Harnit Kaur Kang
Research Officer, SEARP, IPCS
Prime Minister Manmohan Singh admitted in his opening statement at the 16th SAARC summit in Thimphu, Bhutan that, “Investment flows in South Asia are far below what we see in Southeast and East Asia. They are also well below potential.” The reasons behind SAARC’s relative underperformance in attracting foreign direct investments (FDIs) vis-à-vis ASEAN can be understood through some key questions that shed light on the status quo:
Q. What is the importance of FDIs to emerging market economies?
An emerging economy benefits from FDI especially if it is low on domestic savings and needs the inflow of foreign capital to finance and expedite the development and diversification of its economy. Generally, export-oriented economies such as Singapore with limited resources and small domestic market depend more on FDIs than economies such as India which also employ the import substitution model. Nevertheless, FDIs are essential for tapping into the global marketing networks, bolstering technological facilities and expediting skill development of the labor force.
Q. Who are the primary recipients of FDIs in the two blocs? Who are the investors?
According to a 2010 World Bank report, Singapore is ranked as number 2 in terms of best investment potential. The EU is a major source of FDI flows into all 10 ASEAN countries including lesser developed members such as Brunei Darussalam, Laos and even Myanmar. However, the larger slice of the EU-15 pie has been had by Singapore (US$36, 7605 million), Indonesia (US$25,771 million) and Malaysia (US$82,326 million) from 1995-2003 alone. Traditionally, USA and Japan have been the biggest trading partners for Southeast Asia. According to the 2008 ASEAN Statistical Yearbook, Indonesia has been the highest recipient of FDIs at US$62,636 million, with Singapore trailing behind at US$14,279 million. Given the disproportionately large size of India relative to its neighbors, it suffices as the largest recipient among the SAARC countries with UK as the largest investor with over 8 billion pounds of investment according to a 2008 report in the Financial Express. Interestingly, World Bank has included Pakistan and Bangladesh (SAARC) and Vietnam, Philippines and Indonesia (ASEAN) in a list of the ‘Next 11 Engines of Growth’.
Q. What was the impact of the two financial crises on ASEAN and SAARC?
The ASEAN-3 economies of Malaysia, Thailand and Philippines risked being sidestepped for FDIs in the wake of the 1997-98 economic crisis that revealed the vulnerability of their financial sectors. In the 2008 global financial recession, the hardest hit economies in ASEAN were Singapore and Philippines with GDP growth rates plummeting from 7.7% to 3.6% and 7.2% to 2.4% respectively from 2007-2008, according to IMF’s World Economic Outlook figures. Vietnam and Indonesia were least affected with only a slowdown to 6.1% from 6.3% for the latter. Although, India’s GDP growth rate is good regionally, it has been steadily declining since 2007 when it was at 9.3%.
Q. What is the role of Chinese FDIs in SAARC and ASEAN?
The business and political leadership in most ASEAN countries in 2002-03 had been very anxious as China attracted US$50 billion worth of FDIs which were originally earmarked for Southeast Asia. However, on the flip side Southeast Asia has transformed into a primary source of raw materials that is fueling the industrialization of China as well as the recipient of its outward FDIs. According to statistics by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), Chinese companies have developed the most projects in the ASEAN-5 countries (Singapore, Thailand, Malaysia, Indonesia and Philippines), followed by Hong Kong, Macau, USA and EU. According to a report by Stephen Frost in the Pacific Review, the success of Chinese investments in Southeast Asia has allayed regional fears and this has encouraged a similar interest towards South Asia. Pakistan, through its significant tax concessions, attracted in 2004 itself, US$30 million in manufacturing investment, from three Chinese automobile companies.
Q. What are some of the challenges to the accruing of FDIs?
The primary challenge for ASEAN countries and opportunity for SAARC countries is that foreign investors are highly likely to choose countries where the labor force is cheap. Any increases in wage rates in ASEAN countries must balance the benefits vs. costs of a potential FDI turn away. To compensate for its size, ASEAN requires comparative advantage in value-added products and industries that give it an edge in the global economy. Ultimately it’s a vicious circle wherein attracting more investment requires the continued infusion of foreign capital and expertise in Southeast Asia. However, SAARC countries must not rest comfortably on the back of their cheap labor force. Low wages translate into an unskilled labor force and for long-term economic growth, developing countries need to upgrade towards higher productivity in value-added industries. Taken together, the GDPs of countries add to the economic well being of the regional bloc that they are part of. However, ultimately FDIs are determined in large part not by regional collective policies but by distinctive national interests in addition to a combination of other factors such as internal political climate, stability of economy and government policies regarding investment. Every country needs to do its part for bringing prosperity to their regional bloc.
source: www.ipcs.org
