By Yilmaz Akyüz
GENEVA, Dec 29 2015 (IPS)

Foreign direct investment (FDI) is perhaps one of the most ambiguous and the least understood concepts in international economics. Common debate on FDI is confounded by several myths regarding its nature and impact on capital accumulation, technological progress, industrialization and growth in emerging and developing economies.

Yilmaz Akyüz, chief economist of the South Centre, Geneva.

It is often portrayed as a long term, stable, cross-border flow of capital that adds to productive capacity, helps meet balance-of-payments shortfalls, transfers technology and management skills, and links domestic firms with wider global markets.

However, none of these is an intrinsic quality of FDI. First, FDI is more about transfer and exercise of control than movement of capital. Contrary to widespread perception, it does not always involve flows of financial capital (movements of funds through foreign exchange markets) or real capital (imports of machinery and equipment for the installation of productive capacity). A large proportion of FDI does not entail cross-border capital flows but is financed from incomes generated on the existing stock of investment in host countries. Equity and loans from parent companies account for a relatively small part of recorded FDI and even a smaller part of total foreign assets controlled by transnational corporations.

Second, only the so-called greenfield investment makes a direct contribution to productive capacity and involves cross-border movement of capital goods. But it is not easy to identify from reported statistics what proportion of FDI consists of such investment as opposed to transfer of ownership of existing firms (mergers and acquisitions). Furthermore, even when FDI is in bricks and mortar, it may not add to aggregate gross fixed capital formation because it may crowd out domestic investors.

Third, what is commonly known and reported as FDI may contain speculative components and creates destabilizing impulses, including those due to the operation of transnational banks in host countries, which need to be controlled and managed as any other form of international capital flows.

Fourth, the immediate contribution of FDI to balance-of-payments may be positive, since it is only partly absorbed by imports of capital goods required to install production capacity. But its longer-term impact is often negative because of high import content of foreign firms and profit remittances. This is true even in countries highly successful in attracting export-oriented FDI.

Finally, superior technology and management skills of transnational corporations create an opportunity for the diffusion of technology and ideas. However, the competitive advantage these firms have over newcomers in developing countries can also drive them out of business. They can help integrate developing countries into global production networks, but participation in such networks also carries the risk of getting locked into low value-added activities.

These do not mean that FDI does not offer any benefits to developing and emerging countries. Rather, policy in host countries plays a key role in determining the impact of FDI in these areas. A laissez-faire approach could not yield much benefit. It may in fact do more harm than good.

Successful examples are found not necessarily among countries that attracted more FDI, but among those which used it in the context of national industrial policy designed to shape the evolution of specific industries through interventions. This means that developing countries need adequate policy space vis-à-vis FDI and transnational corporations if they are to benefit from it.

Still, the past two decades have seen a rapid liberalization of FDI regimes and erosion of policy space in emerging and developing countries vis-à-vis transnational corporations. This is partly due to the commitments undertaken in the World Trade Organization as part of the Agreement on Trade-Related Investment Measures .

However, many of the more serious constraints are in practice self-inflicted through unilateral liberalisation or bilateral investment treaties signed with more advanced economies – a process that appears to be going ahead with full force, with the universe of investment agreements reaching 3,262 at the end of 2014.

Unlike earlier bilateral treaties, recent agreements give significant leverage to international investors. They often include rights to establishment, the national treatment and the most favoured-nation clauses, broad definitions of investment and investors, fair and equitable treatment, protection from expropriation, free transfers of capital and prohibition of performance requirements.

Furthermore, the reach of bilateral investment treaties has extended rapidly thanks to the use of the so-called Special Purpose Entities which allow transnational corporations from countries without a bilateral treaty with the destination country to make the investment through an affiliate incorporated in a third-party state with a bilateral treaty with the destination country.

Many bilateral investment treaties include provisions that free foreign investors from the obligation of having to exhaust local legal remedies in disputes with host countries before seeking international arbitration. This, together with lack of clarity in treaty provisions, has resulted in the emergence of arbitral tribunals as lawmakers in international investment which tend to provide expansive interpretations of investment provisions in favour of investors, thereby constraining policy further and inflicting costs on host countries.

Only a few developing countries signing such bilateral treaties with advanced countries have significant outward FDI.

Therefore, in the large majority of cases there is no reciprocity in deriving benefits from the rights and protection granted to foreign investors. Rather, most developing countries sign them on expectations that they would attract more FDI by providing foreign investors guarantees and protection, thereby accelerating growth and development. However, there is no clear evidence that bilateral investment treaties have a strong impact on the direction of FDI inflows.

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By Roberto Savio
ROME, Apr 20 2015 (IPS)

This month’s World Economic Outlook released by the International Monetary Fund (IMF) only confirms that consequences of the collapse of the financial system, which started six years ago, are serious. And they are accentuated by the aging of the population, not only in Europe but also in Asia, the slowing of productivity and weak private investment.

