Why foreign direct investment is overrated and why Africa
needs to cultivate local businesses
There is a fad in Africa. It is called Foreign Direct
Investment (FDI). Across our vast continent, foreign investors are the most treasured
visitors. Practically every country is obsessed with attracting them, often
ignoring local investors. An African president will readily give audience to
foreign investors where local investors take months or years to see him. FDI
easily negotiates generous tax exemptions, government subsidies, etc. which
local investors rarely get. And it gets other generous terms such as the right
to 100% ownership of the enterprise and 100% profit repatriation.
But what exactly does FDI bring into the country that gives
it such a cult-like status? The high priests of development tell us that poor
countries have very low incomes, which leads to low savings that cannot be
sufficient to finance their investment needs. FDI also brings technology,
technical, organisational and management skills, etc., which enhance a nation’s
productivity. It also creates more jobs and enhances the nation’s tax base. Who
can challenge these claims? There is a lot of evidence to prove them.
However, if FDI is such an indispensable driver of
development, then it should have developed many countries. Does anyone know of
any country that developed mainly because of FDI? The United Kingdom
industrialised largely through investments made by its nationals. So did
America and the rest of Western Europe. Japan industrialised with national
industrial giants like Toyota, Honda, Nissan, Sonny, Panasonic, Mitsubishi,
Toshiba, etc. South Korea did so with Hyundai, Daewoo, Sam Sung, LG, Kia, etc.
Practically every country in the world that has transformed
from poverty to riches has done so through the growth and expansion of its
national companies. National capital is still the main driver of investment in
China, the nation that has been growing as if on steroids. In 2002, FDI
contributed only 10.13% of total investment. By 2005, 67% of total
manufacturing output in China was from State Owned Enterprises (SOEs). More so,
80% of FDI was by ethnic Chinese from Singapore, Taiwan, Hong Kong, USA and
Western Europe. Chinese, not FDI, are the ones developing China.
Here is the challenge facing Africa. The architecture of
ideas (the ideology of free market capitalism) that is promoted as good for our
development is not interest-neutral. International capital wants to be free to
move wherever it wishes to make money. For it to make the best of itself, it
must have the freedom and ease of entry and exit into and out of countries
alongside the aforementioned generous concessions. Yet these concessions eat
away long term benefits to host countries which are poor.
However, the high priests of development and the recipients
of this gospel miss the obvious. The richest countries possess vast amounts of
capital that need to find new areas where they can get higher returns. So they
argue for free capital movements, for open, transparent and competitive
international bidding. They call for privatisation and liberalisation. These
ideas have been fed into our minds over and over again. Now they have acquired
the status of gospel truths. Yet these ideas are not interest-neutral. They are
interest-laden.
For example, a poor country privatising and liberalising
through international competitive bidding will have multinational firms take
over the commanding heights of the economy. What unique skills and technology
has Stanbic Bank, which bought Uganda Commercial Bank, brought into Uganda that
we cannot find at Centenary Bank? But the value Stanbic captured almost for a
song by taking over UCB was very big. This year it will make up to Shs200
billion in profits, largely through trading in government securities instead of
lending. Most of the profits will go to their shareholders abroad.
Standard Chartered Bank has been in Uganda for over 100
years making profits. But it does not own even a kiosk, and rents its
headquarters from someone else. Whatever one can say of Sudhir Ruperalia, all
profits from Crane Bank are plowed back into the economy, creating a huge
multiplier effect. In 20 years of its existence, witness the number of branches
across many towns and other investments Sudhir has made in the country from his
dividends.
So we are made to open up in those areas where rich nations
have a competitive advantage – capital. Yet rich countries have tight
restrictions on something where poor nations have a competitive advantage –
labour. Through stringent immigration controls, they have blocked cheap labour
from poor countries to freely move to rich nations. Thus the wages for workers
in rich industrial nations are kept artificially high through barriers to entry
into their labour markets imposed on workers from poor countries.
In fact, rich countries have established a system through
which highly skilled labour from poor countries is given easy access to their
labour markets. So they can get what they lack (the best few out of poor countries
i.e. brain drain) and block the many who would outcompete their own
less-skilled workers at home. These decisions have not been made by a free
market but by politics. Yet they tell poor nations that it is wrong to use
politics to protect one’s domestic market from the cold winds of international
competition.
Over the years I have grown wary of many of the ideas I had
internalised about the challenges of poor countries. We need FDI. But I do not
think it deserves the attention and concessions we give it. In 2014, Glencore,
a Swiss company, exported $5.4 billion worth of copper out of Zambia but paid
only $50m in taxes. Through profit repatriation and transfer pricing,
multinationals take foreign exchange out of host nations. In the long term,
poor countries face severe balance of payment problems. And in the long term,
FDI either stifles the emergence of or even kills existing local firms.
The economic bureaucracies i.e. ministries of finance and
the central banks in Africa are run by people schooled by the IMF and World
Bank. The ideas they espouse benefit international capital and discourage the
role of the state in cultivating local capital. Even local civil society and
punditry are also hostile to aggressive state involvement to harness local
capital. This is because of the belief that such state intervention should be
politically blind.
The only transformative state is an activist state. However,
there is no government that can pick winners without exercising cronyism. If
Africa cannot build a transformative state, it is because inside and outside
government, those who seek foreign control of the commanding heights of our
economies have won the battle of ideas.
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amwenda@independent.co.ug
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