Introduction

In order to assess whether Foreign Direct Investment (FDI) has been good for poverty reduction or not, this paper will use Botswana as a micro illustration were FDI has been considered successful. FDI in Botswana has effectively contributed towards increased per capita gross domestic produce (GDP). The example used, shows continued growth and a stable economical climate over a number of years, and has attracted good FDI. This coupled with a sound reinvestment program has stimulated Botswana’s economy into being one of the most secure reliant investment opportunities within the SADC region (southern African development council).

This paper will go on to show that it takes more than FDI to reduce poverty, whilst simultaneously highlighting the fact, that the way we measure poverty, based on one dollar or two dollars a day, is in fact inaccurate. The second section of this paper will use Vietnam as an example, to demonstrate the difficulties faced and the often poverty generating policies, that pre-industrial or semi-industrialised countries use in attempts to create the right economic environment to attract FDI into the country.

A success story: FDI and Good Governance

  There are several unique factors that enabled the success of FDI in Botswana; Firstly Botswana had a clear social good governmental policy in place prior to investment. The government was dedicated to a fully democratic system of rule with a just and fair legal system. What makes Botswana’s system unique is, the incorporation of the House of Chiefs, to represent the clearly demarcated wards within the country and consider the existing tribal heritages and land ownership rights. However, until recently this did not include the indigenous population living within the Kalahari Desert region.

Since independence in 1966 Botswana’s policies have created a stable and attractive investment climate, for would be investors. Subsequently when diamonds of quality were discovered in Botswana, a mutually beneficial and fair (FDI) opportunity was created, leading to the formation of The De Beers Botswana Mining Company on 23 June 1969 (De Beers Group, 2007 a). In 1991 the company changed its name to Debswana, which is owned in equal share by the Government of Botswana and De Beers Centenary AG (2007a). Botswana has enjoyed uninterrupted economic growth and soaring per capital incomes in most years since diamond mining began in ‘1971’ (2007a). The diamond industry transformed Botswana from an agriculture-based economy to one in which diamonds account for ’80 percent of exports and 50 percent of government revenue (see fig1). By value, Botswana is the largest diamond producer, in the world; Debswana produced approximately 28,4 million carats in 2002 (ibid).

Figure 1 (source, IMF: 2006)

Sir Seretse Karma, the first president of Botswana laid the foundation of a moral socially conscious government that has a zero tolerance policy towards corruption, along with a sound Development policy. Botswana is now the leading African state that has never had a war or been victim to political violence or upheaval. The country is presently positioning itself to be the “Banking and Finance centre for African investment” through the creation of the ‘Botswana international finance service centre’ (2007b) and the ‘Botswana stock exchange’ (IFC 2007C www.ifsc.co.bw).

The Botswana exemplar proves that by creating the right climate for investment to happen, along side a sound governmental policy and a solid development strategy, Concomitant with, the will to reinvest and allow the local economy to grow organically, growth will follow. This example offers a glimmer of hope and sets a precedent for the rest of sub-Saharan Africa to follow. However, the unique position Botswana found it self in after independence in 1966, most certainly gave the country a comparative advantage. ‘Debswana’s mining operations have been chiefly responsible for transforming Botswana from an agriculturally based economy in the 1960s to a country that has subsequently and consistently displayed one of the highest economic growth rates in the world’ (DE Beers 2007a: Bureau of African Affairs ,2007b)

The per capita GDP of Botswana has been growing at a steady rate since diamonds were discovered (see fig 2). The US sate department (2007b) places Botswana ‘per capita nominal GDP in 2004/5 at $5,336’ (Bureau of African Affairs, 2007b). This clearly shows that the right climate can attract investment, this together with a comparative advantage and a sound reinvestment policy a can improve per capita GDP, but, does this mean that poverty has consequently been reduced?

Figure 2 (source Earth trends 2003)

Along side the diamond industry, the Botswana government has been following a strategy to diversify their economy (see fig 3). To date there are over 22 FDI investors. Theses include the U.S. Overseas Private Investment Corporation, performing methane extraction, BCL running the Soda Ash operations and in other sectors, Kentucky fried chicken running franchises, Hyundai by direct FDI, H.J. Heinz direct FDI, Volvo Trucks & busses, international private company, to name but a few of the investor in the country (2007b: goliath.2007d).

