The World Investment Report 2021 And The Problem With FDI

The United Nations Conference on Trade and Development (UNCTAD) recently published its annual World Investment Report 2021. True to its title, Investing in Sustainable Recovery, the report highlights the effects that the pandemic has had on foreign direct investment (FDI). It goes without saying that the health crisis has induced a negative effect on economic development, and in turn, the Sustainable Development Goals (SDGs). But when it comes to using FDI as a vehicle for development, Africa paints the gloomiest example.

FDI happens when a firm in one country has ownership of a business in a different country. In terms of development, it’s useful in that it helps the host country enhance productivity through technology transfers while integrating businesses into the global market. This is especially important for less-developed economies, where such wealth transfer is necessary for them to not fall too behind the larger economies. FDI flow into less-developed economies is also vital for hitting the 169 SDGs that were committed to in 2015. The COVID-19 pandemic has severely impacted this.

In a recent interview, administrator of the United Nations Development Programme (UNDP) Achim Sterner stated that this is the first time in 30 years where there’s been a reversal in global human development. Taking the example of Latin American and the Caribbean, 22 million have fallen back into extreme poverty—a number not seen since 2008. Although only one form of wealth transfer, FDI played a role in this reversal. It had already been falling going into 2020, but flows crashed by 35% last year, going from $1.5 trillion to $1 trillion. At first glance, FDI inflow to developing economies was hit less than those to developed ones (an eight percent decrease compared to 58%). However, this modest decrease to developing economies was mostly buffered by Asia, where flows actually increased by four percent. This example is indicative of the general successes and failures of FDI as a driver for development.

As Asia has been able to capitalize on FDI flows to develop, Africa has not. Between 2000 and 2018, Africa’s share of global FDI inflows rose from one to three percent while its share of global value chain participation remained at only two percent. In the same timespan, the Asian-Pacific region saw global FDI inflows rise from 10% to 31%.

The pandemic shrunk FDI flows to Africa by a further 16%, due to the commodity-dependence of its economies. “New” projects built from the ground-up (called greenfield projects) also faced significant investment declines, with this measure being useful in gauging the future of FDI trends. Within this context, it’s been said that Africa faces an FDI paradox: investments should theoretically flow to the countries with the highest returns. Even though African nations had the highest rate of return on FDI from 2006 to 2011, the inflow hasn’t followed. There are several reasons for this given by academics. These include weak infrastructure development, low human capital, weak judicial systems, weak property rights, fragmented investment policies, and limited access to investment opportunities.

In UNCTAD’s report, Secretary-General Isabelle Durant writes that this is a chance to “build forward differently,” and to recalibrate FDI to allow for a more equitable future. Where this recalibration is supposed to stem from, is uncertain. Yes—a pause has been unintentionally introduced, but that doesn’t mean a different route will be taken in the inevitable bounce back. And, if the past few decades and their economic crises can tell us anything, we should be more inclined to believe the exact opposite will be true.

FDI only represents a conscious decision in so far as investors consciously decide where their capital will lead to the greatest return on investment. There are no agreements or promises that a set amount of FDI will go to less-developed economies, unlike development assistance (as weak as these promises may be). The recalibration then falls onto the domestic policies of countries vying for FDI. This means lowering barriers for foreign investments, attracting capital with strong infrastructure and institutions, and often rolling back social, environmental, and sometimes even civil protections.

This isn’t anything new, either—the official stance is exactly so, but written more optimistically. In true neoliberal fashion, it becomes the “individual” state’s responsibility to attract capital. Power structures may be acknowledged and even disagreed with, but it becomes the responsibility of those countries who benefit, to change them. In a complex system of a “community of nations,” what this entails is anyone’s guess. With this being the case, it’s driven as much by ideologues as evidence.

The solution to this issue is obvious, yet ambiguous; simple, yet not. Bringing down power structures is the political zeitgeist—both on the national and international levels. But what does this mean? For one, it means not pretending that a report calling for more equitable development will solve anything. Secondly, it means reimagining both the language and claims we use when arguing for structural change. These assertions strike at some fundamental questions that won’t be answered readily. Is it better to work within the system, or outside of it? What is more practical? More expedience? Should we aim for the former or latter? These questions won’t be answered because they touch on personal feelings as much as (or perhaps even more than), observations. They are large, and the political imagination required to answer them will be commensurate.

The UNCTAD report concludes with the launch of a new initiative, the UN Global Sustainable Finance Observatory. The Observatory is meant to be a multi-agency partnership with the goal of embedding sustainable development into global investment culture. One of its mandates is to assist developing countries build their capacity. Other recent news is the start of the African Continental Free Trade Area (AfCFTA) at the beginning of this year. With the growing importance of regional value chains over global ones, this is an important step in strengthening the lesser developed economies of the continent. There is also a bounce-back expected due to delayed projects starting again later in 2021 and 2022.

However, these solutions are reactive, only working as a response to known crises and inside of the current economic arrangement. FDI has been offered as an answer to chronic underdevelopment, and although it has worked in some areas of the globe, it has fallen short in others. There will be more crises in the future, and they will only serve to shine an even brighter light on the areas we’ve ignored. The UNCTAD report is right in that this is a time for recalibration—but not the one it proposes.


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