Fast-tracking FDI for Sustainable Growth Path

Usually, capital flows into suitable projects which hold a promise of a good return on the investment.

Such capital (referred to as foreign direct investment (FDI) by the recipient country) will flow into places which are seen as politically stable, free from excessive controls and bureaucratic harassment as well as promising returns which are comparatively better than elsewhere. The more secure and business-friendly a country, the more foreign investors will be inclined to bring their investments into it. In other words, there is a global competition among countries to attract FDI. All the more reason, therefore, for countries hoping to attract FDI to keep up a favourable business climate at home.

According to UNCTAD, there was a total of $1.46 trillion (one million million) of FDI flowing into countries at the global level in 2013. This is a level comparable to what prevailed before the economic crisis of 2008. The tide has been rising from the depressed conditions of those days.

According to figures published by the Bank of Mauritius, net FDI inflows into Mauritius amounted to Rs 11.4 billion in 2012-13, which is higher than the comparable net inflow of Rs 6.9 billion for 2011-12. A breakdown of the destination of such investments shows that FDI went largely into real estate activities like the IRS/RES/IHS projects. A lesser part of the investments went in 2012-13 into the financial and insurance sectors.

It is reported that there will take place a total of some Rs 50 billion of FDI-supported investments in several projects between now and 2018 which the Ministry of Finance will fast track and thus help in their implementation. Most of those investments will go into the construction of villas/real estate/housing/hotel projects however. One will be in biotechnology (India-based Aadicon Technologies). It is believed that those projects which will be co-sponsored by local and foreign investors will generate some 3000 additional jobs in the economy over the contemplated time span.

Albeit the amount coming into Mauritius is a tiny fraction of the global FDI flows, it is a positive sign that, given the small size of our economy, we are still able to draw FDI into the country. Investors are taking a positive view of our chances of growth in those sectors into which FDI is flowing. On the other hand, while investment supports economic growth and job creation, it also involves considerations of our chances of future growth. Where the land has gone for a particular line of activity, it cannot be put to alternative use, notably for a better preservation of the environment or for employing the same fixed local resources to have a stronger multiplier effect in terms of economic growth and job creation in time to come.

Normally, countries like to allocate their scarce resources optimally. They would prefer to grant a scarce resource to an area of activity which will keep expanding along with demand on international markets. An example is manufacturing. The same factory can be upgraded in the face of demand to produce a higher level of production and sustain even more jobs than before. The same applies to expansion in the services sector. However, a villa does not have such potential. It can accommodate a certain number of employees and no more, at the risk of becoming unsustainable. Given the choice, one would allocate more resources to directing investment (local or foreign) into a line of activity which holds a promise of being able to expand and sustain more growth and employment in future.

Policy makers would state that we have to take up FDI whichever sector it is going into. Fair enough. We don’t always have a choice to make, given our international comparative advantages. FDI would probably prefer to flow into manufacturing in Bangladesh or Vietnam as compared to Mauritius because of greater advantages they would obtain in those places. But what this situation means is that those countries have created and sustained conditions conducive to the implantation of such more job-intensive activities in their locations. No doubt, they are driving up the edge they already have so that we would be even worse off in terms of attracting FDI going into such job-intensive and higher market-demand driven activities.

What all this means is that we should always be keeping in view our global competitiveness into areas of production which will dominate international markets tomorrow. We may set aside some of our scarce resources like land for allocating it to those alternative uses once we have sharpened up sufficiently our international competitive edge in such newer areas of production. This calls for a long-term view on economic development. We have to keep assessing our potential in existing and upcoming economic activities, prepare the ground for entrepreneurs undertaking such activities at the global level to choose us from among all the alternative destinations they might go to.

Before the boom in our textile manufacturing of the 1980s, we didn’t cut an edge against long-standing textile producers such as Hong Kong and Taiwan. Nevertheless, we worked out a scheme, combining all our fortes, including duty-free access to the European market under the EEC-ACP Lomé Convention, to foster the rapid expansion of manufacturing from deep inside our country. This had a chain effect, triggering a whole range of associated employment in allied sectors. The activity is still giving a livelihood to Mauritians working in the sector today despite international competition having stiffened up but not shaken us out of the activity.

We have to be aware that if we manage to cultivate our comparative advantages, be it in manufacturing or services, those with FDI will find us out and give us the opportunity to engage with the world. For, it should not be forgotten: FDI holds out the key element of our further international economic integration into ever-newer sectors of activity for which we make ourselves competent. This is how innovation will come to our shores and keep us well positioned in the dynamic international market.

There is another aspect from which the importance of FDI has to be considered. If we look at the data, we notice that the external current account of our balance of payments has been recording deficits year after year. From a current account deficit of Rs 22.2 billion in 2007-08, the deficit has increased to Rs 37 billion in 2012-13. This is largely due to the value of our imports of goods exceeding year after year the value of our total exports (called trade deficit), ranging from Rs 55 billion in 2007-08 to Rs 68 billion in 2012-13.

Surpluses earned from our sale of services and net income and current transfers from abroad have proved inadequate year after year to stem the tide, thus producing the earlier-mentioned growing current account deficits on the external balance of payments of the country. The resulting overall shortfall in our foreign payments has been made good to quite an extent by the annual inflows of FDI into the country. The more we look to inducing FDI into sectors that will not reach a point of saturation in the future, the more the FDI will help us to balance our external account. This is more reason why we should give a lot of attention to adopting the right policies which will keep the productive FDI flowing in. It requires long term planning with a meticulous attention to detail, such as: which activities are likely to increase the scope of the economy further? These could become our priorities.

 


* Published in print edition on 4 April 2014

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