Taming of the FDI-Driven Tigers

LAST July, I did a presentation at Harvard Summer School, whereby I did a comparison between the European Celtic economy of Ireland, and the Asian Tiger economy of Singapore.

Apart from their physical size, there are startling similarities between the two countries and their economies (see table below, info from 2007, source: CIA). Of particular interest to me was the fact that both economies were driven by foreign direct investment (FDI).

I lauded the foresight of the governments in attracting FDI into their countries as a viable long-term development plan that will ensure not just economic growth but sustainability too.

However, recently released GDP growth forecast figures seem to suggest that the tigers are losing their growl. A Reuters poll indicates that the Singapore economy is likely to shrink by close to 5 per cent in 2009. A European Central Bank Official predicted that the Irish economy will see a 6 per cent contraction this year.

By any standards, the figures are poor. By the roaring standards that have been set by Ireland and Singapore in the past few decades, the figures warrant a state of emergency to be declared!

Although the economies of both countries cooled in 2008, growth figures were still positive, albeit marginally. Why have the two countries been so badly hit by the financial meltdown?

In the Irish case, one reason lies in their severe housing slump. As for Singapore, it is particularly reliant on trade and hence, in a time of a worldwide slowdown, a decrease in exports is bound to hit the country.

With that said, even a housing or export slump should not have such a drastic effect on the economies. To better understand the reason behind the downturn, one needs to divert one's attention to driver behind the economic growth of the two tigers - foreign direct investment.

I advocate attracting of FDI because investment drives the economy - the demand side in the short run and the supply side in the long. In addition, there is a transfer of technology from the investor to the host country.

Because FDI is long term, a slowing of the economy should not have too drastic an effect on FDI. However, this financial meltdown has been touted as the worst downturn since the Great Depression.

We live in extraordinary times. Big companies, once supposedly infallible, are failing, owing to the folly that can be attributed to either themselves, or fellow corporate conglomerates. Governments have their hands tied up in rescuing their own economies.

Hence, this inevitably results in a fall in FDI-growth. Even if current investors stay put (which is a possibility but not so much a probability), the fall in FDI-growth means that Ireland and Singapore faces a fall in one of their key growth drivers.

My suggestion for the Irish and Singaporean government? Look inward for investment (read: a big fiscal stimulus package) to boost the economy, ride the recession out, and continue to attract foreign direct investors thereafter.

I am hearted to see that the Singaporean government has been active on that front and one can only hope that the Irish government similarly sees the wisdom of such a move, and soon.