The Sunday Mail
Persistence Gwanyanya
| EMPIRICAL evidence proves that there is a direct correlation between foreign direct investment and economic growth.Tight local financial market conditions and high levels of debt make it imperative for Zimbabwe to aggressively pursue FDI. |
The low level of domestic savings has made the country heavily dependent on debt and foreign aid. But high levels of debt, at more than 80 percent of GDP, make contraction of more debt unsustainable.
Relying on foreign aid is also no longer an option. There is need to prescribe and prioritise policies that boost FDI inflows.
Performance
Reserve Bank of Zimbabwe statistics indicate that since 2009, the country has attracted slightly more than US$2,5 billion in FDI, which is relatively lower than investments in countries such as South Africa and Mozambique.
At US$545 million, Zimbabwe’s FDI for 2014 was dwarfed by the US$5,7 billion for South Africa, US$4,9 billion for Mozambique and US$2,4 billion for Zambia.
The country’s FDI remains depressed despite being estimated to have grown to US$591 million in 2015 and projected increase to US$614 million in 2017. Estimates suggest that the country requires more than US$20 billion in FDI to sustainably grow the economy.
A business friendly environment tends to attract more FDI.
Factors constraining the flow of FDI into Zimbabwe can be summarised into the three “I’s”: Institutions, Infrastructure and Industry policy.
Institutions
Like most African countries, institutions of economic governance in Zimbabwe are still relatively underdeveloped.
Zimbabwe was ranked 155 out of 189 countries by the World Bank in its Ease of Doing Business report of 2015. A number of institutional factors were identified as weighing down the country’s ease of doing business.
These include the ease of starting a business, cross-border trade, dealing with construction permits, registering property, protection of minority investors, enforcement of contracts and resolving of solvency among others.
Bureaucratcy and regulatory challenges create room for corruption and discourage potential investors from setting up businesses in Zimbabwe.
Corruption, which has reached endemic levels in both the private and public sectors, is seen as a major deterrent to FDI flows into Zimbabwe.
Scandals at NetOne, Zesa, CMED and Zimra are just but some of the highlights of how the scourge is affecting the country.
Closely related to corruption is poor corporate governance.
The banking sector debacle of 2003-4 and subsequent crises which threatened the collapse of the whole financial sector demonstrate the devastating effects of corporate governance deficiencies.
In some cases potential investment deals are scuttled by the demand for kickbacks or “protection fees” from prospective investors. This is why a number of such proposed deals are stillborn.
There is a social and economic cost attached to corruption.
This is why Nigeria was regarded as a high-risk country by foreign investors, the concomitant effect of which was to discourage FDI.
And this is why China has imposed tough rules to deal with corruption.
Zimbabwe should strengthen its institutions to deal with corruption and corporate governance deficiencies. There is need for tough penalties against corruption. In addition, adherence to good corporate governance should be strictly enforced.
For a nation with such celebrated levels of literacy, it is a shame that Zimbabwe has been slow to exorcise the demon of corruption.
There does seem to be renewed commitment to improving the country’s ease of doing business as shown by the move to make the President’s Office the lead agent in the reforms.
However, there is much ground to cover.
Zimbabwe’s regulatory framework is key to its ability to attract FDI.
Whilst the spirit of empowerment is noble, there is need to ensure that the law is applied in a manner that does not scare aware investors.
Government should be flexible in its application of the law. There is also need for cohesion and consistency in applying the empowerment act; and the sanctity of Bilateral Investment Protection Agreements should be non-negotiable.
Infrastructure
The state of a country’s infrastructure largely dictates its competitiveness on many levels and hence its ability to attract FDI.
Infrastructure, which can be categorised as physical or virtual, is considered the fulcrum supporting productive efficiency.
Physical infrastructure relates to structures required for the economy to function properly, notably: transport networks, electricity and water systems.
Virtual infrastructure is software-based information technology infrastructure that supports economic activities.
Countries with a sound infrastructure base tend to attract more FDI than those without.
Kenya, which emerged as a technological and financial hub for East and Central Africa, performs very well in terms of FDI. The country has also emerged as a leader in the region’s technological revolution.
This progress is supported by establishment of IBM’s first African research lab in Nairobi, following the likes of Google, Microsoft and Intel, which have setup their regional headquarters in Kenya’s capital.
Being a technological leader of Africa, Kenya commands a top ranking in global competitiveness, which enables it to attract FDI.
This is not rocket science at all. And it should surprise no one that a good number of Kenya’s tech leaders originate from Zimbabwe.
It is estimated that Zimbabwe has an infrastructure deficit of between US$14 billion and US$20 billion. Our railway system is appalling, whilst the local road network is still in an unenviable shape.
Power shortages do not augur well for the country’s stated objective of adding value to raw materials.
Given the sheer amount of resources required to close the infrastructure gap – especially at a time when Treasury cannot possibly be expected to invest 20 percent of a US$4 billion budget to capital expenditure – FDI inflows can give a helping hand.
The Plumtree-Mutare Highway dualisation project, a joint venture between Government and Group Five of South Africa; and the Beitbridge-Bulawayo Railway project, a build-operate-transfer arrangement with Beitbridge Bulawayo Railway (Private) Limited, are examples of smart partnerships.
Happily, the Bakota power project, a joint venture between Sino China and Government, seems to be progressing well.
Government must consider more of such projects in the future.
Improving the country’s competitiveness is an important undertaking promoting industrialisation, attracting more FDI and tapping into global value chains.
We also need to emphasise transparency, particularly on pricing structures for infrastructure investments. Inflating project costs for infrastructure investments often leaves room for corruption.
Industry Policy
According to United Nations Economic Commission for Africa, establishing special economic, trade and export processing zones – including a national production network or industrial clusters to include more SMEs/SMIs and promote increased linkages to other areas of the economy – is an important step in attracting FDI and technological and skills transfers.
While the idea of establishing SEZs has been on the cards for a long time, little progress has been registered.
Economic clusters will solve Zimbabwe’s competitiveness challenges.
The concentration of independent and informally linked firms in an economic cluster offers the benefits of economies of scale and scope, making these firms highly competitive in their particular fields.
Silicon Valley, South West Cape, Italian leather and Cairns clusters in computers, wine, leather and tourism offer good examples of such initiatives.
The country should consider developing a diamond cluster in Mutare and a tobacco cluster in Mashonaland as a way of getting more benefits from the respective commodities.
The benefits offered by clusters make them very attractive for FDI.
FDI is more than a missing link to the country’s growth matrix. It could very well be the sole factor that has not been accorded its due place by policymakers.
There is need to focus on the identified “Is” to flag the country’s attractiveness as an investment destination.
Every country in the world still works hard to attract investment. International media are inundated by pay-off lines such as “Invest in Macedonia” and “Make in China”.
Persistence Gwanyanya is an economist, banker and member of the Zimbabwe Economics Society who writes in his personal capacity. Feedback: [email protected] and WhatsApp +263773030691
