EFFECTS OF FOREIGN DIRECT INVESTMENT IN THE CONTEXT OF A POSSIBLE WTO
This paper presents a graphical presentation of the increasing flows and accelerating build-up of the stock of foreign direct investment in developing countries, and its likely financial effects in the long term.
It argues that the stock of inward investment, which has reached unprecedented levels, is equivalent to a large foreign debt at a very high interest rate; that it will have a strong negative impact on host countries’ balance of payments over the long term; and that this effect was a major factor underlying the 1997 financial crisis in some South East Asian countries.
The paper concludes by emphasising the importance of selective policies towards FDI as a means of limiting the adverse financial effects, and warns of the danger that a WTO Investment Agreement will take away the policy space developing country governments need to manage FDI flows prudently.
ABOUT THE AUTHOR: DAVID WOODWARD is an independent development economist. He has previously worked as an economic adviser in the British Foreign and Commonwealth Office, as technical assistant to the British Executive Director at the IMF and World Bank, and most recently as development economist in the Strategy Unit of the World Health Organisation. He has also written on a wide range of development issues for non-government organisations, UNDP, UNCTAD and the Institute of Child Health (University of London). He is the author of Debt, Adjustment and Poverty in Developing Countries (London: Pinter Publishers/Save the Children (UK), 1992), and The Next Crisis? Direct and Equity Investment in Developing Countries; and co-editor of Global Public Goods for Health: Health Economic and Public Health Perspectives (Oxford: Oxford University Press, forthcoming).
TWN TRADE & DEVELOPMENT SERIES is a series of papers published by Third World Network on trade and development issues that are of public concern, particularly in the South. The series is aimed at generating discussion and contributing to the advancement of appropriate development policies oriented towards fulfilling human needs, social equity and environmental sustainability.
The Background: Financial Flows to Developing Countries
3. Financial Effects of FDI: The Simplified View
Financial Effects of FDI: A More Complete View
5. FDI and Financial Crises
Figure 9: Contribution of FDI to Pre-Crisis Current Account Deficits
6. Summary and Conclusion