About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic

Wednesday, October 12, 2016

Africa and the myths of FDI

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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