The FDI gameNepal, a resource-strained least developed country (LDC), needs capital. There are no ifs, and or buts about it. It has had the LDC status since 1971.
Nepal, a resource-strained least developed country (LDC), needs capital. There are no ifs, and or buts about it. It has had the LDC status since 1971. Graduating to a developing country status has proven to be a task in itself. In today’s global economy where literally every country is after foreign direct investment (FDI), attracting foreign capital is easier said than done. Capital is like water. It finds its own level. It will flow to nations and/or geographies where risk-reward odds are optimal. In order to create a conducive environment, countries adopt all kinds of tactics to improve their standing in the eyes of investors. Some cut taxes to a bare minimum, some create special economic zones. Some others cut the red tape. Yet others may just have a geographical advantage. The competition for capital is real and global. Still, some countries make it look easy versus others in how they attract FDI. Nepal’s two giant immediate neighbors serve a case in point. They have a similar population—1.4 billion for China versus India’s 1.3 billion. They are both growing rapidly. China got off the starting blocks early, but India is on a similar trajectory. Yet, when it comes to FDI, China is way ahead. For a country like Nepal, there is a lot to learn in how FDI dynamics evolved in China and India, and, most importantly, if the variables that worked in the past still hold true today.
Mao Zedong died in September 1976. In December 1978, the late chairman’s chosen successor Hua Guofeng was forced from power. Deng Xiaoping took over. Soon followed his market-reform measures. Deng’s ‘open door policy’ opened China to foreign investment and the global market. ‘Socialism with Chinese characteristics’ became a slogan. According to a World Bank data, five years after opening up to the world, China in 1983 drew $636 million in net inflows, growing to $4.4 billion in 1991, before taking off By 2013, FDI had surged to $290.9 billion. Last year was $168.2 billion. Over in India, economic liberalisation did not begin until 1991. PV Narasimha Rao was the prime minister then, and Manmohan Singh his finance minister. A balance of payments crisis in that year nearly pushed the country into bankruptcy. As part of an IMF bailout deal, India was forced to introduce economic reforms. The role of private and foreign investment was expanded, among others. In 1982, FDI totaled $72.1 million in India and $73.5 million in 1991. Five years after liberalising the economy, India in 1996 attracted $2.4 billion, which then reached $43.4 billion in 2008 and $44.5 billion in 2016. Last year it was $40 billion. It has more or less flatlined for a decade. There could be a whole host of reasons as to why China is getting a bigger share of the FDI pie.
China now has a much better infrastructure. Geographically, it is situated in an ideal region. In the ’80s/’90s, South Korea was beginning to take off. Taiwan and Singapore, in particular, were moving up the technology ladder and needed to expand East Asian production networks. China was a cheap alternative for low value-add production. Concurrently, as the computer revolution put down roots in the US in the ’80s/’90s and grew deeper, manufacturing began to shift to the Far East. China began to attract money. Above all, in the eyes of investors, China probably offered something much more valuable than India did—stability. The latter is a multi-party democracy, and the former a one-party system. In China, there is no threat of a political change, and it offers policy certainty. In India as ruling parties change, so do their policy priorities. Politically, it is easier for Beijing or provincial governments to offer tax incentives and subsidies. For investors who come in with a 10- 20-year horizon, or longer, China is safer. Not much labour strife, not too many strikes and/or locked factories—or at least these incidents are rare. Foxconn is a Taiwanese contract manufacturer with some 1.3 million employees in China. Its Zhengzhou Science Park in Zhengzhou that makes half of the world’s iPhones and employs as
many as 350,000 was up and running within a year in 2010 as the provincial government swiftly bought out local farmers. Would that be possible in India? Probably not.
Does FDI prefer authoritarianism?
Hence the question, does foreign investment prefer authoritarianism, or for a lack of a better word, dictatorship? Dictators, for that matter, come in all shapes and sizes. Primarily, there are two types—benevolent and malevolent. Idi Amin ruled Uganda between 1971 and 1979 with an iron fist. Nothing good happened to the Ugandan economy during his reign. Lee Kuan Yew governed Singapore for three decades (’59-’90), transforming an agrarian society into a major electronics exporter. He understood the significance of foreign capital. In the ’70s, major US multinational corporations like Texas Instruments and Hewlett Packard set up operations there. Arguably, at some point in a country’s life leaders like Lee Kuan Yew is a must—someone who wields absolute political power but would only exercise it for benefit of the population. Nepal had an opportunity. The late King Birendra ruled between 1972 and 2001; he lifted the ban on political parties in 1990. Globally, authoritarians were literally everywhere in those days, primarily Latin America, Africa and the Middle East. Domestically, out of fear or respect, the palace was held in high regard. But that sentiment was not channeled toward development and economic growth.
Fast forward to today. Time has moved on. We can literally count dictators—benevolent or malevolent—on the fingers of one hand. The closest we can think of these days is when a party has a supermajority. The KP Sharma Oli government enjoys one—kind of. His Nepal Communist Party (NCP) has 174 seats out of the total 275 in the lower House of Parliament. With support from Federal Socialist Forum Nepal (17) and Rastriya Janata Party Nepal (16), he commands over 69 percent of the votes. This is just about enough to push through any legislation. If done right and used to create an investment-friendly environment in order to appeal to FDI, jobs will be created, living standards will rise and the nation will eventually leave the LDC status. In this scenario, voters, who more often than not vote with their wallets, may even conceivably reward NCP in the next election. Lee Kuan Yew was elected over and over. If instead the Oli government uses its powers to forward its own personal agendas, it may face a backlash in the voting booth in four years. That will be an opportunity wasted. Nepal needs FDI. What is also needed is a leadership that recognises this and uses its supermajority status to create a conducive environment.
Pandey specialises in portfolio investment and economic issues.