Foreign Direct Investment & Development

I recently watched a PBS documentary, “The Big Men” which tells the story of the discovery of the first commercial oil field in Ghana’s history.

As events unfold, the Texan-based venture capitalists who bore all the financial risk, butt heads with a newly-elected government whose officials refuse to endorse the initial agreement allocating to the investors the overwhelming majority of the profits. Juxtaposed with these events is the story and images from Nigeria’s Niger Delta. The dire poverty, environmental degradation and the violence in that oil-rich region add poignancy to the Ghanians’ opposition, even as one wonders about the real motives of the Ghanian officials.

For the Texan-based investors (which included the Ghanian who had initially discovered the resource but lacked the capital to fully exploit it) the issue was couched in the language of risk, adequate return on their investment, as well as respect for the initial contract signed with the Ghanian government. For the Ghanians, the issue was discussed in terms of their need to be able to use the resources located on their sovereign land to properly house, feed, and educate the populace.

The Role of FDI

Developing countries seek to attract foreign direct investment (FDI) to foster economic growth and development. FDI can be a valuable tool to exploit resources, build production facilities while creating jobs and infrastructure in developing countries. At the same time, because for the most part this investment is introduced and controlled by private companies, there is a tension that can, and often does, arise between the goals of private international capital and the country’s development needs.

The events that unfold in Ghana illustrate this tension. On the one hand, we have the private venture capitalists who invested where no one else would probably have. Ghana was not known for its oil resources. In return, however, they demanded a hefty return on their investment. But, does any government have the right to sell a country’s birthright to these investors? Yet, of what use to the country is the oil, or the diamond, or the gold left unmined? Needed are rules to facilitate and support the honest brokers in these transactions.

A Way Forward?

At the end of the day, what Ghana, and other responsible governments want is access to jobs, decent housing, roads, education and other social services for its citizens. Hotels built with foreign capital using workers who live in shacks across the streets is an untenable outcome. Yet, we see this all across the Caribbean, for example.

Rules-based frameworks for trade and investment focus almost exclusively on creating an open playing field for FDI, or on managing disputes. As essential as these are, we also need trade and investment rules that can provide a pathway toward more development-oriented and sustainable outcomes for FDI. Are there guidelines that can help honest governments and fair-minded investors to determine an equitable distribution of profits derived from exploitation of a country’s resources?

What about best practice tools and suggestions to help developing countries negotiate these deals with international capital? For example, can investor agreements contain provisions for investors to make such in-kind contributions as building houses and roads or providing other services that they do well?

Perhaps such tools already exist. If so, they need to be made more visible. The world does not need any more Nigerian Deltas.

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