Approval of investment projects good for economy

Malaysia, the fifth largest investor in Bangladesh, has invested $6 billion here since 1999. The proposed $1.53 billion projects seeking approval include 210km Dhaka-Chittagong highway, worth $900 million, Aktel customer service improving project, worth $250 million, and two power generation projects worth $410 million.

The irony is that the cabinet's approval of the expressway came under diplomatic pressure and public discourse. While addressing the Foreign Investors' Chamber of Commerce and Industry (FICCI) on June 26, Malaysian High Commissioner Mr. Abdul Malek Aziz indicated with frustration that Malaysian investors were likely to pull out their $1.53 billion investment proposals to invest in other countries such as China, Vietnam, Pakistan, and India if the Bangladesh government continued its shilly-shallying posture in approving the projects. The threat of the loss of FDI funds has worked.

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It is, however, prudent for a country not to rush into approving or rebuffing any FDI regardless of its origin without assessing the long term merits and contractual provisions vis-a-vis our national interest. However, if the reasons for dilly-dallying in approving the Malaysian projects were due to multi-layered, burdensome, and circuitous approval process, then the government should take immediate measures to improve on its ineptitudes.

Over the last 25 years, FDI in low-income economies has been highly concentrated in three countries, China, Nigeria, and India. Large market size, low labour costs and high returns in natural resources are amongst the major driving force for investment in these countries. New major destinations for FDI flows in the 1990s were predicted to be Vietnam, Ghana, and Bangladesh. In the first 5 months of this year alone Vietnam already attracted $2.4 billion in contrast to Bangladesh's disappointing $2.5 billion over five years. The reasons why Bangladesh failed to attract substantial FDI during the last five years are arguably manifold.

The loss of Malaysian investments would have entailed a negative impact on future inflows from Malaysia and other potential foreign investors. Bangladesh with its years of political turmoil, hartals and lockouts, deep rooted political corruption and recent rise of terrorist menace, is not considered a hospitable environment for FDI. The theory concerning how political instability and violence influence FDI is built on four elements:

• Investors believe political instability in the host country is important from the premise of investment locations and how much to invest.
• Investors are forward-looking, constantly assessing ex ante how political violence would affect (a) the expected returns of their investments and (b) their exit from the host country.
• Since investors do not have perfect foresight about occurrences and the nature of political violence, they have to adjust to the consequences of political violence ex post.
• Political violence comes in different forms, varying from the extreme of civil war to political unrest involving democratic reforms and power struggle. The inflows of FDI may be affected depending on the severity of different types of political violence and unrest.

Influx of FDI finds its way into a country only when all the criteria to set up an export industry are met. That includes reduced taxes, favourable labour law, freedom to move money in and out of country, government assistance to acquire land, full grown infrastructure, reduced bureaucratic layers, and low level of political corruption. International business literature often refers to a study conducted over the period 1984-2000 using panel data based on several investor surveys covering 22 countries. The major findings of the study indicate:

• Natural resources and large markets prop up FDI.
• Factors having similar positive effects include low inflation, good infrastructure, educated population, openness to FDI, less corruption, political stability, and a reliable legal system.
• A decline in corruption from the level of Nigeria to that of South Africa has been shown to have the same positive effects on FDI as increasing the share of fuels and minerals in total exports by about 35 per cent.
• Countries that are small or lack natural resources can still attract substantial FDI by improving their institutions and policy environment.

India, Pakistan and, to a certain extent, Bangladesh, have large markets but attracted proportionately relatively small FDI flows. Analysts interpret this as evidence of constraints that are still in place deterring the channeling of FDI to these countries.

It is no secret that cutting red tape and providing amenable business conditions generally attract inflows of FDI. China's "open-door' policy and various incentives for investing in the earmarked economic zones contributed to the initial influx of FDI. Additional incentives, such as allowing the same level playing field to foreign investors vis-a-vis local counterparts and the opening up of new markets (e.g. air transport, retailing, banking, etc), have been registered as important driving force promoting FDI flows in recent years.

Each of the three Malaysian investment projects are infrastructure related and hence are much desired for economic development and future FDI inflow. China's transport facilities and the proximity to major ports have contributed significantly on the influx and location of FDI within the country. However, foreign investors often find poor infrastructure both as a barrier and an avenue for investment. Foreign investors point to the potential for attracting significant FDI if host country governments allow substantial foreign participation in the infrastructure sector.

Case studies involving India and Pakistan indicate that, although telecommunications and airlines have attracted FDI flows in these countries, other investments in more basic infrastructure such as road-building remains unattractive, reflecting both low returns and high political risks. Leaving aside the low returns issue, the recent violence in garment industry, current political impasse and uncertainty in the political process along with the prevailing notion of "millionaire ministers" and extraordinary toll collection have become such deterrent that not too many foreign investors would be attracted to risk their funds in Bangladesh's basic infrastructure projects. Therefore, the approval of the new Dhaka-Chittagong highway project is a prudent decision and should be applauded.

Dr. Abdullah A. Dewan is Professor of Economics at Eastern Michigan University.