FDI: US observations point to our tasks ahead

As Dhaka looks East to broaden the range of its international trade, the country's biggest investor--USA--expresses dissatisfaction of things that stand between quick disposal of trading disputes and in enticing desired amount of Foreign Direct Investment (FDI) to the country's ailing economy.

In its July 2003 Country Commercial Guide, the US Trade Center in Dhaka exposed a catalog of handicaps that it believes are acting as deterrent to foreign investment. The report comes on the heel of substantial decreases in the flow of FDI to the country.

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The report blames non-implementation of government policies and bureaucratic and legal bottlenecks as major impediments to foreign investment. It talks of the hassles relating investment in the container port building, in private TV channel and in host of other ventures that got bogged down amid bureaucratic red-tapism and procedural duplicity. The government says it will look into the US' concerns.

It is one thing to look, quite another to mend. The US Trade Center's observations may not be truly reflective of the real investment ambience prevailing in the country, but they constitute an indictment on the failing, duplicity, incompetence and dishonesty of a system that gathered rust and needs immediate re-vamp.

More worrisome is the fact that the accusations come from a country whose investors have around $1.3 billion worth of their money at stake in Bangladesh. Since the mid 1980s, over 200 US companies have gradually crept into Bangladesh's economic scene although the major chunk of such investment arrived in the 1990s following the 'viable discovery' of gas and oil.

FDI vs. free trade

The proportion of FDI to the overall GDP serves as a prime indicator to measuring up a country's degree of integration into globalization and free trade. Using this yardstick, one observes Bangladesh's truncated standing as an economic player. Especially between 2001-02, FDI had spiraled down from $78.1 million to $45 million in a $40 billion(GDP) economy.

Until the US companies' arrival, private investment in the energy sector has been insignificant throughout the 90s, totaling about $ 500 million during 1990-99.

Curiously, the latest US observations followed a different observation by the World Bank, which said in its latest report that,' without significant improvements in energy distribution, expansion of FDI in generation and production is unlikely to be financially sustainable.' Many foreign investors seem to be heeding to these words of caution, as the dwindling FDI trends reflect.

The FDI situation deteriorated badly in July-March 2003 when the total foreign investment reduced to a trickle ($28 million only) of what came during the corresponding period of the previous year. In July-December 2003, it dipped even further to a meager $16 million, 55.6% less than the corresponding period of 2002. The US observations, hence, seem timely and telling.

Although the trade balance between the US and Bangladesh had always tilted in Bangladesh's favour, the US did not hesitate to allow lately duty free access to a number of Bangladeshi products under the Generalised System of Preference (GSP). It, therefore, seems perplexing as one hears about a US exporter's traumatic experience of being stuck for eight years to obtain payment for a shipment of wheat.

This and many other observations (See the Daily Star, July 21, p-1) expose the degree of anger that any foreign investor is wont to feel with regard to Dhaka's handling of international trade issues.

Legal limbo

Allegations like these also collide with the 1986 Bangladesh-US investment treaty that stipulated measures to encourage and protect US investment. Since irritations have multiplied over the years irrespective of the existence of such a treaty, Colin Powell had insisted on Bangladesh signing a new Trade and Investment Framework Agreement (TIFA) during his last month's brief stopover in Dhaka.

The TIFA, however, is meant to do a different trick: bringing into effect more rigorous regulations and modalities pertaining to fund repatriation in particular. But that must not slacken Dhaka's endevour to mind to the existing US concerns and mend them accordingly.

For, over 40% of Bangladeshi exports head for the US, fetching over $2 billion annually to the nation's economic basket. Despite the recent slump in global demand, Bangladesh's overall export rose during the first six months of FY 2003, reducing the trade deficit to $624 million from the $788 million in the corresponding period of the previous year. The US's robust buying from Bangladesh has a lot to do with such a positive trend in our export drive.

Dhaka also can ill afford to deny the pitfalls of our legal system, which is yet to catch up with the expectations of foreign investors. The system is incapable of redressing grievances with respect to compensation, tort, expatriation of fund and bringing to justice the corrupt bureaucratic and business 'mafias' who claim monopoly in matters economic at the expense of the rules and regulations governing international trade relations. The legal limbo is indeed a matter of serious concern for investors from within and without.

