqualified case 
for the liberalisation of the investment regime? Indeed, to be even more 
challenging, might foreign investment not be the cause of the opposite of 
growth? Might it not be a cause of lack of growth, or what some have 
described as "mal-development"?

The World Council of Churches (WCC) has issued a publication recently 
titled "An Ecumenical Approach to Financing for Development" prepared by 
the Ecumenical Coalition of Economic Justice, a project of the Canadian 
churches. It raises similar questions about FDIs, and advocates a 
self-reliant method of financing development.

There is much reflective wisdom in what the WCC says: "Where development 
can be financed at the local community level, without dependence on 
external funds, it should be. What can be financed nationally should be 
funded nationally. Over-reliance on external financing leads to dependence 
and to types of 'mal-development'. Mal-development is characterised by 
ecologically destructive overconsumption by the wealthy minority and the 
concentration of power in the hands of private transnational corporations 
and international financial institutions which exclude the majority of people."

Where, then, did the proposition that FDIs are a necessary ingredient of 
growth gain such widespread currency in modern times? What is the basis of 
such a belief? Like most belief systems, is it also not a matter of blind 
faith? For indeed there is no evidence that FDIs have helped the countries 
of the South. Gertrude Takawira, writing in a recent issue of SEATINI 
Bulletin (November 15 2003), takes us back to the history of Zimbabwe. 
Where is the evidence to show that since 1892 foreign investments have 
helped the people of Zimbabwe?". . . how much has changed since 1892?" she 
asks.

Yes, the injection of foreign capital did help the company of Cecil John 
Rhodes to exploit Rhodesia's mineral wealth. It made England rich. But did 
it make the people of Zimbabwe rich? This is not just a rhetorical 
question. After a hundred years of colonialism, the people of Zimbabwe are 
poorer than their ancestors. The ancestors had at least land and cattle.

After the injection of FDIs since 1892, the people lost both. And the 
attempt to get back the land has got the present rulers of Zimbabwe into 
conflict with the historical owners of the FDIs, the British. A hundred 
years of the injection of FDIs into Rhodesia/Zimbabwe has only enslaved the 
people of the country.

The country is now in a trap. Without FDIs, say the IMF experts, the 
country cannot grow. Zimbabwe, so goes the IMF orthodoxy, must create 
renewed conditions for FDIs to flow into the country for "growth". Out of 
this growth would "trickle" development for the people of Zimbabwe. But 
where is the evidence for that?

It is the same old swan song of Cecil John Rhodes. But history is witness 
to the reality of FDIs. Bring in more FDIs, and England will become richer 
and Zimbabwe poorer. Bring in more FDIs and America will become richer and 
Argentina poorer. Argentina once used to be one of the most developed 
countries of the world, at par almost with England. Today, its people 
cannot even get access to their own savings in the banks in order to buy 
the basic wherewithal for life. Where is justice in the system?

Justice, says the WCC document cited above, is the central issue of 
development, not growth. "By asserting justice, ecological sustainability 
and the creation of viable communities as our goals, the ecumenical 
community's emphasis differs from the dominant approach, which focuses on 
fostering economic growth." On this basis, the ecumenical community 
"expressly rejects neo-liberal economics" based on the Washington Consensus 
and the trickle-down assumptions of "growth" strategies.

"The Washington Consensus policies," says the WCC, "have weakened 
democratic states, and thereby weakened citizens' rights. International 
financial institutions must be transformed so that bodies like the IMF and 
the World Bank cannot impose neo-liberal policies of financial 
liberalisation on sovereign states."

In the article on "The crisis in Multilateral Trading System", in the same 
issue of SEATINI Bulletin as cited above, S. P. Shukla, a former ambassador 
of India to GATT and to Geneva, says more or less the same thing on the 
international trading regime as what the WCC and Takawira say on the 
international investment regime. Where is the evidence that trade 
liberalisation has brought "growth" or "development"? Citing the authority 
of the Trade and Development Report of UNCTAD for this year, Shukla gives 
five "downside" aspects of liberalisation of trade. These are:

- Most developing countries are still exporting resource and labour 
intensive products and have not yet been able to establish a dynamic nexus 
between exports and income growth;

l. Statistics showing a considerable expansion of exports of manufacturers 
from developing countries are misleading in that those exports relate to 
products of labour-intensive, assembly-type process with little or low 
value added. The result is that while developing countries' share in world 
manufacturing exports has risen, their share of income from such exports 
has declined.

2. Most of the value added is appropriated by the producers of imported 
components and parts embodying high technology and by transnational 
corporations (TNCs) organising the international chains of production. In 
an environment of deregulation and liberalisation of trade and fierce 
competition among developing countries for attracting TNC investment, the 
former have very little bargaining power to set the terms and conditions 
for the latter to ensure indigenisation of the production processes. This 
gives rise to the danger of enclave economies with high persistent 
dependence on imported capital and intermediate goods.

- With a simultaneous export drive by developing countries in 
labour-intensive manufacturers or increased competition among them to 
attract TNCs for location of labour-intensive processes of international 
production chains, the fallacy of composition problem surfaces, leading to 
non-realisation or low realisation of intended gains. The competition gets 
transformed into a competition among labour of different countries, 
resulting in a downward pressure on wages.

- A few countries have seen sharp increases in their world manufacturing 
value-added; however, none of the countries which have rapidly liberalised 
trade and investment in the last two decades is in this category.

Shukla goes on to take the authors of the TDR to task for not following 
their own analysis, and for ignoring the lesson of history. The authors, he 
argues, have forgotten the essentially political economy approach of the 
Havana Charter, and have degenerated into banalities when it comes to the 
prescriptive part of the TDR. They are lost in a technicist jargon-laden 
approach to issues of development, issues that require an understanding of 
both power and economics.

So what is the way forward? The WCC suggests that alternative approaches to 
the reigning neo-liberal orthodoxy are required such that they allow 
"righteous" relations with neighbours, which is what the Washington 
Consensus has undermined. Takawira, for her part, has raised the question 
of "withdrawal from the global system" as an "imperative".

But she has wisely asked us to do our homework first before we venture into 
something as radical as withdrawal from the system. "It is not an easy 
option," she says, "but any decision should be an informed one. We need a 
phased, gradual and systematic withdrawal from the global system within a 
regional framework (Sadc). For this to be successful what is needed is:

- Up-to-date and reliable data;

- Strengthen our business sector;

- Revise the meaning of what is formal and what is informal (white = 
formal, black = informal?);

- Revise on what are core businesses for local consumption and what are 
those for export purpose;

- Define our competition policies;

- Know ourselves better and not rely on what other people from the North 
call us.

There is much room for original thinking in our part of the world. The 
Washington Consensus is dead. Much thought is needed to find alternatives 
to the neo-liberal agenda that our rulers are foisting on us at the behest 
of  the IMF, the WTO and the World Bank.