Keeping investors now is harder than attracting them

May 2013 | Investments

Global foreign direct investment flows in 2012 fell by 20%. FDI in developed countries dropped a third compared with 2011, whereas it fell by only 3% in developing countries. Vice President of the European Investment Bank Anton Rop discussed the reasons behind these trends with the World Economic Journal.

World Economic Journal: The biggest drop in foreign direct investments was concentrated in countries with developed economies, while developing countries are more confident. What caused this shift?
Anton Rop: This time around, the crisis begain in developed countries, which plunged into a financial crisis, having partly come out of the banking crisis and a currency crisis. Now in the eurozone, we are once again seeing a mixed currency and banking crisis, which is also causing problems in government funding. The more developed countries are going through very difficult times from an economic point of view: GDP has fallen substantially. This is especially evident when compared to developing countries, where the structure of the economy at the beginning of the crisis was completely different.

WEJ: What caused the developing countries to take the lead? Does this mean that they have completely switched investor interest to themselves?
A.R.: Emerging economies still have the chance now for growth with fairly simple measures and mechanisms. In addition, they are able to maintain this growth, which attracts investors. But none of these things are permanent and countries shouldn’t create illusions and think that investment growth will hold at a certain level, the same as overall economic growth. It is often easy enough to achieve high economic growth, using fairly simply mechanisms. The countries of Eastern and Central Europe, in particular, quite easily reached such numbers by investing in all areas of their own infrastructure and education. This leads to an improved economic situation and high economic growth. But as soon this level is reached, the problems begin and new steps are needed, which are harder to take.

WEJ: What kinds of problems could countries with high economic development and growth be having?
A.R.: The country has to maintain the best quality in all spheres of life, as well as be comptetitive with other states. When a country’s economic growth reaches a high level, people begin to insist on higher salaries, better schools and medical institutions, increased social payments, and so on. All of these costs increase significantly because the standard of living is higher. So yes, developing countries can still have stable economic growth as well as the resulting investment growth, but they should realize that sooner rather than later they will have to invest in more complex economic growth. Just now the European Union is discussing how to prepare developing countries for high economic growth and development. But this isn’t just a simple matter of attracting investments.

WEJ: What is it then?
A.R.: The problem is more likely supporting the existing investments. Many existing investors are facing a number of difficulties. If you look at the European and other most developed countries, you can see the radically different situations: stable growth, for example, in Germany, but a lack of stability in other countries. The less the economic growth and the worse the economic situation, the less internal capacity there will be to attract and keep investors from abroad. Many countries today are in need of domestic investments, especially in the private sector, which is a key to the growth of investments and the economies of the EU and neighboring countries. The European Commission and the European Investment Bank are now developing new tools to attract private savings to investments.

WEJ: Tell us more about this project – are there already any concrete proposals?
A.R.: As I already mentioned, there is a project being led by the European Investment Bank and the European Commission, based on a decision of the European Council. We are thinking through options for stimulating economic growth and specifically how to activate private savings, and we want to work out new ways to attract private capital. Currently we are developing a version where part of the potential investment will be provided by the European Commission. That is, we propose combining financial instruments and shifting some of the risk onto the European Commission. Thus, we will prepare an investment project for private investors with minimum risk. This will attract pension funds, private funds, and others to secure investments in large investment projects throughout Europe, which will raise the overall level of investment and economic growth.

Now we are launching similar projects in the most developed  countries, such as Germany, the UK, and France. But we are also trying to think about and start smaller projects in Eastern Europe, in order that we might utilize private savings and invest them in stable investments. Such a project is already up and running in Slovakia and another is soon to be launched in Poland.

WEJ: And what about associations that could also help many countries to develop and achieve better economic performance? There is a Customs Union among several CIS counties and a Common Economic Space without duties and tariffs. Some think that in the near future, several European countries will also join it. How realistic and necessary is it for Europe?
A.R.: Such associations exist world-wide and membership in them is in the interest of any country. That’s why it’s good for each to have the lowest costs possible and to be in a single economic space with other countries.

Now there are negotiations ongoing for cooperation and membership between Ukraine and the European Union. There are still many things that need to be resolved, but I hope that the EU will sign an agreement by the end of the year. This will obviosuly open doors for negotiations on partnerships like the Customs Union and with Russia. But it depends on Russia as to which countries can enter the Union and on what conditions. I think the possibility of some European countries joining a common economic space is totally dependent on Russia.

Text: Valeriya Khamraeva