Shaky hopes

A new report looks to the private sector for global development

The Arch, the Harbourside Building, and the International Commerce Center in Hong Kong, China
Towering ambition ( See-ming Lee | Flickr | CC BY 2.0)

Of $1.45 trillion in Foreign Direct Investment inflows in 2013, more than two thirds were directed at 42 developed and 10 developing countries. According to the 2014 World Investment Report released last week by UN trade and development body UNCTAD, $566 billion FDI went into developed economies, by which the organization means 30 of 34 OECD countries plus 11 non-OECD European countries, and Bermuda.

While $778 billion of FDI inflows targeted developing economies, $529 billion or 68 percent of that amount flowed into only ten countries. China, when viewing the mainland and Hong Kong together, swallowed $201 billion, or almost 14 percent of the global FDI total. Another $108 billion targeted ‘transition’ economies — those between developing and developed.

In terms of FDI originations, or outflows, the global total reached $1.41 trillion in 2013, with the lion’s share of 61 percent emanating from developed economies. Both FDI streams showed single-digit percentage gains when compared with 2012 but remained about 15 percent below 2011 figures.

All four original BRICs were among the top twenty countries for FDI inflows in the 2014 report, but India trails the other three. With inflows of $28 billion in 2013, India was separated by a substantial margin — $36 billion — from Brazil and by almost $100 billion from the People’s Republic of China (without Hong Kong). In terms of FDI outflows, only China and Russia were among the top 20.

The most needy and vulnerable economies on the other hand attracted $57 billion or 3.9 percent of global FDI. This group comprised well over 80 nations which are classified as either least developed (LDCs) or as landlocked developing or small island developing countries (with overlaps between the 49 LDCs and the two other groups).

Lebanon, for those who are concerned, is part of the developing countries bracket and not specifically addressed in the WIR beyond being identified as a country that was among five West Asian countries that drew in between one and five billion dollars in FDI in 2013 and among another set of five West Asian countries that produced less than $1 billion each in FDI outflows.  Other than that, the WIR dedicated exactly one sentence to the country of the cedars, saying, “FDI to Lebanon is estimated to have fallen by 23 percent, with most of the flows still focused on the real estate market, which registered a significant decrease in investments from the Gulf Cooperation Council (GCC) countries.”

The point most worth noting is perhaps that the estimated drop in Lebanese FDI inflows is not necessarily as incisive economically as its size suggests because the FDI targets were in real estate, not in industry or other productive sectors. And for Lebanon in particular, FDI — or its absence — in the current economic cycle may have fewer implications than for most other countries when compared to other forms of financial interactions such as remittances and foreign deposits in the banking sector.

The bigger worries

The question remains how the current state of global investments offers an “encouraging trend” in the view of the WIR’s authors, specifically one that meshes with the lead idea attached to the report, which relates to the private sector’s role in achieving global development goals.

In a sentence signed by UN Secretary General Ban Ki-Moon, “This year’s World Investment Report offers a global action plan for galvanizing the role of businesses in achieving future sustainable development goals, and enhancing the private sector’s positive economic, social and environmental impacts.”

As the Millennium Development Goals (MDGs) are approaching the end of their shelf lives in 2015, the UN is reissuing these goals as Sustainable Development Goals, or SDGs. The WIR cites the SDGs as pertaining to “poverty reduction, food security, human health and education, climate change mitigation, and a range of other objectives across the economic, social and environmental pillars.” The timeframe for tackling these familiar objectives is the period from 2015 to 2030.

According to WIR estimates, implementation of SDGs in developing countries will require somewhere between $3.3 trillion and $4.5 trillion annually, a somewhat broad range in both absolute and percentage terms. The estimated need covers five vast areas: basic infrastructure, food security, health, education and climate change.

Although MDGs have been pushed since their adoption by the global community in 2000, the world faces a $2.5 trillion annual funding gap for implementing the relevant investments in developing economies under the SDG moniker, the WIR says. Private sector involvement will propel infrastructure and other investable areas with SDG relevancy in some emerging and developing markets. On the other hand, the countries where FDI inflows are lowest, investment returns uncertain and private sector risks are often incalculable — namely the LDCs and other highly vulnerable countries — dependency on foreign aid will remain overpowering.

Private sector investments could play a positive role in propelling SDGs toward fulfillment in the most vulnerable and needy countries, the WIR suggests: “A target for the promotion of private sector investment in SDGs in LDCs could be to double the current growth rate of such investment.” Even then, however, it estimates that public funding and foreign aid would have to treble by 2030 from current levels to achieve SDGs in LDCs.

The language of development reports is generally incapable of conveying the realities of the affected nations and their citizens — who are basically the world’s poorest 15 percent with annual per capita gross national incomes of less than $1,000 — when their existentially necessary developments entail funding needs for that exceed their economic capabilities on practically every front.

Given the spotty track record of the past 15 years, where advancements to MDGs were strong in some regards and disenchanting in other aspects, it bears to note that the WIR sees the importance of private sector investments for tackling the SDGs. The report in this respect seems not to fully trust in its own headline optimism, however, and says, “Without higher levels of private sector investment, the financing requirements associated with the prospective SDGs in LDCs may be unrealistic.”

That does sound like a huge understatement.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.