Zimbabwe`s Finance Minister Patrick Chinamasa |
Recently, there have been amplified calls by government authorities in appealing for Foreign Direct Investment. The importance of foreign investment cannot be over-emphasised, especially for an economy at a precipice like ours. In Mozambique for instance, during the past year, the country registered a 30 percent increase in its FDI flows to $7, 1 billion. It is no coincidence that the International Monetary Fund forecasts its economy to grow by as much as 8 percent this year alone, making it one of the leading ‘frontier market’ economies. What is clear from this example is the crucial role that capital accumulation can play in fuelling economic growth.
The Zimbabwean government`s economic blueprint (ZimAsset)
which is a set of policies meant to induce economic recovery requires at least
US$27 billion for its successful implementation. In the policy document, the
government emphasises on mobilising funding for the programme from within
through leveraging mineral resources. Present economic realities however show
that the local economy is 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
$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 in the quest for better returns. Evidently, investors
foreign or otherwise invest their money in enterprises that can yield positive
returns for them.
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.
Given all this, it is necessary 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. When International Best Practice with regards, to basic international
economic and business law is followed, then 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 projects 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 doing business report
asserts this point. The obvious implications being that the country`s
regulatory 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.
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