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| TRAVEL & TOURISM |
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Why foreign investment hurts
by Dr. Bharat Jhunjhunwala
The ASEAN economic ministers are exceedingly concerned
about the increasing competition from China and India for attracting foreign
investment. They have mooted the idea of establishing an ASEAN investment
area to maintain these inflows of capital. Why is it, though, that they need
to attract foreign investment continually? Will they never break out of such
dependence on foreign capital inflows? Has foreign investment proven to be a
short run boon but a long run curse for them?
There indeed may be a reason why they are worried. Economic theory tells us
that foreign investment leads to increased investment only as long as it
continues to flow in. Once the inflow ceases, the investment thereafter is
reduced. In the long run, therefore, foreign investment hurts.
The reason is that the pie that is available in the long term actually
shrinks in the period of foreign inflows.
Let us think of the total investment in terms of two pies, those of the
foreign and domestic investors. The foreign investors may decide to shift
from reinvestment to repatriation any day. This is the short run pie. The
domestic investors pie, on the other hand, goes on ever increasing.
Restrictions on capital convertibility or preferences of domicile ensure
that their profits continue to be reinvested in the domestic economy. This
is the long term pie.
As foreign investment flows in, the total availability of capital in the
host economy increases. The law of diminishing returns tells us that the
rate of return on capital would decline correspondingly. Thus, the domestic
pie grows at a slower pace than it would have grown without foreign
investment.
Once the foreign investors start repatriating their profits, the investment
comes only from the domestic pie. This pie is now smaller than it could have
been. So is the long term investment. Foreign capital flows did lead to a
short run gain but caused loss of investment and growth in the long run.
This is not a hypothetical scenario. As of now, there is not one major
country in the world which has been able to maintain its growth rate after
foreign investors have withdrawn.
The experience of countries that had attracted high foreign investment in
the seventies shows exactly this. Colombia, Guatemala, Ecuador and Mexico
are four countries which had received foreign investment in excess of 1% of
the GDP in the seventies but failed to attract more of the same in the
eighties. The growth rates of all four were negative in the eighties—between
(-)3.3% and (-)4.3%.
Even among the countries which continued to attract high levels of foreign
investment in the eighties, Sri Lanka, Argentina, and Brazil, had negligible
or negative growth rates at 0.2%, (-)2.4%, and (-)4.8% respectively. The
increase in the investment pie due to foreign investment was more than wiped
out by the contraction of the domestic pie.
Only Chile, Thailand and Malaysia continued to attract high levels of
foreign investment and were able to maintain positive growth rates. The real
test for these countries is yet to come. We have to wait and watch what
happens after the foreign investors withdraw.
The ASEAN countries would do well to learn the lesson early. By continually
running after foreign investment, they may be impairing their chances of
maintaining high growth rates in the long run. Proposals such as the ASEAN
Investment Area are only a short run palliative which may only worsen their
situation in the long run. They should, instead, examine ways of further
enlarging their domestic investment pie.
Author is a political economist and writer
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Bangkok Airways
announces new schedule
Press Release: Bangkok Airways has instituted a new flight program to
see to the needs of increased tourism during the cool season.
The new winter schedule will go into effect on October 27, 1996, and
will run until March 29, 1997. Bangkok Airways will operate 15 flights a
day on the Bangkok-Samui-Bangkok route. The Samui-Phuket-Samui route
will run twice daily.
The airline will also operate a daily flight on the
Bangkok-Sukhothai-Bangkok route, Sukhothai-Chiang Mai-Sukhothai route,
Bangkok-Hua Hin-Bangkok route, Bangkok-Ranong-Bangkok route, and
Utapao-Samui-Utapao route.
For further information about flight times, contact your local travel
agent or call Bangkok Airways on Tel. (02) 229-3456-63.
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