Rethinking Pakistan’s FDI obsession

FDI is not a panacea, instead it poses a question - to open or not to open the economy

ISLAMABAD:

Many economists love quoting the declining or rising figures of the Foreign Direct Investment (FDI) coming to Pakistan. Not only do our governments boast about increasing FDI, but the commentators also appreciate it as an important gain. The SBP regularly updates the figures. Their fascination with FDI appears, if not like a panacea, certainly as a major breakthrough in achieving a faster growth rate or economic development.

The April 23, 2024, newspapers published a story based on the SBP data highlighting an increase in the FDI. One newspaper, Dawn, reports that ‘Foreign direct investment jumps 51pc.’ Another newspaper, The News, reports that ‘investment surges 52pc to 21-month high in March.’

But do mind the devil that resides in the details. The FDI jumping by 51.7% increased to $258 million in March as compared to $170 million in the month of March last year. Actually, so far as the net FDI inflows in the first nine months of the current fiscal year 2023-24 are concerned, they fell by 10% to $1.09 billion.

The point to make is that the FDI story has twists and turns. It’s never a straight path that goes up and up. Bilateral, trilateral, or multilateral relations with various countries or at the level of leadership do not make a strong case to bring FDI to the rescue. Or internally, it never depends on the formation of this or that, or any other entity, whatever its name is, such as the Special Investment Facilitation Council (SIFC).

And this does not take into account under what terms and conditions the FDI is brought in by adopting such measures. But this does preclude the possibility of resolving the chronic issues, that the economy of Pakistan faces, always by resorting to short-term and ad-hoc measures, that is, firefighting through the likes of the SIFC. That may delay the collapse, but the collapse is imminent.

Here is the fate that any FDI may meet sooner or later. On April 14, the Nikkei, a Japanese news outlet, reported that Singapore loses shine as South East Asia base for multinationals. They are increasingly locating their Asian headquarters functions outside Singapore. That saves money. And nearby countries such as Thailand and Malaysia are offering expanded opportunities and incentives to attract investment.

So, the FDI is not a panacea or a solution. Instead, it poses a dilemma: To open or not to open the economy. That is, in order to bring FDI to favour this or that country, or this or that investor, or this or that consortium of investors is not the way out.

Or do something else, something entirely different.

Decades of experimenting with that hackneyed approach shows it’s not the way out and the past also proves that that’s not effective, and that it evaporates within a short time. It doesn’t pay long-term dividends. It doesn’t help the economy grow, in fact.

The way out is: To let the people do it, whoever they are, locals or foreigners. And not running after this or that country or group of investors to “dole us” the FDI.

Why don’t governments and policymakers look back and see how a lot of people struggling with a small business finally transform it into a big business empire? Did they require a government to help them make that progress? No, they actually required that their government not create hurdles, rather absent itself by way of low taxes and minimum regulations that actually facilitate them.

So, why do they think and act like it’s the government (or government-to-government investment) that brings progress and prosperity to the country? Whereas it is actually private businesses and entrepreneurs that bring progress and prosperity.

It’s a misleading economic philosophy, the first tenet of which is that prosperity comes down from above, and its instrument is a government. And the second tenet sees prosperity as something imported from abroad. That explains the economists’ and policymakers’ fascination with FDI.

So, the clearest answer to the question, is it the FDI that delivers, is a big No. No, it’s the entrepreneurs and investors, local or foreign that deliver. And most importantly, it’s the local talent and the spirit to compete in order to earn profits that deliver. Not only does it deliver, it also provides a sustainable foundation for a growing and thriving economy, comparatively on a permanently basis. Charity begins at home!

If not through any arguments, learn a lesson from Singapore, which has to recalibrate its economic policies now.

THE WRITER IS AFFILIATED WITH THE PRIME INSTITUTE AS A DISTINGUISHED RESEARCH FELLOW

Published in The Express Tribune, April 29^th, 2024.

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