The years of 2005-2009 saw the largest amount of Foreign Direct Investment (FDI) routed into Pakistan in the last decade. However, a much talked about aspect is the notion that this ‘investment’ did not carry desired productive results. This stems from the eventual target industries where FDI made its way towards hardly into sectors where future economic benefit is thought to be derived from. Future economic benefit is a vague concept in itself; open to interpretation and dependent upon which angle it is perceived from. Proponents of allocative efficiency in a laissez-faire environment would treat all FDI the same, not differentiating between productive and unproductive inflows. There would not be a distinction between where investment is made, as gain is measured from the perspective of society as a whole. However, a very important drawback of this theory lies in its ignorance of inequality in terms of wealth accumulation that is created within the society – a shortcoming of the capitalist regime as a whole. In all honesty, I am not an advocate, as allocative efficiency; no matter how principally sound it may be is, but a theoretical concept which does not hold in entirety in practical life.
Foreign Direct Investment – which ever form it was in – is now a fleeting memory of the economically boom years gone by. Since the investment friendly period of 2005-2009, FDI has seen a consistent drop each year that has passed. FDI was at a peak during FY08 at USD 5,401mln, falling all the way down to USD 1,574mln in FY11. SBP released figures show that the start of the current year has been worse, with FDI dropping 58 per cent YoY for the 4MFY12. This should not come as a surprise to us, given that the country has been plagued by the nuisance of terrorism, is still actively playing a part in a dead end ‘war’, and has been economically weakened, owing to a myriad of both internal and external factors. But a fact remains, that whatever inflows that occurred during the aforementioned ‘boom period’, little made their way into sectors deemed critical for aiding development in the country and hence, being a sustainable source of income generation for society at large.
The top three sectors which saw the bulk of inflows in that period were Telecom (36 per cent), Financial Businesses (21 per cent), and Oil and Gas (13 per cent). Investment in the telecom sector saw the advent of a mobile purchase cacophony, where it is now very cheap to own and use a mobile connection. Yes, this may have made communicating considerably cheaper and may have provided employment opportunities, but apart from this, has led the nation into a consumer trap which is least bit productive. I fail to see how constructive activity, in turn, economic growth, can be achieved when everyone is busy texting or calling left right and center. Now, investment in this sector has dried up, in fact, is on the decline, owing to profit repatriation which is an inevitable consequence of money being put into short term projects without a long term vision. The investments made in Pakistan over the past few years carry their own benefit, but are these greater than if investment would have been made in sectors which today are victims of severe deficiencies such as power, infrastructure, and education?
Key here is the distinction between near term gains and long term benefits. An investment in the financial context is defined as money being put into something with the expectation of gain within a period of time. It is natural and reasonable that profit repatriation would be the prime goal of a foreign investor. But from a local perspective, this should be in return for long-term boon that the country expects to take advantage from. Given Pakistan’s current status as a developing state, these should be in areas which would assist in the development of other local industries, provide ample employment opportunity, and self-generate other streams of income. In simpler words, help build a sustainable comparative advantage which can be utilised in future on a recurring basis. Taking the example of India, FDI inflow rose by 50 per cent to USD 20,760mln during FY11 alone. But the key aspect of this is the eventual destination where investment has landed; sectors such as services, housing, real estate, construction, and power. These are mostly infrastructural developments where other industries are going to be taking much benefit from in the coming years.
The idea is to invest in areas which offer a comparative advantage; or at the very least invest in areas which provide required support to the key sectors. India’s advantage may not lie in the power sector, or services sector, but surely these are protecting and nurturing the real key industries from where India derives its might. As an optimist and very much a patriot, I do believe in the potential our country harbours and see brighter prospects in future. But to learn from the past and our next door neighbour, it might be wise to think about incentivising the ‘right’ kind of investment in the aim to achieve long-term prosperity as a nation in whole.
The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)
