FDI generally drives economic growth regardless of which party is in power

Dear Editor,

Based on articles in the letter section of our newspapers too many people are suspect of foreign investments. Some are even hostile, and see everything through the lens of old colonial relationships, or new forms of what is labelled neoliberal (foreign) domination. The attacks on the foreign oil companies in Guyana provide adequate evidence of this attitude. Only recently, forty-five Guyanese citizens sent a letter to President Ali for a moratorium on oil and gas.

I can state upfront that I share the view that colonial economic exploitation was real, and that foreign capital today can be a conduit for regressive trickle-down policies to be embedded.  Yet, we need a more nuanced approach for no other reason than Guyana simply does not have either the magnitude or the rate of capital formation to foster sustained growth. In fact, since 1964 Peter Newman had noted “unless one has financial support such as revenues from oil…, then…large projects must be financed from outside… by giant private concerns… (Newman, 1964:12).

Foreign investments in the oil sector is indispensable. We need go no further than our own post-independence economic record to prove the point. I draw on World Bank data to show that the contribution of Foreign Direct Investments [FDI] to GDP leaves no doubt on the matter. Simply put, higher levels of FDI generate higher levels of growth, and impacts associated variables such as GDP per capita. Let us begin with the period 1970-1990. During these two decades the average contribution of FDI to GDP was a meager 0.69%. An argument could be made that 1983, 9184, and 1985 dragged down the average, but the reverse could be argued, namely that 1974 and 1975 were ‘outliers’ on the positive side of the equation.

For 14 years during the two decades, FDI contribution to GDP was less than 1%. FDI to GDP reach 3% in only one year – 1970. GDP expanded a mere 48% over these two decades. 2001-2020 the average contribution of FDI to GDP was 8.74%. The average is no doubt driven up by the dramatic increase in 2020 (43.48%). During this period GDP expanded by a staggering 670%, compared to the 48% in the 1970-1990 period. There should be no complaints against 2020 as a distortion because the key point is that FDI drives growth. In the 1970-1990 period, per capita crawled from $380 to $534, a mere 40% increase over two decades. By contrast per capita GDP for the second period moved from $954 in 2000 to $6956, a huge increase of 629%. 

A particularly revealing period is 1980-1990. In this decade of PNC governance, not a single year recorded a 2% or higher FDI contribution to GDP, with 9 years below 1%. The economy shrunk by 33%, and per capita GDP dived a horrific 32%.  Not surprisingly, Guyana’s foreign debt jumped by US$1B during the 1980s. In the longer period of capital inflow deprivation, 1970-1990, Guyana’s foreign debt skyrocketed from US$82M to nearly US$2B. Foreign exchange could not even cover the interest payments. Editor, note that the positive effect of FDI is not limited to GDP growth but step level improvements in other aspect of our quality of life.

Stabroek News reported the UNDP 2021 HDR findings thus. “The report…states that between 1990 and 2021, Guyana’s HDI value changed from 0.509 to 0.714, a change of 40.3 percent. For the same period, Guyana’s life expectancy at birth rose by 3.3 years, mean years of schooling climbed by 3.3 years and expected years of schooling increased by 2.8 years. Guyana’s Gross National Income (GNI) per capita escalated by about 996.3 percent between 1990 and 2021, a reflection of the oil revenues being received” (9/11/22). Note that the positive developments absolutely coincide with the decades of rising FDI.

It is important that those who use anecdotal evidence to generalize think carefully about the damage they are doing by railing against foreign investments in the oil and gas sector as well as in agriculture, manufacturing, and tourism. One heartening finding here is that FDI generally drives economic growth regardless of which party is in power. Yet, to get a fuller picture of the impact of FDI, we must also assess the quality of governance. Overall, FDI works best when there is democratic governance.

Sincerely,

Dr. Randolph Persaud