DFI: Points to consider
(Jordan Times) – Since the mid-1980s, the world has experienced an explosion in Direct Foreign Investment (DFI). The latter rose from $85 billion in 1985 to $240 billion and $643.9 billion in 1995 and 1998 respectively. An important development here is the increasing volume of DFI directed at developing countries, whose share of all DFI rose from just $13 billion in 1985 to more than $90 billion and $180 billion in 1995 and 1998 respectively.
As is usually the case in economics and politics, the distribution of DFI has been highly unequal among regions and countries. The main beneficiary from the recent surge in DFI has been the Asian continent, which received $ 85 billion or approximately 47 percent of total DFI in 1998, followed by Latin America and the Caribbean region (37 percent of total DFI), and Eastern Europe which received almost 10 percent of total DFI.
The recent surge in DFI has largely by-passed the Arab world which attracted as much as Sub-Saharan Africa approximately 3 percent of total DFI. Jordan has been the fourth largest recipient of DFI in the region, after Egypt, Morocco and Tunisia. However, there is a general consensus inside and outside Jordan that the country has so far received much less than its potential, despite signing a peace treaty with Israel and recent accession to the World Trade Organization. In fact, a great deal of the recent surge in foreign investment in Jordan has actually been linked to privatization rather than new investment in plants and factories.
Joining the WTO alone will not bring in more foreign investment. China's experience with foreign investment supports this argument. During the last decade, China has been the largest recipient of foreign investment in the world outside the industrialized countries. In the early 1980s, the Chinese government began a gradual process of economic liberalization. Contrary to expectations, this alone did not lead to a large increase in foreign investment. It was not before the second half of the 1980s, when the Chinese government introduced, updated and codified its intellectual property rights (IPRs) laws and regulations, that foreign investment started flooding in long before China joined the WTO early this year. These rules and regulations provided the security and protection needed by foreign investors to trust their wealth and assets in the local economy. The main point here is that foreign investment can be attracted if the general business environment is conducive, provided that the country has something to offer to foreign investors.
Although Jordan has also recently joined the WTO, its IPRs are still far from being developed. According to a report by the International Intellectual Property Rights Alliance, Jordan is ranked high on the list of countries with weak enforcement and strong violation of IPRs, reaching 100 percent of available motion pictures videos. Weak enforcement of IPRs rules and regulations is indicative of lack of specialized courts and judiciary systems, and in many cases, specialized solicitors, although the latter problem has been easing up in Jordan over the past few years due to the increased number of Jordanian graduates in the field of International Companies Law from some American and British universities.
The point here is that unless international investors are insured that their assets and IPRs are protected, enticing them to invest in Jordan is a futile exercise. Second, what does Jordan really have to offer to foreign investors? The high qualification and complexity of Jordanian manpower is more than compensated by the higher level of wages and salaries than in countries like Tunisia, Morocco and Egypt, which themselves have no shortages of qualified personnel. These countries are also much richer in natural resources than Jordan, have much larger domestic markets, and, of course, are more strongly integrated into the huge European Union's market.
This leaves Jordan with one major, exogenous comparative advantage, that is its geographical location in the heart of the Arab world. But even this advantage is constrained by the weak intra-Arab trade and economic relations. This suggests that official efforts should also be directed towards increasing regional integration and the establishment of a free trade area in order to encourage specialization and economies of scale, a situation which will almost certainly attract higher volumes of foreign investment. Jordan's efforts to promote foreign investment have been largely based on creating free trade zones and areas.
Foreign investment can, no doubt, bring important benefits to the recipient country, including more and higher paid jobs to local citizens, reduce trade deficit, generate badly needed foreign exchange and knowledge and technology transfer. But empirical evidence suggests that for all of these benefits to be accrued, foreign investment must create linkages with the domestic economy. Foreign investment concentrated in free trade areas and zones where most imports are duty free will create linkages with the home country of the foreign enterprise and therefore limits benefits to local economy. In fact, such a process has often led to widening the gap between regions and individuals within the same country — not a good scenario for a country with an already big gap between the haves and the have-nots.
Finally, empirical evidence also suggests that foreign investment follows the behavior of domestic investment. A government that is able to attract investment by members of its own private sector is better able to convince foreign investors to invest in its economy. Attesting to the private sector's unfavorable assessment of domestic policies in Jordan is capital flight. One source estimated the annual average outflow of private capital in Jordan during 1985-95 at $1-1.5 billion. A more modest and reasonable source put the same figure at $600 million. Unless the Jordanian government is able to attract its own citizens to bring back their capital from Western bank deposits, convincing foreign investors to trust their wealth in the local economy will not be an easy task.
By Hamed El-Said and Mohammed El-Said
© 2000 Mena Report (www.menareport.com)