HAPPY SIPHAMBE (PhD)VISITING PROFESSOR- UNIVERSITY OF

BOTSWANA

Investment Definition- process of postponing consumption

with the aim of accumulating capital- building or expanding factories, , building more infrastructure, houses, schools, etc

Why? From growth models we all know that capital

accumulation is fundamental- HD growth model, Solow model, and later New growth or endogenous growth models.

Even from our accounting identity, Y=c+ I + x-m

Who does the investment- Government and private firms

What influences investment decisions? How can increase I using policy? Why have FDI? How can FDI be encouraged or regulated? What are the effects of FDI on economic

growth and development?

Public and private I Why public I? Provide public good- not profitable to the private

business. Eg road, hospitals, schools, provision of justice and law and order- positive externality

More important for LDCs where markets are not well developed and property rights not easily enforceable.

Private sector may also not have enough money to undertake such activities even if they wished because it requires large start up capital

Private investment Most countries see that as the main means of growing

the economy Reason is ideological as well as economic- private sector

is more efficient and responsive because it is driven by the profit motive.

Some argue- how can you have the private sector play a crucial role when it is just a few individuals- become monopolists- charge higher prices- hurt consumers.

Some countries resorted to created parastatals and are now trying to privatise them- debate about appropriate size of government goes on

Does Govt crowd out or crowd in private sector? What should be the appropriate size of Government?

Empirically it has been found that there is a strong relationship between economic growth and investment- direction of causality not obvious because it does run both ways

Good growth makes investment more profitable, while higher investment leads to more growth

Important for governments to encourage both high levels of I and also make I productive and profitable- make sure factor prices are appropriate and that there are no distortions- eg overvalued e, high subsidies, high real wages- distortions may lower productivity of I and ultimately lower growth

Whether govt or private firm, a tested method of deciding what project to invest in is using cost benefit analysis

Why? Opportunity cost- benefits from alternative uses. Example new school vs road to rural area.

To reflect full economic opportunity costs as opposed to market prices, Govt uses shadow prices- attempt to get to the true costs- useful for LDCs where some commodities may not have a market value

Process of CB analysis involves estimating the present value- discounting and comparing with costs- Net present value

IRR, and then doing a simulation exercise to deal with the risk- best case and worse case scenarios.

Compare across projects For Govt they may include broader social goals

such as income distribution, poverty alleviation, or environmental degradation- use welfare weights to adjust shadow prices- eg place greater weights on poverty reduction

But welfare weights are usually arbitrary making the whole process less scientific

While firms do use CB analysis, not all Govts use the technique to decide what projects to pursue-this is the problem that has lead to resource curse- countries with abundant resources being made worse by those resources- Dutch disease, etc.

This is because countries chose to spend on projects some of which were not viable- created white elephants. Eg Zambia during copper boom

Botswana’s case- use of six years plans, CB analysis and sticking to plans, no projects implemented unless they have been subjected to rigorous CB analysis and are in the current plan, use of conservative planning scenario- worst case- treat diamonds as temporary revenue rather than being permanent

Govt can encourage private I thru several means Making sure the country and economy are stable in

terms of macroeconomic fundamentals- low inflation, stable e, democracy

Provide infrastructure- electricity, water, roads that are affordable- reduce costs of doing business

Trade policies-protection or openness Good quality of institutions and governance, eg

property rights protection, enforcement of contracts Generally want low costs of doing business- starting

business should not take too long, too much govt bureacracy- De Soto

What is FDI Long term I in which a non resident entity

exerts significant management control over an enterprise in the host country

Could also be portfolio equity Most are MNCs or TNCs Why encourage FDI? Generally because you do not have enough

local entrepreneurs to undertake I and create employment; source of capital

Generate employment- depends on type- some are capital intensive

Help increase specialisation in production- stronger links with global mkts- develop comparative advantage

Helps access world markets Transfer of technology, skills and ideas-

spillover effects of r&d- learning by doing and training of workers and managers

MNCs may limit technological transfer deliberately May create few jobs and just plunder resources, eg

in oil, mining, etc MNCs may impose harsh working conditions and

low pay? MNCs may create air and water pollution or cause

environmental damage If protected FDI activities may lead to net economic

losses- may use outdated technology and survive because of Govt subsidy- cost to taxpayers and customers in terms of paying high prices

Loss of control over local business- dependence on foreign country

May also repatriate their profits

Empirical evidence is mixed about effects of FDI on growth

It depends on the type of FDI In some countries like Botswana it has led

to growth In some countries it has led to wars-

resource curse Those that built backward and forward

linkages and were competitive have led to positive growth

Improve the general I environment-improve infrastructure- reduce costs and make investment profitable

Introduce policies and incentives-information provision(one stop shops) epzs, provide incentives such as subsidies, tax cuts or breaks, income tax incentives- may lead to inefficiencies

Tax holidays beneficial for export oriented labour intensive industries that have a wider choice of options- not useful for FDI attracted to natural resources

Local firms may also want those incentives

Impose restrictions and requirements on MNCs- eg joint ventures, domestic content requirement, production requirements

If excessive may lead to discouragement of FDI Best strategy is to get the basics right- get the

macro right, reduce bureaucracy, adhere to the rules of law, etc

But despite getting all these fundamentals right some countries like Botswana have not been able to attract FDI except for the diamond and finance

Why is that the case?- microeconomic issues

While FDI share for LDCs has been rising generally, for Africa it has been small, estimated at 3%

On regional basis, North Africa attracted the highest inflows The composition of FDI inflows was tilted towards natural resources,

particularly petroleum products, whose prices were rising Top 5 recipients of FDI were Sudan, Equatorial Guinea, Angola,

Nigeria, and Egypt Apart from attraction to natural resources the top recipients of FDI

also embarked on a number of policy changes that were making their environment FDI friendlier

Among these include simplification of FDI regulations by establishing more transparent FDI regimes, reduction of levels of tax and royalty payments, adoption of anti-trust laws, privatization, etc

Complementing these were also conclusion of bilateral and multilateral treaties on trade, taxes, movement of business people

Attracting FDI into manufacturing in Africa is becoming difficult due to competition especially from Asia

Issues such as good physical infrastructure and appropriate human skill levels are becoming very important in attracting FDI projects

Africa also faces high cost relative to its levels of income and productivity

Evidence at firm level also confirms the general pattern of low productivity and market segmentation in Africa

There are of course issues of high levels of corruption and crime, political instability, and lack of democracy in general

Several factors have been identified by various researchers. Some of the issues are:

Small population- can’t get economies of scale when you sell in Botswana.

Cost of utilities are very high. High bureaucratic procedures in our processes It takes too long to obtain residence and work permits Costs of transport are very high- Botswana is landlocked Costs of obtaining finance is high- high interest rates. No

more incentives. Other countries in the region are more attractive

because of their major reforms that include privatization Competition from independent SA

Country Starting a Business Enforcing a contract

Procedures Days Procedures Days

Botswana 11 108 26 154

South Africa 9 38 26 277Namibia

10 85 31 270

Lesotho 9 92 49 285

Zambia 6 35 16 274

Uganda 17 36 15 209

Zimbabwe 10 96 33 350

Bangladesh 7 30 15 270

END