Pakistan's Success Story: Foreign Direct Investment

Talking about foreign direct investment (FDI) in emerging economies, former US Federal Reserve Chief Alan Greenspan says: “But clearly the Licence Raj (in India) has discouraged foreign direct investment. India received $7 billion in FDI in 2005, a sum dwarfed by China’s $72 billion. India’s cumulative stock of FDI at 6 per cent of GDP at the end of 2005 compares with 9 per cent for Pakistan, 14 per cent for China, and 61 per cent for Vietnam. The reason FDI has lagged badly in India is perhaps no better illustrated than by India’s unwillingness to fully embrace market forces. That is all too evident in India’s often statist response to economic problems. Faced with rising food inflation in early 2007, the response was not to allow rising prices to prompt an increase in supply, but to ban wheat exports for the rest of the year and suspend futures trading to ‘curb speculation’ — the very market forces that the Indian economy needs to break the stranglehold of bureaucracy.” (p. 322 of "The Age of Turbulence" by Alan Greenspan.)

Since Mr. Greenspan wrote the words above, the FDI in Pakistan has continued to rise
and remains a success story. The total investment grew by 21.4 percent or 23 percent of the GDP and Foreign Direct Investment (FDI) posted a growth of 71 percent from US $ 3.5 billion to US $ 6.0 billion in 2006-07. The FDI represents a deeper and longer term commitment than portfolio investments which tend to be less durable and less reliable. This has happened in spite of the continued political instability and security issues.

As Mr. Greenspan points out, this dramatic increase in FDI for Pakistan has been made possible by the Pakistani government's liberal policies of allowing foreign investments in many sectors of the economy and the ability of the foreign investors to repatriate 100% of their profits in US dollars. These profits have continued to rise as the Pakistani economy has boomed with the GDP doubling over the last 5 years.
Foreign investors sent $519 million as their profits abroad during first seven months of the current fiscal year as compared to $467.9 million of the corresponding period of 2006-07, depicting an upsurge of some 11 percent.

State Bank's statistics show that profit repatriation by foreign investors registered a significantly increase of $51.4 million during July-January of the current fiscal year. The major share of repatriation was seen in the power sector, in which foreign investors have made new investments during the last few years due to the power shortage in the country, reports the Business Recorder, a Pakistani financial daily newspaper.

One of the downsides of liberalization has been an upsurge in inflation in Pakistan which India has attempted to curb by actions such as banning export of wheat and suspending futures trading which Greenspan criticizes in his book. While India has succeeded in the short-term in controlling wheat prices, the longer term consequences of such policies are usually detrimental to the economy.


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