FDIs to the rescue
Foreign direct investment and remittances outpace debt as the main sources of finance for developing countries, said a World Bank report. Mona El-Fiqi reviews the document
Though globally net foreign direct investment has slipped from a 1999 peak of $179 billion to $143 billion in 2002, it remains the dominant source of external financing for developing countries.
The World Bank report, Global Development Finance 2003, said that the Middle East and North Africa (MENA) region had the lowest investment returns on foreign direct investment (FDI) compared to other regions of the world, which, together with the uncertainty surrounding the war in Iraq and the continuing Israeli-Palestinian conflict, eroded investor confidence and posed obstacles to sustained FDI flows.
In the MENA region, capital flows have traditionally been modest, with FDI flows amounting to $2 to $3 billion per year in recent years and net private debt inflows in the neighbourhood of $2.9 billion in 2001 and $2.8 billion in 2002. According to the World Bank report, this modest scale of private capital flows has reduced the region's economic volatility and associated currency and financial crises.
However, the region does carry potential for larger private capital flows as indicated by the recent successful sovereign bond issues by Egypt, Qatar, Iran and Bahrain. They helped broaden the region's investor base and established benchmarks for the corporate sector to tap the market with greater confidence.
The increased reliance on FDI is generally positive for developing countries, according to the report, since FDI investors tend to be committed for the long haul and are better able than debt holders to tolerate near-term adversity. Though FDI tends to be less volatile than debt, its stability cannot be taken for granted, since both domestic and foreign investment depend on positive investment climates.
A good investment climate is also important for effective utilisation of workers' remittances. The report explained that in countries with poor investment climates, remittances are more likely to be spent on just "getting by". But in countries with good investment climates, recipients are more likely to invest in the farms and small and medium enterprises that are key to poverty reduction.
Like FDI, remittances are a more stable source of external finance than debt. According to the report, for most of the 1990s, remittances exceeded official development assistance. Recent trends, including tighter restrictions on informal transfers and lower banking fees, have led remittances through the banking system to continue to rise.
The MENA region is both an important source and significant destination of workers' remittances. Saudi Arabia, Kuwait and Bahrain have in recent years been important sources of remittances to other developing countries, including other countries in the region. Countries receiving large remittances include Morocco ($3.3 billion), Egypt ($2.9 billion) and Lebanon ($2.3 billion). According to World Bank figures, in 2002, the MENA region received $14 billion in remittances representing 2.2 per cent of GDP, ranking among the highest in the world.
"Migration and labour mobility are critical for the region," said Mustafa Nabil, World Bank chief economist for the MENA region. "With unemployment averaging close to 20 per cent, increasing labour mobility is essential to avert poverty and stem the disillusionment of a generation of young workers."
There is some evidence that remittances have been used for investment purposes in the Middle East and North Africa. The report said that in Egypt, for example, a large proportion of returning immigrants in the late 1980s established their own enterprises using funds earned abroad.
Due to the war, developing countries in the region who provide workers to countries such as Kuwait and Saudi Arabia are expected to experience a decline in remittance flow.
Meanwhile, the report also tackled growth performance in the developing countries. The growth performance over the past 18 months has differed substantially across the major regions of the developing world due to differences in domestic conditions.
In developing countries, World Bank figures state, growth stood at 3.1 per cent in 2002, up by 0.3 per cent from weak 2001 results, while world trade grew by three per cent and prices for non-oil commodities rose by 5.1 per cent.
However, in the MENA region, the military intervention in Iraq represents the latest in a series of shocks in recent years. According to the report, regional growth fell from 3.2 per cent in 2001 to 2.3 per cent in 2002. Exporters experienced a sharp economic slowdown in 2002 as a result of lower export prices and lagging demand in European markets, in addition to the substantial shock to tourism linked to the September attacks.
For oil exporters, the report says, lower OPEC quotas were offset by marginally higher prices, with GDP growth remaining virtually unchanged in 2002.
Growth prospects are contingent on political factors. For the Middle East and North Africa, current projections point to a modest pick-up in economic growth from 3.4 to four per cent per year over the 2003-2005 period as exports rise and higher incomes stimulate domestic spending.
Financial conditions facing developing countries are expected to be a little less austere in 2003 compared to 2001/ 2002. FDI is projected to rebound slightly, while net flows from private sector sources should be modestly positive, albeit still quite anaemic, the report said. This outlook is based on the assumption that a quick resolution to the situation in Iraq will take place.
