Addiction to FDI? Arguing against a Mainstream Discourse
Mainstream economists usually consider FDI as being conducive to development. Heretics to such a position perceive this as a dogma, comparable with the idea of the sun circling around the earth.
Income Account Deficit as the Major Problem
According to Jože Mencinger (University of Ljubljana), economic policy makers in the new EU member states, who still consider FDI being a pillar of development, overlook the growing structural current account deficits. These deficits in current accounts are being increasingly caused by an outflow of profits. FDI, he argues, result in a significant gap between gross domestic product (GDP) and gross national product (GNP), i.e. the difference between what is produced in a country (region) and what is produced by nationals of a country. The opportunities to reallocate production to countries with cheaper labor costs might result in a slowing down of FDI inflows which have balanced the current account deficit up to now. Mencinger warns of sudden interruption of investment inflows and possible crises if this outflow of profits should start to exceed FDI.
This fear was justified, because FDI had not decreased the trade deficits in the new member states (NMS) of the EU. Furthermore the countries had already sold most of their "family silver", there were no productive assets left which could become subjects of acquisitions. The inflow of capital through FDI might soon lag behind outflow of foreign exchange through the income account.
Perception of FDI in New and Old EU Member States
Özlem Onaran (Istanbul Technical University and Vienna University of Economics and Business Administration) points to the different perceptions of FDI in old and new EU member states. In the Western popular wisdom it was generally seen as a transfer of income and jobs from west to east. She recognizes a raising discontent on part of working people which was perceived as nationalism in the NMS. Onaran doubts that jobs are relocated and created elsewhere, they rather got lost as they were crossing the border.
The widely spread conviction that FDI created a lot of jobs, she argues, was exaggerated: The newly created jobs in services were just able to compensate the lost jobs in the manufacturing sector. Onaran concludes that the positive demand effects of integration can be even lower than the negative international competitive pressures.
The Case of Austria: FDI Reality-Check
Govind Rao (York University) compared experiences with FDI in Canada and Austria. Although these two countries are being regarded two FDI success stories by liberal economists, he argues that Canada and Austria are rather the proverbial exceptions that prove the rule. Using a world-system perspective, Rao explained the specific situation of the two cases. Both of them were at the top-notch of the international hierarchy - with high wages and state resources. At the same time both were attractive for FDI due to their proximity to the US in Canada's case, and Germany in Austria's case.
Canada and Austria had been viewed as extensions of their national markets by their big neighbors. Foreign exchange outflows in the form of profit remittances had been balanced by foreign exchange surpluses in the field of raw materials and tourism, respectively. As these conditions had been very exceptional, their experiences could not be interpreted as models of a successful route to advanced capitalist development.
Wilfried Altzinger (Vienna University of Economics and Business Administration) argued that the opening up of CEE countries and the recent EU enlargement had caused huge structural challenges and strong distributional divergences. It had helped to improve the competitiveness of the Austrian firms considerably. Yet, these changes had created winners as well as losers. While the aggregated net effect had been favorable for the Austrian economy, wages had increased only marginally; wage shares had even declined during the last 15 years.
The exit option of transnational companies, so Altzinger, would determine their bargaining power. This bargaining power had increased against other economic agents (such as the state, the labor force, and small business) and had given them more influence on national and international institutions and decision makers.
Following Altzinger's input, there was a heated debate over the question whether foreign direct investment in CEE countries destroyed jobs in Austria. One participant explained that companies would tend to buy local companies, as in the case of Austrian main banks. As most of FDI had taken place in the service sector which is said not to be able to be relocated easily, FDI had not affected the labor force in Austrian companies that much. Contrarily, Altzinger stated that banking jobs were indeed "leaving" Austria because a lot of services were done in the accounting and programming sector. Altzinger rejected the distinction between a very local service sector and a manufacturing sector shifting wherever wages are lowest. In some branches of the manufacturing sector, the relocation potential might be low, too. Another participant pointed at opportunity costs: Even if jobs were not destroyed in Austria one had to consider that they were not being created either.
Learning from Latin American Experiences?
Joachim Becker, Institute for Studies in Political Economy (IPE) Vienna, gave an overview of the development of FDI in Latin America during the last decades: During the export oriented development of the late 19th/early 20th century, FDI had been mainly concentrated in the service sector (especially infrastructure). The great crisis of 1929 had brought this mode of development to an end. The Latin American countries had turned towards the domestic market favoring import substituting industries. While much of the infrastructure had been nationalized, Latin American governments had banked on FDI in manufacturing. They had tended to impose, however, certain conditions of foreign investors, like local content requirements. This inward-looking development had encountered certain problems due to the highly unequal distribution of income and limits linked to the external sector as well. During the debt crisis in the 1980s there had been little FDI activity in most countries because of structural adjustment programs, the domestic markets had been in decline. It had been the 1990s that had brought about a new wave of FDI closely linked to privatization and the liberalization of financial markets. Becker concluded that the contribution of FDI to national development had been "zero or negative" because it had not been linked to the productive sector and structurally exacerbated balance of payments problems. With regard to NMS, he added that the externalization of their economies had been even more radical than of Latin American economies.
The author is a student of International Development and Arabic Studies at the University of Vienna
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