Special Economic Zones: South America Lags Behind

By Moises Rendon

It’s no coincidence that Hong Kong, Shenzhen and Dubai have been beacons of economic progress. These areas have attracted the most important high-technology firms and received vast influxes of foreign direct investment (FDI) in recent years. The three share a successful history of operating as what is known as a Special Economic Zone (SEZ), a unique regulatory status which has facilitated rapid economic development. While China, the United Arab Emirates, and other countries have reaped the benefits of SEZs, South American countries have yet to realize the potential benefits SEZs might offer their economies.

An SEZ is a demarcated geographic area within a country’s national boundaries where the rules of business are different from those that prevail in the surrounding territory. Compared to the economic regulations of the host countries, these zones typically include more friendly investment conditions, such as tax and customs exemptions. The goal is to create a globally competitive economic area that, through cost reductions and administrative simplification, attracts corporate investments to encourage new economic activity.

Shenzhen_CBD_and_River

Shenzhen was the first SEZ in China, and remains an economic hub.

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“The Beginning of the End” for Commodity-Reliant Countries

By Erin Nealer

The price of commodities has seen a sharp decline over the last five years, and continued depreciation could leave developing countries vulnerable to economic and political shocks. Many developing countries rely on exporting raw materials like oil, grains, and metals, rather than focusing on service industries. This reliance on commodities, coupled with falling prices, could undermine development initiatives and set least developed countries (LDCs) back to square one.

The United Nations Conference on Trade and Development (UNCTAD) determined that commodity dependence among developing countries is increasing. In 2009-2010, there were 88 developing countries reliant on commodities, compared to 94 in 2012-2013. LDCs saw a similar increase, from 80 percent of countries dependent on commodity trade in 2009 to 85 percent in 2012.

Developing country dependence on commodities, 2012-2013. Map courtesy of UNCTAD State of Commodity Dependence 2014.

Developing country dependence on commodities, 2012-2013. Map courtesy of UNCTAD State of Commodity Dependence 2014.

Trade in commodities is attractive to LDCs for several reasons. While other industries are at the mercy of fluctuating demand, political stability, or technology, extractive industries – “hard commodities” – are consistently in high demand worldwide and can be stored for long periods of time without depreciating in value. “Soft commodities” such as grains, tobacco, and sugar, have a shorter shelf life and can fluctuate in price as weather conditions change, but are in increasingly high demand as the world’s population continues to climb. Stockpiling rubber, oil, or gold can become a commodity exporter’s insurance plan against future economic shocks that result from relying on the continued demand for raw materials.

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Can Morocco Continue to Attract Foreign Investment?

By Motoki Aoki

In the past five years, the Kingdom of Morocco has been the most rapidly transforming economy in the unstable North African region—and arguably even in the world. Morocco has made an incredible leap in the World Bank’s 2015 Doing Business index, ranking 71 out of 189 economies compared to 130 in 2009. This dramatic improvement attracted the attention of the private sector, drawing even more foreign cash into the kingdom. In 2014, Morocco became the second-largest destination for FDI in North Africa and the third-largest recipient of FDI on the African continent. This year, Morocco continues to win foreign investors’ attention.

Last month, French aircraft company Figeac Aéro announced plans to invest $29 million to open a production plant in Morocco, generating 500 direct jobs. The French automaker PSA Peugeot Citroen will invest $632 million in a low-cost vehicle assembly factory, with production scheduled to start in 2019. This is estimated to create 4,500 direct jobs and 20,000 indirect jobs by the time the factory is operational. Additionally, Japanese company Furukawa Electric, the world’s third-largest fiber-optics manufacturer, is poised to invest $8 million to build a Moroccan plant and tap into the growing demand for communications infrastructure in Africa. Not only do these private investments create jobs, they also boost exports of vehicular, aeronautic, and electronic equipment.

Port_of_Casablanca

Casablanca is an important trade and financial hub for both Morocco and the African continent.

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Russian Sanctions, Tajik Remittances, and Chinese Investment

By Michael Jacobs

While the situation in Ukraine and its effect on the Russian and European economies have been the subject of countless news stories and op-eds for several months, the implications for the former soviet countries in Central Asia have largely been ignored. One of these countries in particular, Tajikistan, may face the most severe and direct consequences of a Russian economic slow-down.  This outcome looks increasingly likely as falling oil prices amplify the negative impact of economic sanctions in energy-dependent Russia.

Tajikistan, however much it may depend on the Russian economy now, isn’t waiting around to find out what would happen if the Russian economy falters. Tajikistan recently accepted an offer of $6 billion in new investments from China over the next 3 years, which is part of a larger Chinese push into Central Asia. China may use this investment to build oil refineries and has already built numerous cement factories in Tajikistan in recent years as Chinese workers have contributed to a construction boom in Tajikistan’s capital, Dushanbe. These cement factories have also led to some speculation that in the future China may look to fund the completion of the controversial Rogun Dam, which began construction in 1976 and saw work suspended in 2012. The graphs below illustrate Tajikistan’s dependence on Russia as well as the magnitude of China’s recent investments. As a note, comparisons with China’s investment assume $2 billion are invested each year ($6 billion total investment divided evenly over 3 years).

1.  Tajikistan is the Most Remittance-Dependent Country in the World

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Where’s the Money: Financial Flows to the Developing World

By Michael Jacobs

In order to provide some perspective on the shifting composition of development related financial flows over the last few decades, we assembled graphs using data from the UN Conference on Trade and Development to illustrate trends in Official Development Assistance (ODA), Foreign Direct Investment (FDI), and remittances. The numbers are compared for developing countries in three discrete regions: Asia, the Caribbean/Americas, and Africa.  After a quick analysis of the results, a few common themes are apparent: FDI now exceeds ODA flows for developing countries in all three regions, and ODA flows, long flat relative to FDI in Asia and the Americas, are now leveling off in Africa as well.

This new reality reflects a paradigm shift in how we should view development in Africa, and globally– ODA will continue to play a critical development role, but as a force to mobilize, direct, and augment the substantial financial flows sourced from elsewhere.  These snapshots illustrate clearly that the ODA “bull market” is a thing of the past, and development strategy must adjust accordingly.

Asia remit

  • In Asia today, FDI far exceeds ODA flows, and while remittances are substantial, remittance flows are also dwarfed by FDI. We have to look all the way back to 1985 to see a point at which ODA flows were greater than FDI– while ODA remained flat and even declined slightly in the 1990’s, FDI exploded.

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