Investment must be across the board in Arab countries

In international finance, foreign direct investment (FDI) is a useful instrument for economic growth. This is essential for developing countries because it helps bring in capital, technology and other skills to facilitate higher levels of productivity, says Florence Eid, professor of business at the American University of Beirut.

FDI is capital provided by an overseas investor to an enterprise or project in another with the purpose of acquiring long-term interest in the venture. This has proved very popular. Global FDI inflows increased by 605 per cent from an average of $180 billion from 1985-95 to $1.27 trillion in 2000.

This shows foreign direct investment has come to play a vital role in international finance and is ultimately responsible for growth, employment and trade.

However, FDI has not fared too well in the Arab world. Indeed, these countries have only been able to attract meagre sums of that great liquidity. The highest FDI inflows in the Arab world were recorded in 1975 at 2.6 per cent. After that it followed a downward spiral. The Arab Human Development Report published by the UNDP last year suggests the Arab world has been able to attract less than one per cent between 1975 and 1998.

But there are other figures. Between 1985 and 1999, for instance, only 1.2 per cent of FDI inflows went to the Arab world and the figure went further down to 0.4 per cent by 2000.

Foreign direct investment in the world decreased by 40 per cent in 2001 to $823.82 billion. However, it is argued the Arab world did rather better that year, attracting $10.68 million at 1.29 per cent.

All this was happening when the world economy was opening up, with new concepts like globalisation becoming the trend in the 1990s, and when trade barriers were giving way to such international institutions like the WTO.

Internal weakness

Many experts have been asking why Arab countries have attracted so little of the direct foreign investments experienced by other regions in the world such as Europe, Latin America, the Caribbean and central Asia.

After all, these places are subject to economic and political constraints like Arab countries but have still managed to attract relatively high FDIs. Between 1985 and 1995, developing countries attracted 373.3 per cent of investment from the advanced industrial states.

As for the Arab world, Sami Hadded, director of the Middle East and North Africa department at the International Finance Corp, identified six areas to explain the short supply of IDF investments there.

These include the conflict and instability in the area; unpredictable macro-economic conditions and wrong public policy; weak institutions and high administrative barriers; inadequate infrastructure; underdeveloped financial sector; and inadequate availability of a skilled and flexible workforce.

It is argued these factors produce structural weaknesses in the economies of the region with the result that many overseas investors shy away from the area. Added to that are the suggestions made by the 2002 Arab World Competitiveness Report which stress the need to deepen the financial market, improve the quality of government and eliminate red tape and corruption in the region.

This would have the effect of creating more transparency, a favourite catchphrase in the 1990s, to introduce more liberal economic laws, cut down bureaucratic procedure and provide better management to attract overseas investors to the region.

Financial experts agree there is an additional vital factor to attract greater levels of FDI to the region and that is through increasing the process of privatisation in the Arab world, points out Eid.

She argues there is delay and opposition to privatisation in these countries which inevitably mean most investments in the region are made by Arab governments, as stated by the Arab Competitiveness Report.

The ratio of private investment to public investment is only 2 while some ratios stand at 6 in the Organisation of Economic Cooperation and Development countries and around 5 for countries in southeast Asia. Investments by the public sector are relatively inefficient and result in wastefulness of resources, says the report.

Where does FDI go?

Foreign direct investment seems to flow to a concentrated number of countries in the Arab world. These include Saudi Arabia, Egypt, the UAE, Tunisia, Morocco and Jordan. Saudi Arabia and Egypt have taken the lead in the last five years with large FDIs invested in their countries, at $1.1 billion and $962 million respectively.

However, it is argued the UAE has been a key destination for FDI through most of the 1990s except 1999. In 2000 it recorded an inflow of $260 million, but it is pointed out the country is a capital exporter as well.

The largest receiver of FDI in 2001, however, was Morocco, at $2.65 billion. But Bahrain and Jordan have also been receiving FDIs. Jordan, for example, received $1.8 billion in 2000.

Through its stress on greater privatisation of its economy and the development of its information technology sector, it has been able to attract large numbers of overseas investors, with the French being the most prominent.

At present, the bulk of the region's FDI is directed to the petroleum-related and primary industry which could constrain overall development. The point about FDI, however, is it has to be across the board in the region.

Arab governments have only lately realised the value of FDI and that they have to be more forceful to get more at a time when the rest of the countries in the world are pressing hard for this type of investment.

FACTFILE

Where funds flow
* Global FDI inflows increased by 605 per cent from $180 billion between 1985 and 1995 to $1.27 trillion in 2000.

* Arab countries were able to attract less than one per cent of FDI between 1975 and 1998.

* Developing countries attracted 373.3 per cent of investments.

* Arab countries have only just begun to realise the value of FDI, with countries like Jordan trying the most to attract such investments.