Nikola Gruevski’s Way Out

Foreign Direct Investment (FDI) is not the solution to unemployment.

Title of Book: The Way Out: Foreign Direct Investment,Guest Posting Economic Development, and EmploymentAuthor: Nikola GruevskiPublisher: Evropa 92 KochaniMonth, Year of publication: October 2007# of pages: 210Nikola Gruevski, the youthful and dynamic Prime Minister of Macedonia, has just published his Master’s Thesis in the form of a book, titled “The Way Out”. In an earlier book, co-authored with the author of this review and titled “Macedonia at a Crossroads” (1998), Gruevski expounded on the same themes and suggested very much the same remedies. Though, surprisingly, his earlier book is not mentioned anywhere in his new tome, it is instructive to study it and to discover that Gruevski had the same vision for Macedonia in 1998 as he does in 2007. And this is precisely the source of my disagreement with some of his work: in the intervening 10 years, the world has changed and economic research has advanced.

Macedonia is not known as a bastion of economic studies. Most of its professors were educated and trained under Tito’s socialist regime and find the transition to capitalism baffling. Many of them don’t even know English. It is, therefore, to Gruevski’s great credit that he succeeded to produce a comprehensive, erudite, and thought-provoking review of issues tackled in his thesis. As an introduction to the topic of foreign direct investment and its role in emerging, developing, and transition economies, Gruevski’s book is more than adequate. It measures up to many textbooks on the topic that it so aptly covers.

Alas, the two pillars of his proposed way out for Macedonia’s economy are somewhat shaky. Macedonia cannot be compared to Ireland, Singapore, or even Romania and Poland. These countries have advantages that Macedonia can only dream of: proximity to mega-markets, knowledge of foreign languages, or a huge domestic population. Their experience is inapplicable to Macedonia: a landlocked, tiny polity with a xenophobic and poorly-educated population.

More importantly: the role of foreign direct investment (FDI) in promoting growth and sustainable development has never been substantiated. There isn’t even an agreed definition of the beast. In most developing countries, other capital flows – such as remittances – are larger and more predictable than FDI and ODA (Official Development Assistance).

Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies. Be that as it may, close to two-thirds of FDI is among rich countries and in the form of mergers and acquisitions (M&A). All said and done, FDI constitutes a mere 2% of global GDP.

FDI does not automatically translate to net foreign exchange inflows. To start with, many multinational and transnational “investors” borrow money locally at favorable interest rates and thus finance their projects. This constitutes unfair competition with local firms and crowds the domestic private sector out of the credit markets, displacing its investments in the process.

Many transnational corporations are net consumers of savings, draining the local pool and leaving other entrepreneurs high and dry. Foreign banks tend to collude in this reallocation of financial wherewithal by exclusively catering to the needs of the less risky segments of the business scene (read: foreign investors).

Additionally, the more profitable the project, the smaller the net inflow of foreign funds. In some developing countries, profits repatriated by multinationals exceed total FDI. This untoward outcome is exacerbated by principal and interest repayments where investments are financed with debt and by the outflow of royalties, dividends, and fees. This is not to mention the sucking sound produced by quasi-legal and outright illegal practices such as transfer pricing and other mutations of creative accounting.

Moreover, most developing countries are no longer in need of foreign exchange. “Third and fourth world” countries control three quarters of the global pool of foreign exchange reserves. The “poor” (the South) now lend to the rich (the North) and are in the enviable position of net creditors. The West drains the bulk of the savings of the South and East, mostly in order to finance the insatiable consumption of its denizens and to prop up a variety of indigenous asset bubbles.

Still, as any first year student of orthodox economics would tell you, FDI is not about foreign exchange. FDI encourages the transfer of management skills, intellectual property, and technology. It creates jobs and improves the quality of goods and services produced in the economy. Above all, it gives a boost to the export sector.

All more or less true. Yet, the proponents of FDI get their causes and effects in a tangle. FDI does not foster growth and stability. It follows both. Foreign investors are attracted to success stories, they are drawn to countries already growing, politically stable, and with a sizable purchasing power.

Foreign investors of all stripes jump ship with the first sign of contagion, unrest, and declining fortunes. In this respect, FDI and portfolio investment are equally unreliable. Studies have demonstrated how multinationals hurry to repatriate earnings and repay inter-firm loans with the early harbingers of trouble. FDI is, therefore, partly pro-cyclical.

What about employment? Is FDI the panacea it is made out to be?

Far from it. Foreign-owned projects are capital-intensive and labor-efficient. They invest in machinery and intellectual property, not in wages. Skilled workers get paid well above the local norm, all others languish. Most multinationals employ subcontractors and these, to do their job, frequently haul entire workforces across continents. The natives rarely benefit and when they do find employment it is short-term and badly paid. M&A, which, as you may recall, constitute 60-70% of all FDI are notorious for inexorably generating job losses.

FDI buttresses the government’s budgetary bottom line but developing countries invariably being governed by kleptocracies, most of the money tends to vanish in deep pockets, greased palms, and Swiss or Cypriot bank accounts. Such “contributions” to the hitherto impoverished economy tend to inflate asset bubbles (mainly in real estate) and prolong unsustainable and pernicious consumption booms followed by painful busts.

