NEW YORK: The slowdown in foreign direct investment (FDI) in emerging markets is an early warning sign of a slowdown in globalisation, according to a top American economist.
Gail D. Fosler, senior vice-president and chief economist of The Conference Board, said the slowdown had broadened recently into a more worrying absolute slowdown in global FDI.
This decline stands in sharp contrast to the early 1990s, when capital flows to emerging markets surged in the face of restructuring in the United States as businesses sought new market opportunities.
“The severity of this slowdown may signal a fundamental break in the process of global arbitrage, where in the past companies sorted through market and production opportunities for their optimal market and cost structure,” she said.
“Today there may be a greater 'home bias' or a pre-disposition to invest and grow in just a few chosen markets,” she told a group of foreign journalists at the New York Foreign Press Centre here.
She said the move towards “home bias” for investment would create “walls” in the decade ahead for the US.
“These kinds of walls will create some competitive barriers that may cause some rising pressure on pricing for producers to consumers.
“What is disturbing is that the path to global investment and technology has been a major force for economic growth in the countries in which it occurred and to the extent that this growth contracts that we go through a period of slow economic growth globally,” she said.
Fosler said that in addition to the decline in global FDI, the range of countries with strong economic performance and significant foreign investment gains appeared to be narrowing.
“Today only about 20 countries can boast of economic growth at more than double the global average, while in the early 1990s, about 60 countries could,” she added.
The same was true for foreign investment, even more so as overall the level of private capital flows to emerging markets today was about half what it was before the Asian financial crisis.
China, Brazil, Mexico and the emerging market countries in Eastern Europe accounted for over 90% of all private capital flows to emerging markets.
“China alone accounts for 80% of the private capital flows to Asia and was the world’s largest recipient in 2002, capturing one-third of FDI in the emerging countries.”
She said the concentration of growth in a few emerging markets was equally true of the industrialised countries where the mostly English-speaking countries – Australia, Ireland, Canada, New Zealand, Britain and the US, that were growing significantly faster than the other industrialised countries.
Fosler said her concern was not on the US economic cycle or the global economic cycle but the much more fundamental global economic and political infrastructure and the kind of sharing of information and technology and investment that created global opportunity for industrialised country businesses and was a major dynamic force among the emerging markets.
On whether the pre-emptive doctrine of President George W. Bush would create more uncertainty on globalisation, she said that 9/11 was a fundamental shift and the pre-emptive policy and its exercise from the US point of view was based on security concerns.
“The pre-emption policy means that it is going to be very hard for the US to pursue this policy and one of global integration.
“It is not going to make the rest of the world feel better or secure. It (the US) feels sufficient insecurity to launch this kind effort means it will be very hard to get back on any kind of track towards global institutional integration,” she said.
Fosler said that too much emphasis was being placed on the war in Iraq for the current state of the world economy, particularly in the field of business and investment.
“The global expansion in business and investment was slowing at a disturbing rate even before the confrontation with Iraq,” she said.
She said that war-related anxiety affecting consumer and business spending will keep the US economic growth in the 2.5% to 3% range, adding that although this change suppresses short-term growth, it added somewhat to the economy’s strength in 2004.
“These changes do not alter the view that an underlying cyclical improvement is under way, even though the pace is, and is likely to remain, slower than one would like for most of 2003,” she said.
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