|
|
As you can see, international investment, like many aspects of globalization, presents opportunities as well as challenges. You may wonder where the balance of costs and benefits lies. The question is particularly acute for developing countries: many of the greatest controversies about financial liberalization covered in this issue brief are raised when investment flows from developed to developing countries. To be sure, many of the problems of developing countries stem from internal deficiencies, ranging from the inadequate supervision of the banking sector to corruption or inadequate labor and environmental standards.
On the one hand, very few economists—even among the harshest critics of financial liberalization—dispute that international investment can be a powerful engine for economic growth. A look at development statistics shows that there is a correlation between investment and growth in developing countries. Proponents of liberalization such as David Dollar of the World Bank point out that essentially no developing country has managed to achieve rapid and sustained growth, successfully raising the prosperity levels of their population, without increasing their openness to foreign investment (Blustein, 2001).
But critics question the extent to which these success stories can be attributed to foreign investment alone. They tend to argue that what is most important for a developing country is that it supports an environment that is generally supportive of investment. That is, when the climate is favorable for domestic investment, it is likely to be favorable for international investment. Economists from this school of thought—while not denying the importance of international investment—tend to promote policy prescriptions that are more focused on internal concerns.
For example, when asking whether a developing country with a limited government budget should spend funds improving infrastructure at an EPZ to help attract foreign investors, or spend that money on local and national courts, police, and prosecutors to improve the management of their justice system to eventually help control corruption, they would argue for the latter. Their reading of the data posits that investment tends to follow growth, not lead it.
Other economists have suggested that, when disaggregating the data on growth and investment in developing countries, many of the supposed problems associated with foreign investment flows can be attributed to certain kinds of restrictions on investment. According to Theodore Moran:
“Foreign direct investment is most likely to be harmful—actually damaging—to the growth and welfare of developing countries and the economies-in-transition when the investor is sheltered from competition in the domestic market and burdened with high domestic content, mandatory joint ventures and technology-sharing requirements” (Moran, 1999).
If this is the case, then it would appear that the most damaging scenario for developing countries would be in receiving foreign investment in the absence of strong agreements like TRIMs, the MAI, or NAFTA’s Chapter 11.
Other economists have stressed that there can be big differences in the effects on development according to the types of economic activities in which foreign investment is involved. In particular, many analysts have suggested that investment in the extraction of natural resources can have deleterious effects on a nation’s development and environment, but investment in more labor-intensive manufacturing is more likely to be beneficial.