Figure 3 (source earth trends 2003)

Despite all this FDI and growth according to world standards, Botswana still has an unacceptable amount of people living in poverty or relative poverty. According to Earth Trends (2003: p2) the percentage of the population living on less than a $1 a day in Botswana is ‘33%’ (2003) and ‘61.4 %’ on less than $2 a day’ (ibid). Assuming these figures are correct, clearly Botswana’s money is not making it into the majority of the population’s pockets. Why is it that, after almost thirty years of independence approximately ‘64%’ (2007b) of the population remains in so-called poverty? Perhaps we should consider the demographic make up before we attempt to answer that question by normative dollar a day calculation.

It must be considered that the people of the Kalahari, (excluding the Tswana), the Kalanga, Kgalagadi, Herero, Bayeyi, and Hambukush – some of whom have fought over a 20 year long, court battle to be able to return to the desert after being banned from their land due to mining activities. These people represent the traditional inheritors of Botswana; a view the current constitution strongly apposes. These people of the desert, who choose not to be in the towns or cities, having little need for a dollar a day and very little interest in industrialisation, collectively account for around an estimated 11% of the indigenous population. These people along with the traditional cattle herding communities, who incidentally consider cow more valuable than money and who collectively account for around 40% of the population (2007b), represent 51% of the population that live in the rural regions of the country.

The US State department states that that ‘More than one-half of the population lives in rural areas and is largely dependent on subsistence crop and livestock farming. Agriculture meets only a small portion of food needs and contributes a very small amount to GDP – primarily through beef exports – but it remains a social and cultural touchstone. Raising Cattle dominated Botswana’s social and economic life before independence. The national herd is estimated between 2 and 3 million head, however, the cattle industries are experiencing a protracted decline’ (2007b. This seemingly supports the figures quoted earlier this paper. For some of these people, the choice is to live rural lives. The city is often not far away and there is work, thanks to FDI and good governance. However, they choose to stay on the cattle post or wander the desert, and, when considering PPP, two dollars a day would be more than adequate for some of these rural communities. In Botswana ‘literacy rate is ‘80%’ (2007c: 2007b) so choice is almost certainly the reason for staying on the cattle post not ignorance. With all these factors in mind, should all these people still be considered to be living in poverty and therefore be included in the poverty calculation based on a dollar a day? Or should the poverty calculations include and value alternative ways of living?

The Disadvantages

The myth of the trickle down effect: FDI and the increasing poverty gap

The trickled down effect is a presumptuous theory that does not happen. Invented by classical neo-liberal economist, indisposed to admit that it is a sham. What is well known to economist is that as wages increase by one percent, spending increases by only a half of a percent, so trickle down is virtually non existent,. Ricardian economists call this diminishing returns. Similarly, FDI brings fiscal wealth into the economy; this has an affect of bringing about a wider variety of imported goods to local market, corresponding with the increase in wealth and consequent liberalisation. The effect this has on the economy is that the imported goods compete with locally manufactured goods. What is often the case is that, the imported goods are cheaper than locally produce ones. This has a potentially devastating affect on the local economy and in some instances can completely kill local capability.

Vietnam faced this problem with the importation of cheap motorcycles and bicycles from china.
A report produced by Oxfam (2002) ‘Rigid rules double standards’, reports the Vietnamese case, which shows the effects of introducing importation tariffs, whilst simultaneously, highlighting the effects of liberalisation. Not surprisingly both these strategies have their failings. For example the Vietnamese government introduced tariffs as ‘high as 50 and 60 percent’ (2002: 63) on bicycles and motorbikes respectively, in order to protect local industry. The average cost of bicycles is nearly ‘twice the average monthly income of people living in rural communities’ (ibid), Where bicycles are principally essentials for transportation of goods to markets. the average price of a motorbike according to the Oxfam report (2002) cost a ‘minimum of VND 8 million’ (ibid). This effectively puts them out of reach of the majority of people. When considering that approximately a ‘100,000 people’ (2002:63) work in state owned industries, manufacturing bicycles and motorbikes, for an average income of ‘between, VND 500,000 and VND 700,000 per month'(ibid) for bicycle workers; whilst motorbike assemblers can ear as much as ‘VND 1million per month’(ibid). It is easy to understand why the governments introduced tariffs. Unfortunately when they tried to protect local manufacturing, it is the people themselves who suffered the consequences, of paying higher prices for essential commodities. On the other hand as the Oxfam report suggest, if the Vietnamese government where to drop tariffs – here again lies a paradox – local industries might have a problem competing with cheap imports again, therefore jobs would be lost in the ensuing cut backs, that would be necessary in order to compete. Oxfam suggest that there may be some consolation for local industries in that consumers may wish to continue paying higher prices for locally manufactured goods, due to possible quality deficits in imported ones (Oxfam 2002). This clearly shows the difficulty LDC countries face, when trying to create the right economic climate in-order to attract FDI.

