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FINANCE: Drop in Foreign Investment Threatens Development Goals

Emad Mekay

WASHINGTON, Sep 4 2003 (IPS) - Global foreign direct investment, already down by over 40 percent in 2001, fell by another 21 percent in 2002, raising ”considerable concerns” about prospects for achieving the Millennium Development Goals, according to a United Nations trade body.

Foreign direct investment (FDI) should stabilise this year and could rebound slightly in 2004, continued a report by the body, the U.N. Conference on Trade and Development, released Thursday.

”The FDI slump continues,” said UNCTAD Chief Economist Karl Sauvant at the release of the ‘World Investment Report’, an annual publication that examines international FDI trends.

”We anticipate that somewhat stronger global economic growth, enhanced corporate profitability and the gains from corporate restructuring will combine to boost FDI,” he added.

Global FDI flows declined in 2002 for the second consecutive year, falling to only 651 billion dollars, the lowest level since 1998 and one-half the 1.4 trillion dollars – a record volume – of 2000.

”The main factor behind the decline was slow economic growth in most parts of the world and dim prospects for recovery, at least in the short term,” said the UNCTAD report.

The eight Millennium Development Goals set by the United Nations in 2000 include halving the incidence of poverty from its 1990 levels by 2015, achieving universal primary education and developing a global partnership for development, with targets for aid, trade, and debt relief.

Most international bodies, like the World Bank and the International Monetary Fund (IMF) say that FDIs are central to countries’ development and many nations focus intently on attracting more FDIs.

According to the UNCTAD report, among developing regions, Latin America and the Caribbean was hit hard in 2002, suffering its third consecutive annual decline in FDI (a drop of 33 percent).

Services, telecom and electricity were the sectors hardest hit.

The report blamed financial crises, like one in Argentina, and political uncertainties in a number of the region’s economies, including Venezuela, for the decline.

FDI to Africa declined 41 percent but UNCTAD predicted better flows in 2003 because of expanded exploration and extraction of natural resources, particularly oil, and regional privatisation programmes.

Angola, Chad, Nigeria, Mauritania, Sao Tome and Sudan are among the countries expected to see new FDI flows into their petroleum industries, especially with renewed U.S. interest in the continent’s oil.

Among developing regions, FDI declined least in Asia and the Pacific because China continued to receive record inflows, said UNCTAD. The socialist country banked 53 billion dollars last year, making it the world’s second biggest recipient of FDIs after Luxemburg, which received 126 billion dollars, in search of tax breaks.

Asian nations have also adopted national measures that facilitated FDI flows, added the report.

Worldwide, FDI dropped because of falling stock market valuations, lower corporate profitability, a slowdown in the pace of corporate restructuring in some industries, a fall in cross-border mergers, more guarded bank lending and a winding down of privatisation in some countries.

”The last couple of years have seen a dramatic fall in cross-border mergers and acquisitions. In 2000, these amounted to 866 billion dollars, while last year they were just 213 billion dollars,” said Sauvant, whose organisation is the lead organ for the U..N. General Assembly in the field of trade and development.

Outflows were also down in 73 of the 151 countries tracked in the report, according to UNCTAD.

At 120 billion dollars, U.S. outflows rose by 15 percent from 2001, while EU outflows (394 billion dollars), dropped by 13 percent. Japan’s outflows fell by 18 percent, to 31 billion dollars.

FDI from developing countries totalled 43 billion dollars, dipping by four billion dollars, but their share in total world outflows remained at roughly seven percent.

Outflows from Central Eastern Europe (CEE) climbed by 700 million dollars to 4.2 billion, with the Russian Federation being the largest investor in the region.

Finance, transport, storage and communications were the sectors that suffered most worldwide from declining FDIs, while sectors like health and social services remained unchanged, added UNCTAD.

Sectors that saw growth included mining, quarrying and petroleum, despite extensive lobbying by civil society groups and environmentalists against such industries.

UNCTAD predicted a slight rebound in FDI in 2004 as the United States, the world’s largest economy, shows signs of economic turnaround.

”We have clear indications that the downturn has bottomed out, and we don’t expect a further decline this year,” said Sauvant. ”We expect next year to have an upturn again.”

The report, which also ranks the world’s largest multinational corporations, said that after years of expansion, foreign business operations – measured by foreign assets, sales and employment – of the top 100 multinationals stagnated in 2001, the latest year for which there is complete data.