I had a question on a grad school (Econ M.A. program) discussion board:
What role does foreign investment in a developing nation play in such a nation’s economic growth?
My answer is below. Any comments or ideas to continue to develop the hypothetical scenario would be appreciated.
What role does foreign investment in a developing nation play in such a nation’s economic growth?
The role of foreign investment is a very interesting point to consider, particularly as the World continues to move to a truly global economy. Foreign investment in a developing nation can have varying intentions and results depending on the delivery. The distinction must be made between private foreign investment and interventionist foreign investment by governments.
Private or, free-market foreign investment characterized by free trade with no government intervention can be a mutually beneficial enterprise. Firms invest in foreign markets and in return receive productive resources, goods, and services. Unhampered by government and free from violence and coercion, this sort of interaction between nations can lead to peace and prosperity for all involved. Economic growth is the direct result of voluntary exchange in a free and uninhibited economy, and is widely spread throughout the developing nation. This would be in line with a laissez-faire capitalist approach that operates free from government patronage, preference, or intervention.
The other form of foreign investment is not always as happy a story. This is when governments are doing the investing. Whenever governments “invest” in anything, it usually involves tax dollars that are taken from citizens under the threat of coercion. Government “investment” overseas can take various forms. The first form is foreign aid. This is the use of tax dollars intended to aid and assist developing nations stimulate growth, alleviate poverty, and build infrastructure for example. The aid is usually diverted away from the intended recipients, and winds up in the hands of the foreign government to be spent as they see fit.
There is another more nefarious and damaging form of foreign “investment” comes in the form of loans cloaked as “free-market” development initiatives. These are not free-market by any stretch of the imagination, and are really asset and resource grabs aimed at making a foreign nation subservient to a greater power. Here is a hypothetical example:
Hegemonia wants the oil, sugar cane, lumber, and minerals of Developingia, a smaller, developing nation. Hegemonia promises Developingia that it will encourage investment in order for it to modernize and continue to develop. Developingia is skeptical at first, but becomes open to the idea after Hegemonia begins to conduct naval exercies in its waters. Hegemonia will also send troops into Developingia to win hearts and minds of the citizenry, for whom they provide food, clothing, shelter, etc. They may even undertake community projects such as building schools, religious buildings, or assist with disaster relief. This is aimed at winning over the population to accept foreign loans, and warm up to the idea that Hegemonia is an ally. Hegemonian corporations, seeking to diversify away Hegemonia and its excessive taxes, anti-competitive labor laws, and unions, are also welcomed in to build plants and factories in Developingia.
Enter Banco Grande. Banco Grande gives millions in political contributions to both major parties of the ruling class of Hegemonia. It is also the key member bank of the Hegemonian Central Bank. Banco Grande enters a “competition” to make loans to Developingia so they can improve their ports, electric grid, build roads and bridges, and any other project that Hegemonia believes it needs. Banco Grande “wins” the rigged “competition” and makes a loan in the billions to Developingia, which their political class gladly accepts. But there are a few stipulations in the loan. Developingia must use the loan exclusively for projects Banco Grande says, as “suggested” by Hegemonia. Developingia must also employ contract firms selected by Banco Grande, also suggested by Hegemonia. Flotech, Genronics, and BasicElectrics are selected. All of the loaned money goes right from Developingia into the hands of these companies. Add to it, Developingia is still on the bag to repay Banco Grande all of the loaned money plus interest.
So, how does Developingia repay the money? Simple: Taxes are slapped on the Developingians, who are subsequently enslaved to debts they can never repay. As they fail to pay taxes, make rents, etc, they are evicted and marginalized, ultimately impoverished. These people then become prey to those who will also enslave them, this time in the form of ideology, complete with promises of food, clothing, and shelter, and a paradise in this world or the next. Marxists and religious terrorist groups are able to cash in on recruits who suffer from this vicious cycle.
All the while, it is all gravy for Hegemonia and its patrons. Hegemonia gets its oil, sugar cane, lumber, and minerals. The corporate patrons cash in, and the ruling class of Developingia does as well. Hegemonia and the Developingian ruling class become the targets of hatred and terrorism by the marginalized people who directly suffer from the interventions. All of this could have been prevented with a free and unhampered market with no government intervention.