In the last few decades, the magnitude and direction of foreign investment flows has come to be regarded as a critical element in determining the pace of development of various countries. According to a recent report by the United Nations Conference on Trade and Development (UNCTAD), a sort of milestone was reached during 2010 when developing countries and economies in transition together attracted more foreign investment than developed countries for the first time.
Within each group, however, the flow of foreign investment showed divergent trends. Developing countries in Latin America, Southeast and East Asia attracted strong inflows, with China topping $100 billion for the first time. Hong Kong, which UNCTAD data treats separately from China, jumped into third place with $62.6 billion.
India, on the other hand, witnessed FDI flows drop by 31.5 percent in 2010 while flows into Africa fell by 14.4 percent, with huge drops in South Africa and Nigeria. Among the developed countries, the European Union attracted 19.9 percent less FDI than the previous year. Japan also saw a drop of 83.4 percent in foreign investment due to big disinvestments by foreign companies.
However, the FDI jumped by 45.3 percent to $186 billion in the US, largely due to the significant revival of reinvested earnings of foreign affiliates. UNCTAD does not yet have a breakdown of the sources of investment, but it is generally believed that developing countries were now playing an increasing role as investors as transnational corporations (TNCs) in these countries were becoming more financially potent.
While divergence of flows of FDI between different regions and countries was quite sharp, its overall global level, nonetheless, stagnated at almost $1.12 trillion in 2010 as compared to $1.14 trillion in 2009. This level of FDI, it may be noted, was still 25 percent below the pre-crisis levels in 2005-07.
According to UNCTAD estimates, global FDI would pick up to $1.3 trillion to $1.5 trillion in 2011, with stronger growth held back by the uneven economic recovery, investment protectionism, currency volatility and sovereign debt worries. Another interesting observation was that multinational companies in developed countries were now holding a record $4-5 trillion in cash, which will be seeking a home. It is good to see that developing countries and economies in transition are now attracting increasing levels of foreign investment and 2010 was the first year when the aggregate amount of FDI in this group of countries was higher than the developed countries.
The continuation of this trend would certainly help in bridging the development gap between the developed and underdeveloped regions of the globe and raise the welfare levels of vast majority of populations residing in poor countries. It will also eliminate, at least, one source of tension between the haves and have-nots of the world.
While the huge flows of FDI into developing countries have been an important factor in accelerating their development, a fundamental shift in the attitude of global investors in favour of developing economies seems to have primarily emanated from a change in ground realities in these countries where the FDI is not only safe and more than welcome now, but also comparatively remunerative in terms of rate of return.
Pakistan's position in this regard is, however, quite frustrating. Net inflows of FDI into the country have not only been small but declined substantially during the recent years, despite the fact that we badly need this source of investment to spur our economic growth and meet the huge gap between domestic savings and investment requirements of the country.
FDI inflows into the country, which stood at $5.4 billion in FY08, came down to $3.7 billion in FY09 and further to $2.2 billion in FY10. During the first half of FY11, FDI declined further to $828 million, which was 14.5 percent lower than $969 million received in the corresponding period last year. Several factors seem to have contributed to this dismal trend.
Overall the reform process in the country has not been encouraging to the extent to give the needed confidence to investors about the country's economic prospects. Also, foreign investors normally like to avoid a country on reasons such as law and order, rampant corruption, growing militancy and lack of infrastructure like the provision of electricity and gas.
Although, we do not wish to comment in detail for obvious reasons, certain recent court cases may have also contributed towards scaring some of the foreign investors away even if they were plausible and justifiable. Whatever the reasons behind this significant drop in FDI, the trend, in our view, has to be reversed to generate higher level of employment and reduce poverty to successfully meet the growing threat of anarchy and social chaos in the country without any further loss of time.
There is no need to add that the higher level of FDI would also help in upgrading the level of skills and technology, enhance the pace of innovation in industry and integrate the economy of Pakistan with the rest of the world. Although we are aware about the present difficulties of attracting foreign investment in the country, our authorities need to try their utmost to make Pakistan a favourable destination of investment as far as possible to avail the economic opportunities now routinely provided by foreign funding sources to other countries for their development.