Chart of the week: FDI comes back, especially in Latin America | beyondbrics | News and views ... http://blogs.ft.com/beyond-brics/2010/12/20/chart-of-the-week-fdi-comes-back-especially-in-lat...

Chart of the week: FDI comes back, especially in Latin America

December 20, 2010 3:01 pm by beyondbrics

By Valentina Romei and Henry Mance

If economic policy-makers were to organise an end-of-year pantomime, the perfect

villain would be hot money. You could fill a theatre with prime ministers and
central bankers ready to jeer its every appearance.

Who, then, would be the hero of the show? Quite possibly foreign direct
investment, which represents the majority of flows to emerging markets, and is
widely seen as productive and reliable. Because FDI generally comes from
companies with longer-term horizons than fund managers, and because it goes into
solid assets like factories, it is less likely to be withdrawn in a crisis. However, as
our chart of the week (below the page break) shows, FDI in emerging markets did
drop sharply in 2009 – and even a rebound predicted for this year will still leave it
below 2007-8 levels.

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Chart of the week: FDI comes back, especially in Latin America | beyondbrics | News and views ... http://blogs.ft.com/beyond-brics/2010/12/20/chart-of-the-week-fdi-comes-back-especially-in-lat...

The chart shows the total value of net direct investments flows into emerging
regions, using IMF forecasts for 2010 and 2011. It shows how the global financial
crisis interrupted a multi-year trend of rising FDI, which was boosted by improved
economic growth and terms of trade (the strength of countries’ export prices
relative to import prices).

FDI rose from less than 1 per cent of emerging markets’ GDP in the 1990s, to an
average of 3 per cent in the following decade (eastern Europe and sub-Saharan
Africa received more, central Asia less).

Then, in 2009, with tighter credit conditions in rich countries (the major source of
FDI), flows to emerging markets fell 40 per cent from 2007 levels. Asia and central
and eastern Europe had the biggest drops, with FDI falling by over 50 per cent,
while flows to Latin America and the Middle East were down around 30 per cent.
Amazingly enough, FDI to sub-Saharan Africa was actually higher in 2009 than in
2007, thanks to natural resources investments and new players such as China.

Now FDI is slowly recovering. The picture is uneven across regions: Latin America
is set to receive record FDI in 2011, while flows to developing Asia are recovering
more slowly. But is an uptick unqualified good news?

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Chart of the week: FDI comes back, especially in Latin America | beyondbrics | News and views ... http://blogs.ft.com/beyond-brics/2010/12/20/chart-of-the-week-fdi-comes-back-especially-in-lat...

There are caveats. First, FDI includes, for example, real estate purchases – many of
which may be speculative, or at least do little to improve productivity.

Second, FDI flows remain concentrated in large-ish, middle-income countries,

epitomised by the Brics. That may be because of political risk, which has overtaken
weak government institutions as investors’ primary concern, according to a recent
World Bank survey. Latin America is seen as increasingly stable and investor
friendly (with the exception of Venezuela) so it is no coincidence that it has seen
strong FDI inflows. As macroeconomic concerns recede, countries need to assure
investors that taxes and regulations are stable.

Third, FDI cannot compensate for the effects of low domestic savings. Last year, it
represented just over 20 per cent of gross fixed capital formation in sub-Saharan
Africa, 17 per cent in the Middle East and north Africa, 10 per cent in Latin
America, and less than 4 per cent in east Asia and the Pacific, according to the
World Bank. If countries wish to finance future development while avoiding
dangerously-wide current account deficits, they need to promote domestic
investment alongside FDI.

Related reading:
Chart of the week: China-Africa trade, beyondbrics (Dec 14)
Goldman: watch India’s current account, beyondbrics (Nov 16)
QE2 is ‘unfair’, says deficit-hit Turkey, beyondbrics (Nov 11)
The hot money’s on Poland, beyondbrics (Oct 14)

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