When FDI helps development

Bálint writes*

Foreign direct investment (FDI) is a form of cross-border investment in which an investor resident from one economy establishes a long-term interest in and a high degree of influence over a firm registered in another economy. However, FDI does not necessarily help development. For example, FDI can hurt development when foreign firms use it to expropriate natural resources. This post investigates some factors that prevent foreign investors from doing so.

Botswana is one of the few natural resource-rich countries that avoided the resource curse. The central idea is that having point-source, non-renewable resources often contributes to political, economic and social issues.

Botswana does well on all these dimensions. Politically, Botswana is a multiparty democracy with competitive elections. Corruption is quite low. Many social policies are progressive. The legal acceptance of LGBTQ+ representation groups illustrates the extent of human rights progress in Botswana. While the country still struggles with AIDS, they have progressed in combating the disease. Finally, Botswana has done well economically. Their high per capita incomes have not shown the sluggish growth rates characteristic of many resource-rich countries. To summarize, all components of Botswana’s HDI increased consistently since 1990, as the graph below shows.

Source

Botswana suffered from deep poverty and had virtually no infrastructure after independence from the British in 1966. How could they achieve all this growth and development progress? The surface-level answer is that they had prudent economic policies, their politicians cared about the public and they negotiated well with powerful foreign companies.

Knowing that Botswana made the right policy decisions, I invite you to explore the factors that enabled all this success. First, Botswana is ethnically largely homogeneous. Gapa (2013) argued that this homogeneity facilitated trust and peaceful cooperation between the people in positions of power. Better cooperation and more trust mean that foreign powers could not divide society so easily. Thus, foreigners could not rely so much on insiders to help them expropriate natural resources in exchange for a part of the rents.

Furthermore, the Kgotla system facilitated cooperation. Kgotla is a respected traditional institution of participatory democracy in which local leaders are invited to share their views and criticism of those in power freely and directly. The large number of local leaders representing interests across the society of Botswana means that Kgotla passed down information from many people. Thus, a relevant traditional source of accountability remains that hinders government and business officials from disregarding the interests of the population at large. Furthermore, British colonial destruction did not reach this institution. Since locals had been used to it for generations, the Kgotla can be a widely used and understood institution.

Finally, the ruling BDP political party is decentralized. It offers various localized points of entry, such as local assemblies that provide the population with a voice in decision-making. As Gapa (2013) argued, this decentralization helps enhance accountability, leading to more efficient political outcomes. The dynamic is similar to the Kgotla system outlined above, except that a wider population group can participate in the assemblies.

Bottom Line: The case of Botswana suggests that ethnic homogeneity, institutions of accountability and decentralized ruling parties all contribute to a more positive FDI-Development relationship in resource-rich countries.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

3 thoughts on “When FDI helps development”

  1. Hi Bálint!
    This was a really interesting post! Especially because I was born and raised in Botswana and know it well. Your analysis is accurate, and indeed the economic policies that they have deployed have been praised by the international community. The fact that the country is land-locked makes its economic progress even more special.
    However, I do have some more pointers that you may be interested in. The cultural/ political history of Botswana is very cool, as the ‘Tswana people’, were indeed under a British protectorate, however no resources were found in this time, it was only after that significant diamond mines were discovered. This helped as less extractive institutions were followed. A second point that is interesting is that the British allowed Botswana to keep its equivalent Royal Family, and in Tswana culture, they were very well respected and followed, and inherently had very good leadership. Seretse Khama is singled out as being a founding father of modern Botswana, and a very important individual. He has his face on the money notes you see. The outcome was that the culture of Botswana was already a form of democracy even before the British took over, meaning that its transition was smoother, and of course, economic policy was the positive result of this. I have written a paper in Institutions in time that compared Botswana to Siera Leon (both Diamond countries) that I can send to you if you want? It just shows the timeline and critical points in time that made the two countries diverge so much.

  2. Hey Balint, thank you for this blogpost it was fascinating. I found it specifically interesting for two reasons, first is our discussion in class about ‘tribal- personal exchange societies’ and impersonal exchange societies. From what I gathered it was in fact Botswana’s traditional so called tribalistic character rather than ‘learning from Western Societies’ that saved it from the resource curse. I think it illustrates how important it is to learn from traditions that seem sometimes primitive but actually accrued social wisdom for centuries. Second, in the Political Economy (that we took together), we talked about the impact of ethnic division only briefly, but there are several papers that argue that one of the worst outcomes of colonialism was the artificial borders drawn in Africa that clustered people of different cultures beliefs and institutions into the same country. I found it slightly difficult to agree with this argument, but I think the success of Botswana is a perfect illustration of it. Also, in some ways this story shows how everything goes back to institutions, especially considering the horrendous effects FDI had in other countries. Anyways, I am waiting for your draft it seems like a very interesting paper!!

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