Boosting Foreign Direct Investment And Supporting Countries In Fragile And Conflict Settings

Hello and welcome to Expert Answers with me, Andrea Tapia. Today we're taking a deep dive into the World Bank Group's Global Economic Prospects Report. We'll unpack two trends that are making development more challenging. The first, dwindling flows of foreign direct investment. The second, rising conflict and instability. We'll seek to understand the context of these challenges and paths forward. All coming up in Expert Answers. Ayhan Kosas, the World Bank Group's Deputy Chief Economist. Ayhan, welcome back to Expert Answers. Thank you. Let's get started. As you know, foreign direct investment is a key driver of economic growth and higher living standards. What's happening with FDI flows currently and why? As you said, Andrea, FDI is very important when we think about economic development. It basically helps create jobs, facilitate private capital mobilization, of course, helps reduce poverty. When we look at FDI flows in the century, there has been a dramatic sea change. In the 2000s, we saw a sharp increase in FDI to developing economies. In fact, at some point, FDI to GDP ratio reached around 5% in mid-2000s, basically. Since then, we have seen a steady decline. In fact, in 2023, when we have the latest good data available, we had the lowest level of FDI flows to developing economies since 2005. When you think about the share of FDI relative to GDP, that number has been hovering around 2%. Now, why did we end up with this outcome? At the global level, we have seen unprecedented geopolitical tensions, unprecedented policy uncertainty, and in the 2000s, we had basically broad-based embrace of globalization, integration, opening up financial markets. That has changed. We have basically more fragmentation. More countries are introducing trade restrictions, and that makes a big difference when you think about cross-border investment flows. And when you look at country-specific reasons, in the 2000s, we had this incredible appetite to basically push new reforms, structural reforms, financial sector reforms, liberalization, labor market reforms. That appetite has waned. With that, the type of improvements we saw in business climates, the pace of those improvements has slowed as well. And so, based on this, how can developing countries respond? Now, the good news is that we had a period of very strong FDI flows. That means we have a kind of a playbook here. What that playbook implies, one, countries have to do certain things to attract FDI. Two, they need to do certain things to maximize the benefits of FDI. And three, at the global level, we have to have certain interventions to basically see more FDI going to developing economies. Now, obviously, there is no one-size-fits-all policy. But at the end of the day, at the country level, we need to see reforms to improve business climates. We need to see, basically, human capital improvements, increasing the schooling use, increasing the quality of education. And labor market reforms are critical, making these countries more business-friendly. And, of course, pushing more trade integration and having investment treaties between countries. At the global level as well, we need to find ways to cooperate rather than fragment the investment flows. As you know, at the World Bank, as the largest development bank, we have a wide range of instruments we provide, especially in the context of de-risking, providing insurance against, basically, political risk. And, of course, at the private sector level, our private sector are, IFC, working extremely hard to basically facilitate FDI into these economies. This edition of the Global Economic Prospects Report also analyzes the impact that conflict and instability is having on 39 affected economies. Why are you discussing this now? Andrea, when you look around the world, we have a very sharp increase in the number of conflicts. Obviously, some of them are outright wars. And we have a very sharp increase in the number of fatalities associated with conflicts. Nearly half of extreme poor, they live in these economies. Conflict takes this very heavy toll on these economies. Some estimations we have done suggest that over a five-year period, because of conflict, you basically lose 20% of GDP. And how can the global community best respond to this? Now, when it comes to fragility and conflict, it is impossible, actually, to solve the problems on the ground without the help of the global community. Now, let me basically talk about certain concrete interventions. Number one, obviously, prevention of conflict is critical. Second, these countries have a huge financing gap. That financing gap will require the global community to basically help through grants, concessional loans, to address the broader development challenges in the context of health, education, infrastructure, for example. Third, there is a huge need when it comes to capacity building in these economies, facilitating private sector development. There is a huge need when it comes to creating jobs. All of these will require, along with financing, policy advice, technical assistance. And when you think about these economies, this is the fourth item. They're fragile for a reason. Many of them are subject to a wide range of climate-related shocks. The number of these shocks has been increasing. You look at, you know, natural disasters. The number of natural disasters is increasing. Cost of natural disasters is increasing. And finally, we have a huge debt challenge in these economies. 70% of them are in debt distress, or they have very high risk of falling into debt distress. We need to be more aggressive. We need to accelerate the process of resolution of these debt challenges so we can make progress when it comes to, you know, addressing the underlying debt overhang. And in your view, is there any glimmer of hope? Yes, there is always, you know, a glimmer of hope. There were countries, they were basically fragile. They were countries, they were basically fragile conflict states. They made progress. In fact, this study talks about these countries extensively, provides examples. Now, when you look at what happened over the five years, we had this series, a cascade of shocks. And these shocks really hit these economies hard. So the growth averaging around 2%. Other developing economies actually grow at around 4.5%. It's going to take a very long time for them to get back to the pre-pandemic trajectory. Now, where is the big hope? Number one, a huge demographic dividend. These countries are still young. They have basically increasing working age population, while the rest of the world is aging. If we can equip these young people with the type of skills that's necessary, if they get the education and become competitive to basically help the global labor force in terms of the types of skills they needed, that will be basically a huge dividend, not just for these economies, but for the global economy. The second important thing, as much as they are fragile, as much as they suffer from conflict, they have incredible natural resources. They have basically the type of minerals necessary, rare earth metals necessary to basically speed up the energy transition. These types of natural resources will require, of course, careful management, the governance structure, capacity to basically utilize these resources in an intelligent strategic way and channel the funds into the type of project that will generate the jobs these countries need. And in all of these, we at the bank, of course, working on the ground through IDA, through MIGA, through IFC, IBRD, to help these economies. Thank you so much, Ayhan, for sharing all those insights with us today. And see you in Expert Answers next time. Thanks again to Ayhan Kosa, World Bank Group's Deputy Chief Economist and Director of the Prospects Group. And thank you, too, for watching Expert Answers. If you want to learn more about the issues we have covered today and wider economic forecasts, check out the latest edition of the World Bank Group's Global Economic Prospects Report. See you next time.