In the article War and Peace and FDI, Investment Monitor‘s Ben van der Merwe explores the link between peace and foreign direct investment (FDI), coming to the overall conclusion that a positive link is obvious, but the direction of causality less so.
The topic is also something we have studied at the UN Development Programme (UN DP) in a recent working paper titled ‘FDI and growth in fragile and conflict-affected countries – the role of peacekeeping and natural resources‘. The main insights from our study are as follows.
The relationship between conflict, peace and FDI
Countries that can be categorised as fragile and conflict-affected (FCA) attract on average, and relative to GDP, similar levels of FDI inflows as non-FCA developing countries. However, breaking down the group of FCAs shows that countries with no significant extractive resources attract the lowest levels of FDI of all countries, averaging less than 2% annually, whereas resource-dependent FCAs (about two-thirds of all FCAs) attract the highest levels, averaging 5.6% annually.
We also wanted to understand how periods of conflict and post-conflict, relative to peacetimes, are associated with changes in FDI attraction and real economic growth, and if the presence of UN peacekeeping operations (PKOs) is likely to matter for post-conflict FDI and economic recovery broadly. To that end we constructed a data set covering 127 developing countries from 1989 to 2018 with information on civil conflicts, FDI, growth and UN peacekeeping. The results of our econometric analysis show that, post-conflict, countries only experience a pick-up over peacetime levels of FDI and growth when a PKO is present, and significantly so.
More specifically, we found that FDI as a percentage of GDP is about two percentage points higher and real economic growth four percentage points higher in post-conflict years with a PKO presence. Peacekeeping can therefore be an important contributor in closing conflict-attributable GDP losses (see example in chart below) including through its effect on FDI. Our results also provide some tentative evidence that ‘stronger’ PKOs and PKOs in resource-dependent economies are more effective in facilitating recovery rates of FDI and growth.
Please note that the figure depicts the results from regression (3) in Table 3 in the working paper.
The hidden advantages of peacekeeping operations
Our motivations for undertaking the study were several. First, understanding how important FDI can be for developing countries in general, we wondered whether foreign investors would be more inclined to view the presence of a PKO as a deterrent rather than a risk-mitigating measure.
Second, even though understanding the drivers of conflict and fragility is highly complex, it is commonly accepted that inclusive economic growth is an important prerequisite for sustaining peace. Countries that are able to recover faster should therefore be less prone to conflict relapse and have a better foundation on which to build peace.
Third, the existing literature on the economic impact of conflict has shown that country experiences are highly different – some countries more than recover while others never do – and such differences are not well understood. Based on our earlier ‘Pathways for Peace’ work undertaken jointly with the World Bank, we suspected that PKOs could be an important overlooked explanatory factor.
On natural resources, our study suggests that fragility, alternatively the risk of civil conflict, is not a major deterrent of resource-seeking compared with market-seeking FDI. Local market conditions, demand and production factors – all likely to be negatively affected in the event of conflict – matter less for investments in the extractives industry as it tends to rely more on imported capital equipment and production inputs, demand and prices are determined on global markets, and payments are settled in US dollars. Furthermore, main assets in the form of deposits are often shielded underground and extractives sites located in remote or inaccessible areas; for example, in the form of offshore oil and gas.
As the world turns towards an urgently needed low-carbon future, demand for minerals, on which green technologies rely heavily, will grow and with it also resource-seeking FDI venturing into developing economies. History has shown many times that investments in extractive industries, and the resource rents accruing to governments, have failed to produce sustainable development outcomes. However, there is nothing deterministic about natural resource wealth. Countries can, with the right support and set of economic, environmental and social policies, ensure that investments and rents contribute to sustainable peace and development. This also entails laying a foundation for moving away from that same resource dependence and attracting more market-seeking FDI.