Sunday, August 1, 2010

The FDI issue: Let us take it above politics

Published in The Independent, August 1st., 2010
M. Serajul Islam

The World Investment Report (WIR) , 2010, on the decline in FDI flow to Bangladesh was hardly surprising. The explanation given by the Executive Chairman of the Board of Investment (BoI) was however surprising. The Executive Chairman did not hold the energy crisis, lack of water supply and political unrest for the fall. He thought that bureaucratic tangles to be main reason why in 2009, the country attracted US$ 700 million compared to US $ 1086 million the previous year.

Participants expressed disagreement with the Executive Chairman at the seminar in which the WIR was launched. They considered gas and power crisis and confrontational politics as the major factors for the decline. Energy is the heart of industrial production for which a steady and uninterrupted supply is indispensible. Given the fact that Bangladesh’s poor energy situation is well known and likely to continue for a few more years, it does not need a crystal ball to predict in which direction FDI flow would go.

It is unfortunate that the energy situation in the country has become such a huge problem at a time when Bangladesh seemed poised to overcome the major factor that had held back the expected FDI flow to the country. In the past, political instability had stood in the way of FDI flow. In the last 4 years, political instability that has been epitomized by hartal did not occur and generally the message that such instability is destructive to economic development has sunk in the minds of the politicians. This is the time when Bangladesh should have been poised to draw to the country the same way such FDI has flowed to China and Malaysia, countries whose miraculous economic development has been fuelled in a large way by FDI. It is the time when Bangladesh could have gone to the foreign investors with the natural lures that it has for attracting FDI.

These lures are significant. Bangladesh is a bridge between two regional blocs that together have a population that is 1/4th of the world’s population. SAARC of which Bangladesh is a founding member is also committed to become by 2016 a free trade zone for trade among its member countries. Bangladesh, India, Sri Lanka, Myanmar, Thailand Economic Cooperation (BIMSTEC) is also likewise committed to have a similar free trade agreement among its member countries including Bangladesh. A foreign firm investing in Bangladesh would thus have a huge market eventually. Bangladesh’s own large population that is also a source of cheap labour is added attraction to the foreign investor as is its location at the mouth of the Bay of Bengal. Between the AL and the BNP governments, Bangladesh has also put together an attractive policy to attract the foreign investor.

Yet FDI has never flowed to Bangladesh at the expected level. It is also not going to increase unless the basic problems are tackled. Bangladesh has an image problem for a complex set of reasons; some of which we have ourselves created. During the last BNP regime, we have gone out of way to show to the rest of the world what we are not; a country seething with Islamic fundamentalism. The WIR has shown that even Pakistan where acts of terrorism are a fact of life, more FDI has flown than Bangladesh. In fact, in newspaper analysis after the WIR, a great deal of curiosity was expressed over this fact. It is true that acts of terrorism are widespread in Pakistan but then such acts are on objects of politics and not economics. In Bangladesh, two facts have deterred FDI in past and present. One is hartal which targets politics but ends up destroying the economy. Second, in recent times the disturbances in the RMG sector have also created an image problem for Bangladesh as a country not safe as a FDI destination.

In a country where domestic resource mobilization is weak, FDI holds one of the keys for transforming the country to a middle income group. For this, dealing with issues with political motivation will only hamper the process of bringing FDI. Political stability and steady and uninterrupted supply of energy are the absolute must for FDI increase in Bangladesh. On the issue of political stability, it would be wrong to consider Bangladesh as politically unstable. Since 1991, except for 2 years’ aberration under the emergency, the BNP and the AL have completed three terms uninterrupted and there is no reason to think that the AL won’t govern till end of its term. It has been the hartals in between that have given the perception outside that Bangladesh is politically unstable. While the politicians at home have felt that hartal is a political strategy for fighting undemocratic forces; those whose money we have sought as FDI have considered hartal as the antithesis of FDI. Bangladesh seems to have just come around this issue of hartal not because the politicians have suddenly realized its destructive nature for the economy but because they have correctly assessed that by indulging in hartal, they can only lose favour with the public. The recent raise of salary in the RMG sector is also expected to calm the workers.

It took our politics 2 decades to realize what damage hartal can do. Today, Bangladesh cannot even seriously seek FDI with the energy situation being what it is. Seeking FDI now by highlighting all the pluses we have like location, population, good policy, etc would be like inviting guests with the promise of a sumptuous dinner and then serving them with a few entrées and that too in a room without lights! If Bangladesh is serious on the FDI issue, it has no alternative but to work overtime and ensure s steady and uninterrupted supply of power for the industrial sector as quickly as it can. Till then, it would just be futile to enter into any discussion on the reasons for fall in such flow.

The Prime Minister would soon be going to Japan for an official visit. Despite its current economic woes, Japan is still the best target for Bangladesh to woo FDI. In four years in Japan from 2002-2006 as Ambassador, I was convinced that Bangladesh could be a major target for Japanese FDI. Before my departure from Japan, the chief of Japan External Trade Organization ( JETRO) told me at a farewell lunch that Japanese investors in China were becoming wary about the future of their investments there and were openly talking about a formula called “China plus one”. Under the formula, Chinese investors were seeking out other countries to divert slowly their investments in China where Bangladesh fitted perfectly. I am not sure where that formula now stands but I have no doubt that Japanese investors would be positive still about Bangladesh if their concerns on political stability and uninterrupted energy supply are met.

To go about wooing the Japanese investors, the Prime Minister would be well advised to take a grip of reality; that lack of energy supply would be the biggest question in the minds of the Japanese investors. She must have an explanation for that; perhaps give them a clear road map on energy development in the country and couldeven seek Japanese investments for energy development. She could brief the Japanese that the days of hartals are a matter of the past and then place her case for the Japanese investors. If she does so, Japanese FDI would not start to flow immediately but at least the Prime Minister would succeed in ensuring that eventually it would and when it does, it would flow very encouragingly.

Targeting FDI is not an easy matter. It is most definitely not a matter of slogan or propaganda or politics. The chief of Toyota told me during an exclusive meeting I had with him as Ambassador in Japan of a visit he had undertaken to Russia where Putin as President treated him as his personal guest because he was interested for Toyota to build a plant in Russia. The point worth noting here is that a plant of Toyota is a great message for foreign investors that the country is an excellent destination for FDI. During her Japan trip, the Prime Minister could perhaps keep Putin in her mind.

There was one important point in what the Executive Director had said in his speech on inauguration of the WIR, the issue of the weak bureaucracy. It is absolutely true that with such incompetence in the bureaucracy, foreign investors would think twice before coming to Bangladesh. Here is a suggestion for the BoI and the government. There is little chance in the short term for the country’s bureaucracy to raise its level or come out of its current tryst with corruption. The BoI which theoretically works directly under the Prime Minister should be allowed to recruit its own staff and pay them as salaries and perks that are paid today in the private sector and raise their level of competence. In USA, where there is a cap on government recruitment, contractors are appointed by the government who then recruit staff for the government departments and pay them. May be we could try this as an experiment in the Board of Investment for the simple reason that its success could bring the FDI at a level of flow that could sooner rather than later make Bangladesh a middle income country.

The writer is a former Ambassador to Japan and Egypt

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