The Era Of FDI-Driven Growth Is Over

Private investment can no longer be relied upon to drive the world economy. This reality is gradually being understood

- Bandi Ram Prasad

Free flow of foreign investment (direct and portfolio) has been a major plank of globalisation and liberalisation. FDI is a key economic constituent, accounting for 40 per cent of incoming resources and 10 per cent of capital formation in developing countries — and can go up to 50 per cent in some economies. Recent trends, however, show that not all is well on the FDI front. As per UNCTAD, global FDI inflows reached a peak of $2 trillion in 2007 but bottomed out after the 2008 global financial crisis; they were expected to recover to $1.6-2 trillion by 2012. The reality, however, is that global FDI could only reach to $1.1 trillion in 2018. Looking back, the rise of FDI inflows from $225 million in the early 1990s to $1.5 trillion in 2000 was impressive, but the pace has now ebbed.

Other sources for external capital too are seeing a slowdown. Net debt and equity flows to the low and middle-income countries have fallen from $1.27 trillion in 2017 to $1.03 trillion in 2018, with a sharper fall noticed in long-term debt, that fell from $404 billion to $303 billion; private creditors from $352 billion to $225 billion; and net equity flows from $540 billion to $503 billion; with only remittances holding fort at about $481 billion. The growing spat between the US and China might be a cause of the reversal, but the outcome is a major concern for the developing world.

Recent figures