Rethinking Pakistan’s FDI obsession

Rethinking Pakistan’s FDI obsession

Many economists like to cite falling or rising figures for Foreign Direct Investment (FDI) coming into Pakistan. Not only does our government brag about the increase in FDI, but commentators also appreciate it as an important gain. SBP is constantly updating the figures. Their interest in FDI appears to be, if not a panacea, certainly a major breakthrough in achieving a faster rate of economic growth or development.

Newspaper 23 April 2024, published a story based on SBP data highlighting the increase in FDI. One newspaper, Dawn, reported that ‘Foreign direct investment jumped 51 percent.’ Another newspaper, The News, reported that ‘investment jumped 52 percent to a 21-month high in March.’

But remember the devil lives in the details. FDI jumped by 51.7% to $258 million in March compared to $170 million in March last year. In fact, as far as net FDI inflows in the first nine months of the current fiscal year 2023-24 are taken into account, it fell by 10% to $1.09 billion.

The point to be made is that the FDI story has twists and turns. It’s never a straight road that goes up and up. Bilateral, trilateral or multilateral relations with various countries or at the leadership level do not make a strong case for bringing FDI to the rescue. Or internally, it never relies on this or that formation, or any other entity, whatever its name, such as the Special Investment Facilitation Council (SIFC).

And this does not take into account under what terms and conditions FDI is brought in by taking such steps. But this does not preclude the possibility of solving the chronic issues, which the Pakistani economy faces, always using short-term and ad-hoc measures, that is, putting out fires through parties like the SIFC. That might slow down the collapse, but the collapse will happen.

This is the fate that any FDI may face sooner or later. On April 14, Nikkei, a Japanese news outlet, reported that Singapore is losing its luster as a Southeast Asian base for multinational companies. They are increasingly locating their Asian headquarters functions outside of Singapore. That saves money. And neighboring countries such as Thailand and Malaysia offer expanded opportunities and incentives to attract investment.

So, FDI is not a panacea or a solution. On the other hand, it creates a dilemma: To open or not to open the economy. That is, to bring FDI in favor of this or that country, or this or that investor, or this or that investor consortium is not the way out.

Or do something else, something completely different.

Decades of experimenting with that hackneyed approach shows it’s not the way out and the past has also proven that it doesn’t work, and it evaporates in no time. It does not pay long-term dividends. It doesn’t help the economy grow, really.

The way out is: Let people do it, no matter who they are, locals or foreigners. And not chasing this or that country or group of investors to “hand us over” FDI.

Why don’t governments and policy makers look back and see how many people who struggled with small businesses eventually turned them into big business empires? Do they need the government to help them make that progress? No, they actually want their government not to create barriers, but instead to exist in the way of low taxes and minimal regulations that actually make things easier for them.

So, why do they think and act like the government (or government-to-government investment) that brings progress and prosperity to the country? In fact, it is business and private entrepreneurs that bring progress and prosperity.

It is a confusing economic philosophy, its first principle is that prosperity descends from above, and its instrument is government. And the second holding sees prosperity as something imported from abroad. That explains the interest of economists and policy makers towards FDI.

So, the most obvious answer to the question, is FDI delivering, is a big no. No, entrepreneurs and investors, local or foreign who deliver. And most importantly, it is local talent and the spirit to compete for profit that gives results. It not only delivers, it also provides a sustainable basis for an economy that grows and thrives, comparatively permanently. Charity begins at home!

If not through any argument, take a cue from Singapore, which needs to recalibrate its economic policy now.