Home »Articles and Letters » Articles » FDI: Lost cause?

In fiscal 2008, Pakistan attracted FDI of about $5.5 billion. In 2016, it was $1.28 billion, half of it in the power sector. This fiscal it is not likely to get any better - if you adjust for the Dutch purchase of Engro Foods and the Turkish of Dawlance, it could be below last year, despite CPEC.

What has changed since 2008?

If anything, the drivers of FDI - market size, 'cheap' labour, political stability, macroeconomic fundamentals, domestic investment - are said to be better now than ten years ago. Our FDI regime continues to outshine our comparators, and the flow of FDI to the developing countries maintains its upward trajectory -from $35 billion in 1990 to close to a trillion dollars now.

We are tempted to lay our lacklustre FDI performance at the Accountant's door - nothing grows under his towering shade except what he lords over - but that will be bit over the top. Darnomics may have FDI-unfriendly priorities, but that doesn't explain it all.

The explanation is in an analysis of FDI inflows during the Shortcut days. The main pullers in 2008 were financial business, telecom, oil and gas, and 'others'. These sectors accounted for$4 billion inflows. Fast forward to 2016 and the total tally for these sectors is only half a billion dollars.

The intervening years too show that FDI has been largely restricted to these very sectors, albeit on a declining scale. (Unsurprisingly, there has been a resurgence of the power sector during the last two years) What this tells us is that FDI in Shortcut days had more to do with lucrative 'opportunities' than government policies or investment climate, both of which remain largely unchanged.

In terms of FDI origins, we see a marked shift from the traditional sources (the US, the UK, Switzerland, Japan and Norway) to China. The UAE and the UK also make small contributions, possibly the Pakistani diaspora there being the conduit. There are some instructive takeaways from this quick look at the numbers. First, we have not had a broad-based FDI, and almost none in the manufacturing sector. Second, it has largely flowed towards sectors that offered extra-ordinary returns (sometimes government guaranteed) and quick exit potential, suggesting a tendency on our part to 'buy' FDI. Third, China is acquiring near exclusivity as our FDI source.

FDI is not an unqualified blessing. It has its downsides too: MNCs, often the lead sponsors of FDI inflows, appropriate bulk of the profits and rarely share their innovative capabilities with the host country; it can actually hurt a country's current account balance, both through heavier imports and repatriation of profits and capital; and it can be quite fickle, ready to migrate to another destination when pressed.

It also has its benign impact. It brings in capital, often acting as surrogate for host country's low savings rate; it brings in know-how and technology and superior management practices; it can have significant spillover effects (greater competition and learning through 'demonstration effect'); it promotes backward and forward linkages and 'crowding in' of domestic investment.

It is in manufacturing that the positives of FDI are best leveraged. In our context, the experience of having Exxon (Engro Fertiliser) and Unilever (a raft of consumer goods) is quite illustrative; as is the significant contribution of Pharma Multinationals to the development of our 'National' pharmaceutical industry.

All countries vie for FDI, but not all have our kind of 'open door' policy. For strategic, as well as reasons of limited economic impact, many countries place restrictions on foreign investment in certain sectors - like financial (banking and insurance, particularly), telecommunications, and shipping.

The real race now is for export-oriented FDI (eFDI). The incentives are compelling: forward and backward linkages, neutralising effect of FDI related import bill, greater market access (because of the foreign investors' 'network'), higher quality standards (to meet the stringent social and environmental demands of the consumer), production management upgrades, and greater economies of scale.

There is also this new kid on the block: Global Value Chain; the high value added club that eFDI buys. GVC integration is measured by 'trade in value-added' (TVA) that takes into account share of value added in a country's exports as also its share in global value-added exports. Contemporary literature reaffirms that countries with low value added products -not much of a supply chain (like yarn or rice) - are destined to remain poor.

No prizes for guessing where Pakistan is in the TVA rankings. Pakistan has no eFDI to speak of. Ethiopia has it, Malaysia has lots of it, Vietnam is getting more and more, and China is the undisputed champion. The real surprise, though, comes out of Uzbekistan. It exports several hundred thousand vehicles a year! Also, its engine plant in Tashkent (GM has a 52% stake) produces more than 225,000 engines for use in GM small passenger cars around the world. Wonder what our auto assemblers and parts manufacturers will have to say about that?

We have a Board of Investment. We do not know what it does, despite the weight it thinks it draws from being a part of the PM's office. More importantly, what can it do - other than having the PM occasionally ask the various Ministries to draw up 'investment codes'?

More intriguingly, what do the provincial BoIs do?

What they can do is not hide behind ready excuses - quick to cite Pakistan's position on Competitiveness, Human Development, and Ease of Doing Business indices as the cause of low FDI levels. These indices were not much different ten years ago. Further, even if these indices improve, and of course, we should spare no effort to do so, we are unlikely to see significant FDI growth unless BoIs learn to think differently.

If FDI should be directed towards the manufacturing sector in general and eFDI in particular, as we contend, it won't do to have the same across-the-board incentives (power sector excepted), as our current FDI policy does. We need to put more fuel into the manufacturing tank.

We can't do it in the absence of an Industrial Policy. For starters, BoI should join the battle against the unconscionable protection levels and an out of whack exchange rate, the twin foes of FDI. Otherwise be prepared for borrowings to make up for descending exports, remittances, and FDI.

[email protected]



the author

Top
Close
Close