Roberto Savio

Average growth before the financial crisis in 2008 was around 2.4 percent. It fell to 1.3 percent between 2008 and 2014 and now the estimates are that it will stabilise at 1.6 percent until 2020, in what economists call the “new normal”. In other words, “normality” is now unemployment, anaemic growth and, obviously, a difficult political climate.

For the emerging countries, the overall picture does not look much better. It is expected that potential growth is expected to decline further, from an average of about 6.5 percent between 2008 and 2014 to 5.2 percent during the period 2015-2020.

The case of China is the best example. Growth is expected to fall from an average 8.3 percent in the last 10 years to somewhere around 6.8 percent. The result is that the Chinese contraction has worsened the balance of exports of raw materials everywhere.

The crisis is especially strong in Latin America, and in Brazil the fall in exports has contributed to worsening the country’s serious crisis and increasing the unpopularity of President Dilma Rousseff, already high because of economic mismanagement and the Petrobras scandal.“Progressive parties were able to build their success during economic expansion but the Left has not developed much economic science on what to do in period of crisis”

This, by the way, opens up a reflection which is fundamental. From Marx to Keynes, redistribution theories were all basically built on stable or expanding economies.

Progressive parties were able to build their success during economic expansion but the Left has not developed much economic science on what to do in period of crisis. What it tends to do is mimic the receipts and proposals from the Right and, when the crisis is over, it has lost its identity and has declined in the eyes of the electorate.

From this perspective, the situation in Europe is exemplary. All those right-wing xenophobic parties which have sprouted up – even in countries long held to be models of democracy such as the Nordic countries – have developed since 2008, the beginning of the financial crisis. In the same period of time, all progressive parties have lost weight and credibility. And now that the IMF sees some improvement in the European economy, it is not the traditional progressive parties that are the beneficiaries.

The term that the IMF gives to the current economic moment is “new mediocrity” – which is a franker way of saying “new normal” – and it observes that in the coming five years, we will face serious problems for public policies like fiscal sustainability and job creation.

In fact, every day, the macroeconomic figures, which have become the best way to hide social realities, are becoming less and less realistic if we go back to microeconomics as we have done during the last 50 years.

The best example is the United Kingdom, which is the champion of liberalism. Each year it has cut public spending and now claims to have growth in employment, with 600,000 new jobs in the last year. The only problem is that if you look into the structure of those jobs, you will find that the large majority are part-time or underpaid, and employment in the public sector is at its lowest since 1999.

A clear indicator is the number of people who visit the food banks created to meet the needs of the indigent. In the world’s sixth largest economy, their numbers have grown from 20,000 before the crisis seven years ago to over one million last year. And the same has happened all over Europe, albeit to a lesser extent in the Nordic countries.

U.K. economists have published studies on how austerity has affected growth. According to the Office for Budgetary Responsibility, established by the U.K. government, austerity blocked economic growth by one percent between 2011 and 2012. But, according to Simon Wren-Lewis of Oxford University, the figure is actually about five percent (or 100 billion pounds).

In other words, fiscal austerity reduces growth, and this creates large deficits which call for more fiscal austerity. It is a trap that Nobel laureate Keynesian economists Joseph Stiglitz and Paul Krugman have described in detail to no avail. We are all following the “liberal order” of Germany, which think its reality should be the norm and that deviations should be punished.

Now, while we can all agree that much of this is obvious to the average citizen in terms of its impact on everyday life, what is important and new is that the IMF, the fiscal guardian which has imposed the Washington Consensus (basically a formula of austerity plus free market at any cost) all over the Third World with tragic results, has woken up to reality.

Don’t get me wrong – I’m not implying that the IMF is becoming a progressive organisation, but there are signs that an important pillar of neoliberal thinking is vacillating.

Of course, those responsible for the global crisis – bankers – have come out with impunity. The world has exacted over three trillion dollars from its citizens to put banks back on their feet. The over 140 billion dollars in fines that banks have paid since the beginning of the crisis is the quantitative measure of illegal and criminal activities.

The United Nations calculates that the financial crisis has created at least 200 million new poor, several hundred millions of unemployed, and many more precarious jobs, especially for young people. And, yet, nobody has paid, while prisons are full of people who are there for minor theft, the social impact of which is infinitesimal by comparison.

In 2014, James Morgan, the boss of Morgan Stanley, cashed in 22.5 million dollars, Lloyd Blanfein, the boss of Goldman Sachs, 24 million, James Dimon, the boss of J.P. Morgan, 20 million. The most exploited of all, Brian Moynihan of the Bank of America, a paltry 13 million. Nobody stops the growth of bankers.

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

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