VOL. XLVII

No 11

15-March-2004

CAPITAL MARKETS

FDI Inflows To ESCWA Region Fall Away From 1998 Peak

Flows of foreign direct investment (FDI) into the Economic and Social Commission for Western Asia (ESCWA) region fell away from a peak of $6.7bn in 1998 to just $1.1bn in 2001, according to figures published in the UN body’s Survey of Economic and Social Developments in the ESCWA Region. FDI flows into the region are intrinsically volatile, notes the report, because they are heavily dependent on oil and oil-related sectors. Saudi Arabia, for example, made up the vast majority of regional capital inflows in 1998 with $4.3bn out the total $6.7bn. But the large negative figures in 1999 and 2000 for the kingdom illustrate the other regional problem of capital flight – not only does the region fail to attract significant amounts of capital, but it also fails to retain local capital. Egypt has seen the most consistent inflow of capital over the period, but even there inflows dropped away in 2001.

The ESCWA figures show that the region’s small share of world FDI diminished to a tiny 0.16% in 2001, while the region’s share of FDI to developing countries has also shrunk to just 0.58%. The causes of the ESCWA (and wider Middle East) region’s poor performance in attracting FDI are widely attributed to regional instability and the structural weaknesses of regional economies. Other factors blamed for the malaise include: inadequate availability of a skilled and flexible workforce; weak institutions and high administrative barriers; inadequate infrastructure; underdeveloped financial sectors; and unpredictable macroeconomic conditions and public policy choices (MEES, 9 June 2003). 

Net FDI Inflows Into ESCWA Member Countries, 1998-2001

($Mn)

Source: UNCTAD, World Investment Report 2002, August 2002.

1. ESCWA total should be interpreted as the sum of FDI inflows to each ESCWA member country. When intraregional FDI flows are subtracted, net inflow into the ESCWA region will be lower than that figure. Intraregional FDI data comparable to the UNCTAD data were not available for the ESCWA report.

Efforts to improve the situation have focused on four areas, says the report, including integration into world markets, liberalization of the business activities of foreign entities, the development and promotion of economic free zones and private participation in infrastructure (PPI). With regard to the first of these, Jordan’s free trade agreement with the US is seen as an example of trade integration promoting FDI, with the result that the country’s qualified industrial zones (QIZs) have seen a surge in FDI. The region has seen a series of investment laws passed and investment promotion agencies established to improve the climate for foreign companies to do business. Syria became the last country in the region (apart from Iraq) to join the Multilateral Investment Guarantee Agency (MIGA) when it concluded an agreement in June 2000. Free and special economic zones have become a popular way of attracting investment, and Dubai has led the way with initiatives such as the Dubai Internet City and Dubai Media City. However, the region continues to lag its developing country competitors in attracting FDI flows, and much more in the way of reform remains to be done.