What is interesting to note at this point, is that both the USA and the European neo-liberals are pushing the LDC countries into liberalisation, whilst, they themselves have tariffs and quotas in place, as well as subsidised industries. It is all so a fact that out all the so called “Asian tigers” as well as the Europeans and Americans history of development, few of them succeeded without imposing importation tariffs and quotas during their early stages of their respective development histories.

What governments do, when allowing FDI in the form of industrialisation investment, is effectively, give away a sector of their economy to an outsider; who, unless managed correctly as in the Botswana exemple, will export most if not all profits whilst maximising workforce output, often by exploitative means. This may make GDP look good, however, in reality; it has very little if no effect on poverty reduction or “real” per-capita income augmentation. Taxation, a way gaining some revenue from foreign investors, is usually very low, due to concessions offered prior to investment in order to make investment look attractive in the first instance.

Does FDI Reduce Poverty?

When considering these two examples as a micro view of the affects of FDI towards poverty reduction, it becomes immediately clear that it takes more than FDI to reduce poverty. Taking the Botswana as an ideal candidate model for FDI, what can be seen is that over a prolonged period FDI can improve growth in all economic sectors and therefore per-capita GDP if properly reinvested. When considering the effects this has on poverty reduction we immediately run into problems. Using the Dollar a day to measure poverty, 64% of Botswana’s population still live in poverty. However, we know that, at least 15-20% of people included in these figures have no need for a dollar a day, Leaving at least 30% that have chosen the traditional life style, of herding cattle and living on the cattle post. The remaining conservative estimate of 14% reserved for children, street children, and, unemployed people in the towns and cities, as well as the sick, lame and elderly. (Possibly a small percentage of the above 30% mention could also include elderly retired ex-city folk). It is clearly obvious from these figures that the Dollar day measurement is implicitly wrong (demographic sources; US State Department 2007b: earth Trends 2003: et al)

The Vietnam model clearly shows the difficulties that LDC countries face, whilst trying to create the right economic climate to attract FDI. What Vietnam shows is that there is a clear need to balance social as well as economic needs, whilst trying to attract FDI. The Vietnamese model also highlights the need to address the effects of trade liberalisation, as a method for FDI attraction, – a pre-requisite for the WTO, GAT to name but a few- which can have a severe negative effect, on the local industry and economy.

Taking these two examples as a snap shot of FDI as working strategy for poverty reduction, it is difficult to assess the affects. From the Botswana example it is clear that more is needed than just FDI. Even along with a sound development reinvestment program and good governance, using the current method of measuring poverty, a clear reduction is not evident. From the Vietnamese point of view it is clear that the methods used in order to look attractive for FDI can actually increase poverty.

Conclusion

In conclusion it would seem that in order to answer the question “to what extent has FDI been good for poverty reduction”, firstly the way poverty is measured needs to be addressed as the current method of a dollar a day is implicitly incorrect. Secondly the damage limitation on poverty must be taken seriously when trying to attract FDI. The finding of this paper concludes that there is no clear evidence to suggest FDI reduces poverty or not. The main reason that little or no evidence can be gained, clearly lies with a fault in the way in which we measure poverty. Another reason is the liberalisation strategies that are favoured by the TNC, Multinational’s and most western governments, actually help increase poverty. Until these issue can be addressed from the recipient perspective, poverty will increase no mater how much FDI is thrown on the table, and, the question of the effectiveness of FDI towards poverty reduction will remain unanswered.

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