COVID-19 and the global contraction in foreign direct investment

By Adnan Seric, Research and Industrial Policy Officer at the Department of Policy Research and Statistics (PRS) at the United Nations Industrial Development Organisation (UNIDO), and Jostein Hauge, Research Fellow at the Centre for Science, Technology, and Innovation Policy (Institute for Manufacturing) at the University of Cambridge


This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.


shutterstock_163440290COVID-19 is uprooting economic globalisation. As both supply and demand are experiencing simultaneous shocks due to lockdown measures, global production networks and international trade flows are being disrupted on a scale never seen before. Disruptions to flows of portfolio and foreign direct investments (FDI) — which are part and parcel of economic globalisation — are no exception. According to the International Monetary Fund, investors removed over US$100 billion of portfolio investment from developing countries since the beginning of the COVID-19 crisis, the largest capital outflows ever recorded. According to the UN Conference on Trade and Development (UNCTAD), global FDI flows are expected to contract by 40% during 2020/21.

The contraction in FDI is going to hit developing countries particularly hard, mainly for two reasons. First, FDI inflows to developing countries are expected to drop even more than the global average seeing that sectors that have been severely impacted by the pandemic account for a larger share of FDI inflows in developing countries. Second, developing countries have become more reliant on FDI over the last few decades — FDI inflows to developing countries increased from US$14 billion to US$706 billion (current prices) between 1985 and 2018, as seen from Figure 1. As a share of world FDI inflows, this represents an increase from 25% to 54%. Continue reading

How China’s Rebalancing Affects Africa’s Development Finance … and More

By Helmut Reisen of Shifting Wealth Consulting and former Head of Research at the OECD Development Centre

 

Africa-globe2015 has been a challenging year for Africa. Average growth of African economies weakened in 2015 to 3.6%, down from an average annual 5% enjoyed since 2000. Total financial flows have decreased 12.8% to USD 188.8 billion, including UNCTAD estimates for foreign direct investment. Africa´s tax-GDP ratio tumbled to 17.9%, down from 18.7% in 2014.

Three core factors have underpinned Africa’s good economic performance since the turn of the century: high commodity prices, high external financial flows, and improved policies and institutions. Now, China´s decline in investment and rebalanced growth is depressing commodity prices and producing headwinds for Africa. Such macroeconomic headwinds for net commodity exporters also imply that Africa’s second pillar of past performance — external financial inflows — have suffered as well.

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