Business Page – October 17, 2004

Introduction

Today we present the second and concluding part of the article prompted by the publication of United Nations Conference on Trade and Development's (UNCTAD) 2004 World Investment Report dealing with investments by multi-national companies across borders. We noted in part one which appeared in Sunday, October 3, 2004 that the report assumed particular prominence in 2003, mainly in the state-owned media, for its disclosure that Guyana was among one of the highest-ranked countries for inward foreign investments in 2002. Despite the time that has elapsed since the 2004 report this year, Go-Invest which was the cheerleader in 2003 has been noticeably silent this time round.

Readers will recall that there was a financial decline in 2003 in the Caribbean and Latin America, where for the fourth year in a row, FDI (FDI) flows into Latin America and the Caribbean (LAC) fell by 3% in 2003, to $50 billion - the lowest annual level of FDI since 1995. Guyana, which is classified as an LAC was one of the countries contributing to the decline. The report shows that in 2003 FDI was $26M compared with $67M in 2000, $56M in 2001 and $44M in 2002. In relative terms Guyana's ranking has declined from the 2000-2002 average of 18, to 26 for the three years 2001-2003.

Caveat

It is, however, erroneous to place too much significance on performance in any one year, although a declining trend is clearly a major concern. If foreign investment is indeed considered the driver of economic progress and government the facilitator, then we have a real problem. Most of the investment taking place in Guyana is done at the government level. Does the IDB, for example, believe that the private sector is the engine of growth, and if so, how does it justify the billions it lends to the government? The same may be said of the other donor agencies and countries, though on a smaller scale.

The decline in the region has been partly attributable to the effect of privatization in the region. For example, much of the region's increase in the latter part of the last decade was due to the privatization process, which in many countries has now run its course. There simply are no more entities to privatize or the process has simply run into political opposition at home, particularly since almost without exception the process delivered much less than it promised.

The report also reflects data limitations, such as those tables listing the economies for which national official source data were available. There is some ambiguity about the source of the data used in the report for Guyana, although the report indicates that Guyana is among these countries which confirmed the data used.

Foreign affiliates

Guyana is shown as having fifty-six (56) parent corporations and foreign affiliates operating in Guyana, and it would be interesting to determine who these are and the extent of their investments by year. For the purpose, however, there is a fairly narrow definition of foreign affiliate. If the numbers shown are accurate then Guyana is within a reasonable range, but they also suggest that the average investment by these companies is fairly low, despite what one would consider the nature of the investment opportunities in Guyana. We have been trying to attract investments in extractive and manufacturing industries which are largely capital intensive, but the reported investments indicate an average of less than US$1/2M per entity. Clearly there is research work to be done and we need to enquire whether those companies which have received huge concessions are in fact making their promised investments.

Facilitating the shift

One area that the report stresses is the number of agreements signed among states to facilitate foreign investments, and here both Guyana and Caricom fare very badly. In fact only a bilateral agreement between Caricom and Costa Rica was concluded while the report indicates that negotiations are taking place on a Caricom-European Union agreement. The absence of agreements facilitating this type of investment might help to explain the low level of investments in the region.

The other is whether the region possesses the capacity to benefit from the shift to services - an area in which Bangalore in India is fast approaching first-world status. The report's conclusion is that to benefit from the increasingly globalised world economy, countries need to strengthen their services, and notes that with the right conditions, FDI can help to achieve this. Countries need to bring together the capital, skills and technology which are the essential ingredients for set up competitive service industries whether they be the highly prominent IT-enabled services, or traditional services such as infrastructure and tourism.

While many services are local, many are also growing in their international relevance and coverage, and are therefore becoming more tradable. The report is convinced that FDI can help link developing countries to global value chains in services, since they include networks that are increasingly important to access international markets. It cautions, however, that care must be exercised in countries' efforts to attract FDI in services. Some services (especially basic utilities and infrastructure) may be natural monopolies and hence susceptible to abuses of market power (whether firms are domestic or foreign). Others are of considerable social and cultural significance, which can alter in undesirable ways the whole fabric of a society.

Conclusion

Not surprisingly, therefore, the report does not seek to be prescriptive, and recommends that countries need to strike a balance between economic efficiency and broader developmental objectives. Perhaps the best way to conclude this piece is to quote from the conclusion in the Overview of the Report which states: "This is why it matters to have the right mix of policies. In light of the shift towards FDI in services, developing countries face a double challenge: to create the necessary conditions - domestic and international - to attract services FDI and, at the same time, to minimize its potential negative effects. In each case, the key is to pursue the right policies, within a broader development strategy. Basic to them is the upgrading of the human resources and physical infrastructure (especially in information and communication technology) required by most modern services. An internationally competitive services sector is, in today's world economy, essential for development."

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