Trade Policy For FDI Policy - Things Are Looking Up

Trade Policy For FDI Policy - Things Are Looking UpThe issue of foreign direct investment in Pakistan has been a source of extreme debate amongst the Pakistani leadership. Many have considered it as an investment for the country's development. Yet others have, on the other hand, argued that the Foreign Direct Investment (FDI) Policy on the basis of which FDI can be freely allocated to selected sectors is not yet effective enough to ensure that FDI is not misused by well-connected businessmen. Yet there are those who believe that FDI should be allowed to go ahead, even if in its current form, the policy may not be effective enough to control the growth of FDI.To understand the debate one has to look at the recent development of direct investment in Pakistan. In addition to what is being described as a slowdown in development, development has also been associated with the global crisis. As unemployment rates rise in Pakistan and companies struggle to meet the rising costs of raw materi als, international financial institutions like the IMF and the World Bank have seen fit to curb FDI in the country. While in many countries, particularly those which have seen their political stability threatened by instability or violence, FDI flows into these countries are stopped, FDI in Pakistan seems to be too risky. This is evident from the fact that investment abroad accounts for over half of the country's GDP.So what is the reason for this increased fear? When you think about it, foreign direct investment in Pakistan is still important, but it can also be dangerous, particularly when it is misused for crony capitalism.To use the term correctly, crony capitalism is when private companies or individuals buy business at the expense of the government, while operating below the profit line. By definition, crony capitalism is therefore illegitimate and illegal. It is bad because it stifles a nation's growth. It is bad because it lowers the value of the currency and makes trade unp rofitable. It is bad because it creates unplanned growth and red tape, because, as economic historian Thomas Carlyle pointed out, 'Each of these evils takes all the plans and laws and institutions that we had carefully laid out; and turns them to a hindrance.'While foreign direct investment in Pakistan is beneficial for Pakistan and for its economy in general, and there are many examples of how this has boosted Pakistan's growth, it is important to understand that crony capitalism is inevitable in an open economy. Only by controlling the flow of FDI can the nation expect to become a strong and stable place to invest.A few years ago, India made it quite clear that if it had the ability to direct more than 60% of its investment towards specific industries, they would consider it in bad faith and terminate the deal. It seems that the same thought process needs to be applied to FDI in Pakistan, and it is this which provides the greatest opportunity for the government to control the grow th of this investment.As such, while there is no doubting the fact that direct investment in Pakistan is necessary for the country's development, the debate on how much foreign direct investment can actually be allowed without detrimental effects needs to be looked at properly. And for this to happen, research papers need to be written to make sense of the dilemma Pakistan faces in managing the investment of foreign capital.