Democracy Lab

Not Quite the Holy Grail

The changing global picture of foreign direct investment.

Not so long ago, foreign direct investment (i.e., foreign ownership of businesses as opposed to investment in securities) was widely viewed in developing countries as a form of neo-colonialism. Big American, European, and Japanese companies would come bearing promises of jobs and riches. Once there, they would bribe the local autocrats to keep their distance, then strip the country of its mineral wealth, old-growth forests, etc. -- or maybe just entrench plantation agriculture that displaced small farmers, wrecked environmentally sensitive watersheds, and made the economy more vulnerable to the vicissitudes of global commodity markets.

Today FDI is, more often than not, touted as the Holy Grail of growth, a vital source of capital, technology, training, and managerial know-how. Moreover, unlike investments in the form of bank loans or stock/bond purchases, the foreign owners can't cut and run in times of crisis.

If forced to pick sides, I'll go with the sunnier interpretation of FDI. The global economy is now utterly dependent on cross-border production, much of which would not be practical without massive cross-ownership of firms and factories. But, in truth, neither caricature is (or was) quite true. Allow me to muddy the waters with a few facts and some educated speculation.

The United Nations Conference on Trade and Development (UNCTAD) estimates that global FDI totaled $1.24 trillion in 2010, and probably increased by about $200-300 billion in 2011 -- which is still well short of the $1.9 trillion peak in 2007. Of the total, a bit more than half ended up in developing and emerging-market economies. But that's a new phenomenon: 2010 was the first year in which less than half went to rich countries. All told, $12.5 trillion of the total $19.1 trillion foreign-owned stock of capital in 2010 still consisted of assets in developed economies.

The EU and the U.S. were still the biggest recipients, attracting $305 billion and $228 billion, respectively. But, as you'd expect, the real action has been in emerging-market countries, with China ($175 billion, up from $72 billion in 2005), Brazil ($48 billion, up from $15 billion), Russia ($41 billion, up from $13 billion), and India ($24 billion, up from $8 billion) leading the pack.

The most inauspicious -- if not unexpected -- FDI numbers are for truly poor countries. All of sub-Saharan Africa received just $38 billion. And the 48 "least developed" (in UNCTAD-speak) pulled in a mere $26 billion. That's down substantially from what had been an upward trend, which is especially troubling since just a handful of mineral-rich countries (Angola, Democratic Republic of Congo, Sudan, and Zambia) got half the total.

The bulk (about 70 percent) originates in developed countries. No surprise there: The EU, U.S. and Japan are home to the headquarters of most of the great multinational corporations, which do most of the FDI. The other 30 percent isn't so easy to explain, though.

The emerging-market countries all generate big outflows of FDI, in large part because they are deeply enmeshed in the multinational production chains that add value to products in three or four countries before selling them in a fifth. But there are more specific incentives. Russians, for example, invested an astonishing $51 billion abroad in 2010 -- much of it, one would guess, to protect earnings generated by extractive industries and organized crime against political risk. Brazil, Chile, and Mexico, for their part, are headquarters to companies with strong ambitions to become multinational powerhouses, as well as home to very rich families with strong incentives to diversify their holdings in countries and currencies. Then there are a handful of "entrepot" economies and regional financial centers -- think Hong Kong, Singapore, the Cayman and British Virgin Islands -- that register inflows and outflows of hundreds of billions in FDI for hard-to-explain reasons (which, in some cases, may be just the point).

China, though, is the most interesting case of a big recipient and a big source of direct investment. In 2010, for example, China invested some $68 billion abroad. In part, this may be explained by the usual suspects: the desire of businesses and individuals to diversify their holdings, the need for multinationals to create subsidiaries for expanding operations in other countries. But a couple of reasons are almost unique to the middle kingdom. For one thing, China's own financial markets are not up to the task of efficiently allocating capital in a large, sophisticated, industrial economy, creating incentives for both private and public entities to put their wealth to work in foreign business. For another, it is government policy to assure access to key raw materials by locking up resources in other countries.

In 2005 China tried to buy Unocal -- a U.S. oil company with substantial assets in Southeast Asia -- for $18 billion. Meanwhile, state-owned Chinese enterprises are investing heavily in projects ranging from oil fields in Sudan, to copper mines in Vietnam, to liquefied natural gas facilities in Iran, to a pipeline to import gas from Russia. And they are apparently even prepared to finance the infrastructure to divert Canadian tar sands crude from the U.S. market if the XL Keystone pipeline is stillborn.

Even the simple cases of abusive FDI aren't so simple. Corruption is generally high in the classic tin-pot dictatorships where foreigners dominate extractive industries. But is corruption the result of the autocracy or the FDI? The econometric evidence suggests that FDI has little impact on the level of corruption in democracies (think Chile, Botswana, India), and quite a bit in autocracies like Pakistan and Vietnam. Not surprisingly, opportunities for extractive industries are the single biggest pull for FDI, especially in Africa. But all other things equal, democracies are better at attracting FDI.

Does FDI typically create the vaunted positive spillovers coveted by developing countries? The evidence is (again) mixed. A group of researchers on Latin America at Tufts Global Development and Environment Institute concluded that while FDI facilities were generally more productive, paid higher wages, and contributed to exports more than their domestic counterparts, they were not much good at diffusing advanced technology, creating networks of suppliers, or maintaining higher environmental standards. Moreover, they often "crowded out" local competitors rather than "crowding in" (that is, stimulating) new business investment. The Tufts Group's bottom line: To date, FDI simply hasn't had enough impact to make a material difference to the rate of economic growth in Latin America.