Alphabetical Bibliography

Austria’s Foreign Direct Investment in Central and Eastern Europe:‘Supply-Based’or ‘Market Driven’? – W Altzinger – thInternational Atlantic Economic Conference, Vienna, 1999Blessing Or Curse?: Domestic Plants’ Survival and Employment Prospects After Foreign Acquisition – S Girma, H Görg – 2001 – opus.zbw-kiel.deCompetition for Foreign Direct Investment: a study of competition among governments to attract FDI – CP Oman – 2000 – books.google.com(The) Contribution of FDI to Poverty Alleviation – C Aaron – Report from the Foreign Investment Advisory Service – 1999 – ifc.orgCorruption and Foreign Direct Investment – M Habib, L Zurawicki – Journal of International Business Studies, 2002Determinants Of, and the Relation Between, Foreign Direct Investment and Growth – EG Lim, International Monetary Fund – 2001 – papers.ssrn.comDirect Investment in Economies in Transition – K Meyer – Cheltenham and Northampton (1998), 1998(The) disappearing tax base: is foreign direct investment (FDI) eroding corporate income taxes? – R Gropp, K Kostial – papers.ssrn.comDoes Foreign Direct Investment Accelerate Economic Growth? – M Carkovic, R Levine – University of Minnesota, Working Paper, 2002Does Foreign Direct Investment Crowd Out Domestic Entrepreneurship? – K De Backer, L Sleuwaegen – Review of Industrial Organization, 2003Does Foreign Direct Investment Increase the Productivity of Domestic Firms? – BS Javorcik – American Economic Review, 2004Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America – K Zhang – Contemporary Economic Policy, 2001The Economics of Foreign Direct Investment Incentives – M Blomstrom, A Kokko – 2003 – NBERThe effects of foreign direct investment on domestic firms Evidence from firm-level panel data – J Konings – The Economics of Transition, 2001Effects of foreign direct investment on the performance of local labour markets–The case of Hungary – K Fazekas – RSA International Conference, Pisa, 2003(The) Effects of Real Wages and Labor Productivity on Foreign Direct Investment – DO Cushman – Southern Economic Journal, 1987Employment and Foreign Investment: Policy Options for Developing Countries – S Lall – International Labour Review, 1995Export Performance and the Role of Foreign Direct Investment – N Pain, K Wakelin – The Manchester School, 1998Exports, Foreign Direct Investment and Employment: The Case of China – X Fu, VN Balasubramanyam – The World Economy, 2005Facts and Fallacies about Foreign Direct Investment – RC Feenstra – 1998 – econ.ucdavis.eduFDI and the labour market: a review of the evidence and policy implications – N Driffield, K Taylor – Oxford Review of Economic Policy, 2000Foreign Direct Investment and Capital Flight – C Kant – 1996 – princeton.eduForeign Direct Investment and Economic Development – T Ozawa – Transnational Corporations, 1992 – unctad.orgForeign Direct Investment and Employment: Home Country Experience in the United States and Sweden – M Blomstrom, G Fors, RE Lipsey – The Economic Journal, 1997Foreign Direct Investment and Income Inequality: Further Evidence – C our FAQ, R Zone – World Development, 1995Foreign Direct Investment and Poverty Reduction – M Klein, C Aaron, B Hadjimichael, World Bank – 2001 – oecd.orgForeign Direct Investment as a Catalyst for Industrial Development – JR Markusen, A Venables – 1997 – NBERForeign Direct Investment as an Engine of Growth – VN Balasubramanyam, M Salisu, D Sapsford – Journal of International Trade and Economic Development, 1999Foreign Direct Investment, Employment Volatility and Cyclical Dumping – J Aizenman – 1994 – NBERForeign Direct Investment in Central and Eastern Europe: Employment Effects in the EU – H Braconier, K Ekholm – 2001 – snee.org Foreign Direct Investment in Central Europe since 1990: An Econometric Study – M Lansbury, N Pain, K Smidkova – National Institute Economic Review, 1996Foreign Direct Investment in Developing Countries: A Selective Survey – Luiz R. de Mello Jr. – NBERForeign Investment, Labor Immobility and the Quality of Employment – D Campbell – International Labour Review, 1994Foreign direct investment-led growth: evidence from time series and panel data – L de Mello – Oxford Economic Papers, 1999Home and Host Country Effects of FDI – RE Lipsey – 2002 – NBERHow Does Foreign Direct Investment Affect Economic Growth? – E Borensztein, J De Gregorio, JW Lee – Journal of International Economics, 1998The Impact of Foreign Direct Investment Inflows on Regional Labour Markets in Hungary – K Fazekas – SOCO Project Paper 77c, 2000(The) Impact of Foreign Direct Investment on Wages and Employment – L Zhao – Oxford Economic Papers, 1998(The) link between tax rates and foreign direct investment – SP Cassou – Applied Economics, 1997Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals – SO Becker, K Ekholm, R Jäckle, MA Muendler – Review of World Economics, 2005Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment? – H Gorg – The World Bank Research Observer, 2004Should Countries Promote Foreign Direct Investment? – GH Hanson – 2001 – r0.unctad.orgTaxation and Foreign Direct Investment: A Synthesis of Empirical Research – RA de Mooij, S Ederveen – International Tax and Public Finance, 2003Trade, Foreign Direct Investment, and International Technology Transfer: A Survey – K Saggi – The World Bank Research Observer, 2002Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit – MW Klein, J Peek, ES Rosengren – The American Economic Review, 2002Vertical foreign direct investment, welfare, and employment – W Elberfeld, G Gotz, F Stahler – Topics in Economic Analysis and Policy, 2005Volatility, employment and the patterns of FDI in emerging markets – J Aizenman – 2002 – NBERWho Benefits from Foreign Direct Investment in the UK? – S Girma, D Greenaway, K Wakelin – Scottish Journal of Political Economy, 2001Why Investment Matters: The Political Economy of International Investme

Posted in Uncategorized | Tagged , | Comments Off