Since the onset of the debt problem in the early eighties, developing countries have been in the grip of a deep and protracted economic crisis. For them the decade of the eighties has been aptly described as a lost decade as their standard of living suffered stagnation or even deterioration. Most of them have incurred unsustainable external deficits and experienced high rates of inflation, crushing debt-service burdens, and sluggish growth in gross domestic product (GDP). Part of their woes is undoubtedly ascribable to an unfavorable external environment, notably, mediocre growth in the industrial countries, a rising tide of protectionism, stagnation of financial flows, and worsening terms of trade. While these factors are important, they fail to offer a satisfactory explanation. A good part of the blame lies with domestic factors. In a large number of cases poor economic management is responsible for widespread macroeconomic and structural distortions and for failure to implement timely and effective programs of adjustment in the face of deteriorating external conditions.
This paper looks at investment in developing countries, its relationship to growth and development, and the macroeconomic conditions and policies through which investment and growth can flourish. It draws heavily on recent empirical studies by the International Monetary Fund in this area and brings out some of the issues surrounding the efforts by the Fund to support policies conducive to higher savings, investment, and growth in the context of adjustment programs.
The efficiency of public investment is quite a relevant and timely subject in Arab countries, because the public sector invests heavily, and because all resources for development are becoming increasingly scarce. In these countries, public investment is high both as a proportion of total investment and as a percentage of gross domestic product (GDP). This means that in the long run the growth of output, the standard of living, and welfare crucially depend on the efficiency of public investment. As Arab countries have adjusted to the reduced inflows of foreign resources that started in the early 1980s, the tendency has been to reduce public investment, meaning that maintaining any semblance of past growth rates depends on increasing the efficiency of the investment that remains.
This paper will discuss the policies that require foreign investors to enter into joint ventures with local firms, and the institutions used by host countries to promote, screen, and service foreign direct investment. These are related topics because the kinds of institutions that host countries need to put in place to deal with foreign investors will depend on the policies they are trying to implement. If the host country does not intend to screen foreign investors, or require them to enter into joint ventures with local investors, there may be no need to establish a procedure or an institution to deal with foreign investment. Brazil, for example, has had a very open attitude toward foreign direct investment, and therefore has not established a specific institution to regulate an investment approval process.
The objective of this study is to highlight the salient features of the regional scheme of investment guarantees managed by the Inter-Arab Investment Guarantee Corporation (IAIGC)—an institutional offshoot of joint Arab economic effort—and to review the experience acquired by the Corporation since it commenced operations in 1975. Before proceeding with this, however, we should consider the concept of investment guarantees against non-commercial risks and briefly discuss international guarantee schemes, which provide a useful point of entry into the subject of inter-Arab investment guarantees.
The promotion of private investment is being widely discussed at present by officials and intellectuals in most countries, developed and developing, irrespective of their political ideologies or economic philosophies. Developing countries in particular have come to realize that prospects for increased external grants and loans are dim and that funding investment through domestic borrowing, with its adverse effects on the rate of inflation, cannot be sustained indefinitely. Furthermore, governments have learned from experience that expansion and tight control of the public sector require the adoption of policies to protect that sector from competition and funds to meet the mounting budget deficits caused by its losses and subsidization. Such protection further impairs the public sector’s ability to compete internationally and reduces the prospects for increased exports. The call for the promotion of private investment has emerged as a practical response to these growing concerns.
The rate of capital accumulation is the key variable that determines the rate of growth of an economy in the medium term, while the allocation of investment resources across sectors and activities is critical in determining the pace and sustainability of long-term growth and equilibrium. After experiencing a decade of unprecedented growth in investment and gross domestic product (GDP) (9 percent per annum) from the mid-1970s to the mid-1980s, Egypt is again suffering from all of the symptoms of structural imbalance and stagnation that colored the interwar period, 1967–73. Investment strategy, together with the package of macroeconomic policies adopted since the Infitah of the 1970s, is largely responsible for the suboptimal pattern of investment that has in turn accentuated the underlying problems of disequilibrium in the labor market, the foreign exchange market, and the government budget.
Development is in essence a series of changes in the socioeconomic structure, namely, in areas of manufacturing, agriculture, infrastructure, and services, such as education and health. The investment process itself generates these sectors’ output, whether direct (industry and agriculture) or indirect (infrastructure and services).
The emphasis on investment as a basic and strategic component of a country’s economic and social development should perhaps not be overdone. It is not, of course, the only component, for there are other strategic factors, such as entrepreneurial ability, the required skills and know-how, the efficient utilization of resources, political and social stability, and other elements that complement the factor of capital. But investment remains one of the most important determinants of a country’s economic growth. An examination of Iraq’s investment policies at this point is thus quite timely, particularly in view of the special conditions the country is currently experiencing after its emergence from a war that proved long, costly, and far-reaching in its economic and social ramifications.
International Monetary Fund. External Relations Dept.
Amid blaring headlines on Iraq, war, and reconstruction, several African finance ministers and a central bank governor held a press briefing on April 11 in Washington to remind the world that their continent’s needs required urgent and continued attention. Charles Konan Banny (Governor of the Central Bank of West African States), Benjamin Radavidson (Madagascar), Timothy T. Thahane (Lesotho), Joseph B. Dauda (Sierra Leone), and Gerald M. Ssendaula (Uganda) reported on progress with the New Partnership for Africa’s Development (NEPAD), highlighted pressing issues, among them market access, meeting the UN’s Millennium Development Goals, and debt relief. They appealed to donors to attend to Afghani and Iraqi needs but not withdraw support for Africa’s determined effort to reduce poverty.