The US trade center's allegation that foreign companies' profit remittances have been delayed for over one year in some instances-- pending tax clearance-- is another disturbing sign. "As a result, actual foreign investment has legged well behind its potential,' claimed the report. Interestingly, few will dare to disagree with the report's main thrust and the theme.

The winding path

The path to investment in Bangladesh is an ever- winding and circuitous one. It is compounded further by the shameless corruption of customs and other officials-- and the overlapping bureaucratic supervision by officials from the Board of Investment (BOI) and the Export Processing Zone Authority.

The report claims 30-40% of the overall fiscal deficiency of Bangladesh springs from losses incurred by the State Owned Enterprises (SOE). The Board of Investment (BOI), on the other hand, only registers investors outside the EPZ.

Investors willing to invest in power, mineral resources and telecommunications must face bureaucratic hurdles in respective ministries while garment exporters must obtain production allocation for quota from the Export Promotion Bureau (EPB). 'BOI is not the one stop shop as is touted by the government', maintains the report.

Although the BOI is housed organizationally in the Prime Minister's office, regulatory and administrative powers remain vested in respective ministries. The report hence remains dismissive of the BOI's role as an effective advocate for foreign investors.

Municipal law and international jurisprudence

The report invokes the example of one US firm that was denied permission to repatriate gains on share sales although there is no specific restriction on such repatriation in the Bangladesh's Foreign Private Investment Act of 1980.

And, being a signatory to the International Convention for the Settlement of Disputes (ICSD) as well as the UN Convention for the Recognition and Enforcement of Foreign Arbitral Awards, Bangladesh might face international litigation unless its own legal system comes of age in dealing with such matters judiciously and expeditiously.

For, a provision in the US Bangladesh Bilateral Investment Treaty lays out procedures for referring irresolvable investment dispute for third party settlement in the ICSD. As well, there are other mechanisms to resolve international trade disputes under the aegis of the WTO and the UNCTAD.

Dhaka is reminded to be receptive of another fact, that, besides being the largest investor, the US also doles out about 4% of its international aid to Bangladesh each year. This has resulted into a phenomenal increase in the US' annual aid over the decade; from $170 million in the early 1990s to about $332 million by now.

The military collaboration and wage remittances from the US constitute the two other strong currents of ties to bind the knots and nuggets of the two nations' mutual interests.

Regional scenario

Dhaka's shortcomings can also be gleaned by comparing within the region the level of FDI the other nations had attracted. Throughout the 90s, India outperformed Bangladesh in enticing foreign investors despite Bangladesh having opened up its economy in the late 1970s and India beginning the process almost two decades later (since the early 1990s).

Even China received more FDI than the US throughout the 90s without dismantling the Communist infrastructure. China's annual average FDI flow exceeded the $45 billion mark throughout the 90s. The Asian economic miracle and availability of cheap labour acted behind such phenomenal inflow of FDI to the region.

Bangladesh's fault-ridden investment climate deterred investment from the region as well. East Asia is awash with dollar for investment, some $950 billion in excess liquidity sloshing around the region's banking system, reserves and portfolios. More dollars are heading to the region due to the stymied performances of the US and European equity markets. Dhaka must prepare herself to attract some of those funds without squandering any more time.

While the debt to GDP ratio is over 160% in China, Bangladesh still enjoys a comfortable margin due to its debt GDP ratio not overshooting the threshold of 50-100% that most economists believe as safe.

The twin danger to investment comes from the dwindling public investment by the government and the more alarming depletion in the flow of FDI. This double danger retards employment opportunities, hence the buying power of the consumers and the instances of poverty.

The changes in the regulations and attitudes are also called for due to the UNCTAD's prediction of increased FDI in the least developed nations (LDCs) in 2003-04. In its recent survey, the UNCTAD predicted the FDI to rise almost 84% in some selective LDCs.

Bangladesh is unlikely to be one of those lucky ones with its age-old attitude and a baby-walk toward reforms that should have been in place long before foreign investors caught us napping.

Author and columnist M. Shahidul Islam is a senior assistant editor of this paper.