FEATURE (Zimbabwe Investor) – Recently, there have been amplified calls by Zimbabwe government authorities in appealing for Foreign Direct Investment (FDI). The importance of foreign investment cannot be over-emphasised, especially for an economy at a precipice like Zimbabwe.
Mozambique during the past year has registered a 30 percent increase in its FDI flows to US$7.1 billion. It is no coincidence that the International Monetary Fund (IMF) forecasts its economy to grow by as much as 8 percent this year alone, one of the highest among the ‘frontier’ economies. Mozambique’s case serves as an example of the crucial role that capital accumulation can play in fuelling economic growth.
The Zimbabwean government`s economic blueprint (ZIMASSET), a set of policies meant to induce economic recovery, requires at least US$10 billion for its successful implementation. In the policy document, the government emphasises mobilisation of funding for the programme from within through leveraging mineral resources. Present economic realities however show that the local economy is in no state to provide capital of this stature. Zimbabwe largely remains a consumptive economy, with little income set aside for investment spending thereby undermining the country`s ability to raise capital domestically. FDI is thus essential to the turnaround of the country`s economy.
In today`s world, capital flows have no borders and are very fluid in nature. Essentially, capital follows the path of least resistance, and gravitates towards areas with the best risk-return profiles. For instance, a Bank of America report earlier this year indicated that investors withdrew over US$6.4 billion in one week from emerging market stock funds following economic vulnerabilities in the ‘fragile five’ emerging market economies, reinvesting their money elsewhere. Evidently, investors foreign or otherwise invest their money in enterprises that can yield positive returns for them at acceptable risk.
This principle lies at the crux of free market capitalism, widely lauded as the best economic system that has ever existed. Even where this economic system is varied; as in the case of China`s state-led capitalist system, investors look at the potential risks and rewards in determining where to invest.
It therefore becomes imperative that Zimbabwe eliminates obstacles to the free flow of capital into the economy. Guaranteeing of property rights and assurances of implementing existing legislation in keeping with economic and business law are both elemental preconditions for attracting FDI. Ensuring this is in place means that the risk attached to that particular country is greatly reduced. To put it into context, if foreign investors are not convinced that Zimbabwe will be able to protect property rights constitutionally, these investors can always find recourse in expropriation insurance provided by the Multilateral Investment Guarantee Agency (MIGA) a division of the World Bank. Yet this hinges upon Zimbabwe`s successful re-engagements with these international financial institutions, such that they are in a position to guarantee such with international investors.
The International Finance Corporation and World Bank`s ‘Ease of Doing Business Report ‘plays an important function in pointing out foreign investors to economies with business friendly regulations. Among other things, this report measures the basic steps and amount of time it takes for a business to be registered, access to credit information in an economy, and the amount of time a business takes to file a case in a court of law and get a court decision to enforce a contract. Frankly, these are areas that Zimbabwe fares poorly at, and its rank at 170 out of a pool of 189 in the latest report asserts this point.
The obvious implications of these inadequacies are that the country`s environment does not favour private enterprise, and assuming the earlier supposition that capital or investments follows the path of least resistance, Zimbabwe`s access to the much needed foreign investment will be negatively affected. Conversely, Rwanda which ranks at 32 on the same index has a regulatory environment which encourages businesses and the country has been attracting major investments and in 2013, even successfully issued a $400 million Eurobond.
At a broader level, there must be coherence and consistency at the national government planning level to assure potential investors that there will not be any marked gyrations in policy. The harsh realities of the ‘winner takes all’ capitalist system is that rational investment decisions are made to achieve positive returns for the investor. Hence the notion of ‘all weather friends’ is a mirage that is as inconsequential as it is implausible in my mind. Investors will only make rational economic decisions in their pursuit of self-interest, as mainstream economics presupposes.
Interestingly, the amount of the FDI going into Africa`s greenfield projects is ever increasing. Mineral exploration of the country`s economic reserves could lure potential investors to invest into Zimbabwe`s own greenfield projects. This and a lot more can be done to make the country an attractive investment option. Fundamentally, the argument is that unless the structural features of the local economy that inhibit a business friendly economic, political and regulatory atmosphere continue to exist, the country will be deprived of any meaningful FDI.