But researchers at the Inter-American Development Bank did find evidence of a variety of positive spillovers. In a classic case dating back to the 1970s, American investors created a firm (FlorAmerica) that grew flowers in Colombia to market by air freight in the U.S. This triggered the creation of a whole ecology of local suppliers, as well as competitors who imitated FlorAmerica's business model and technology. Indeed, the new industry even created a trade association to lobby against trade protectionism in the U.S. and for improved freight service from Columbia's state-owned airline.

There's no single answer, then, to the question of whether FDI is doing more good than harm -- or just plays a passive role in the arc of development. Nor, when you think about it, would you expect there to be. With $7-8 trillion in FDI already on the ground in developing/emerging market countries, and several thousand projects begun every year, the range of impact is bound to be large.

What does seem clear is that the integration of capital ownership is virtually unstoppable, as national economies converge and supply chains grow ever more complex. By the same token, it's hard to imagine any contemporary economy thriving without access to FDI. Indeed, the only countries that remain largely untouched by FDI are the poorest of the poor.

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Argument

The Missing Piece

More than a year after the 2011 uprisings, Arab publics are concerned about the economy, but hopeful about democracy.

In Egypt, Mohamed Morsy, the country's first civilian president, is locked in a power struggle with his generals. To the west, votes are still being counted, but it looks as if rebel political leader Mahmoud Jibril will be responsible for unifying post-war Libya and bringing rogue militias into the fold. Both men also face harsh economic realities, compounded by months of conflict and unrest. These are the dual challenges wrought by the Arab Spring: Institutionalizing nascent democracy while simultaneously kick-starting much-needed economic growth.

In a perfect world, democracy and economic growth would be mutually reinforcing. But in many corners of the globe -- from Latin America, to Africa, to the former Soviet bloc -- the reality has proven to be more complex. Whether the Arab world can have both democracy and prosperity is a question that will play out for months and years. But for now, all we can do is measure the attitudes and aspirations of Arab citizens themselves.

Solid majorities in Egypt, Lebanon, Jordan, and Tunisia say that democracy is the best form of government, according to a recent survey by the Pew Research Center. At the same time, at least seven-in-ten respondents from these countries say that their national economy is performing poorly. 

Perhaps not surprisingly, given the diversity of the region, people from different Arab countries weigh the tradeoff between these differently. Most Jordanians and Tunisians believe that robust economic growth is more important than consolidating democracy. The Lebanese, in contrast, place more importance on democracy, while Egyptians are evenly divided.

What do Arab publics make of the Arab Spring's impact on prospects for democracy? Across the board, solid majorities believe the 2011 popular uprisings will lead to more democracy in the Middle East, including nearly three-quarters of those surveyed in Egypt and seven-in-ten in Tunisia. Roughly two-thirds in Jordan and Lebanon agree.

But as the recent Tunisian and Egyptian elections demonstrate, voters have their own views about what democracy should look like.

Most in these four Arab nations want a major role for Islam in public life, and most want Islam to have at least some influence on their nation's laws. Majorities in Jordan and Egypt believe laws should strictly follow the teachings of the Quran, while in Tunisia, a former French colony, views on this question look like more secular Muslim nations such as Turkey and Indonesia. Most Tunisians want their laws to be influenced by the values and principles of Islam, but not to strictly follow the Quran. 

In three of four nations, solid majorities say Islam is already playing a large role in the country's political life. In newly democratic Tunisia, where the Islamist party Ennahda won the largest share of votes in the recent parliamentary election, fully 84 percent think Islam already has a major role. Similarly, in Egypt, where the Muslim Brotherhood has won both parliamentary and presidential elections, 66 percent hold this view, up from 47 percent just two years ago. The clear exception is Jordan, where the Western-educated and largely secular King Abdullah II continues to hold the reins. Only 31 percent of Jordanians believe Islam currently plays a large part in their nation's political life.

While most people in the Arab countries surveyed believe democratic institutions and political stability are crucial priorities, even more prioritize economic prosperity. Their concerns are understandable. The International Monetary Fund foresees slow growth for the region in 2012: only 1.5 percent in Egypt, 2.2 percent in Tunisia, 2.8 percent in Jordan and 3 percent in Lebanon. Strong majorities in Lebanon, Jordan, and Egypt say their standard of living has either not improved or has gotten worse over the last generation. And, in the wake of the Arab Spring, their current economic situation is worsening. Majorities in Egypt, Lebanon, and Jordan think their personal economic situation is bad -- and the percentage has increased in all three countries since the Arab Spring broke out.

Tunisians stand apart, however. A majority (57 percent) thinks their lives are better than that of their parents. And 56 percent say their personal finances are good.

The economic outlook over the next 12 months is mixed. Half or more in post-revolutionary Tunisia and Egypt believe the economy will improve, but less than a third of Jordanians and Lebanese say the same. Meanwhile, people in all the countries surveyed believe overwhelmingly that the next generation will struggle to exceed today's standard of living.  

This downbeat mood about the economy coincides with low levels of faith in capitalism, democracy's economic handmaiden. Just half or fewer in Egypt (50 percent), Jordan (43 percent) and Tunisia (42 percent) agree that most people are better off in a free market economy. And while a majority of Lebanese embrace capitalism, support is down 12 percentage points since 2007, a year before the start of the global recession.

The Arab uprisings had two broad objectives: Democracy and improved economic conditions. But even as Arab publics have largely embraced democracy (often despite the reluctance of their governments to follow suit), the economies in the region are still struggling.  

If the new governments in Egypt and Tunisia are unable to deliver economically, public faith in capitalism and nascent democratic institutions may falter. Over the last few years, the dismal economic performance of many former Eastern bloc countries has resulted in plummeting enthusiasm for both democracy and capitalism. The heady optimism that followed the Berlin Wall's collapse has since been replaced by economic and political frustration. It remains to be seen if Arab public opinion will follow a similar trajectory.   

KHALED DESOUKI/AFP/GettyImages