Colombia has been attracting worldwide foreign direct investment (FDI) and has understandably been looking towards China as a model, as well as Asia in general, as the recent Sino-Latin American economic forum demonstrated. But Colombians must learn from the Chinese culture of saving before record-high FDI can turn into palpable benefits for the country at large.
Despite the financial crisis, Colombia expects to receive around US$8.5 billion in Foreign Direct Investment (FDI) this year, compared to US$10.5 billion in 2008. But record-high FDI levels have not translated into higher standards of living for most Colombians. This is because most FDI is in the oil and minerals industries; in 2009, up until November 15, these industries received 89% of total FDI, or US$5.983 billion. These industries neither contribute to creating jobs nor create secondary industries. Moreover, massive FDI to these few industries result in the “Dutch disease”, whereby a high exchange rate leads to a de-industrialization on a national level.
In order to increase FDI the government has turned to signing free trade agreements (FTAs) in the hope of spurring economic development. FTAs have been signed with the United States, Canada, Guatemala, and Chile. There are FTAs under negotiations (or about to start) with the European Union, South Korea, Australia, Singapore and Panama. But these FTAs would only increase FDI in the mining sectors.
The government’s focus on FDI may be a result of East Asian countries’ rapid economic development through FDI. But it is important to note that these countries also followed a state-led development process. In this model the government plays a significant role in creating and promoting certain industries, rather than leaving the free market to rule unconstrained. In the case of China there are various important elements that led to its rapid rise.
Time magazine, in a recent Asian edition, published five things that the U.S. can learn from China. These were: ambition (in undertaking gigantic infrastructure projects), education, elderly care (important transmitter of cultural values), savings, and determination (to achieve life-changing goals). Colombia is missing some of these elements, especially ambition and determination. But the most important missing element is savings.
Savings are crucial for economic growth because what is saved is invested, thus resulting in solid economic growth by tapping into the country’s entrepreneurship.
Some may argue that in open economies FDI compensates for a sub-optimal domestic savings rate. But, Diego Comins, a Harvard Business School professor, argued that savings also play an important role in the underutilization of FDI. FDI introduces state-of-the-art technology. When foreign companies cannot (or do not want to) shoulder the economic burden of adopting such technologies, local companies must become supporters of this adoption or co-financers. But these locals companies can only become viable with appropriate domestic savings channeled through a sound banking system.
Some may point to the chicken and egg problem regarding savings: if there are not jobs how can there be savings, and if there are not savings how can there be businesses creating jobs? Nevertheless, anyone who has been to Colombia can confirm that Colombians live a happy-go-lucky life without any deep contemplation of the future. Asians could not be more different in this regard. This may explain why Latin America’s share of global trade has remained stagnant for 30 years at 5%, while Asian’s has quadrupled to reach 20% in the last 30 years.
In Colombia, low savings rates hinder economic development. According to the latest data compiled by the Legatum Prosperity Index, Colombia’s domestic saving’s rate was 20% of Gross Domestic Product. It ranked 61st out of 104 countries. China’s savings rate is third highest overall at 53% of GDP.
An example of Colombia’s household economic culture was illustrated by an October poll conducted by Fedesarrollo, an independent foundation dedicated to economics research in Colombia. It found that for the second consecutive month Colombians’ positive perception of the economy decreased, and yet the number of people considering the purchase of a car increased.
The importance of savings become clear when Colombia’s economy competes in similar sectors to China, namely manufacturing. It is not surprising when after 2001 (China’s entry into the World Trade Organization) China’s inward FDI negatively affected FDI flows to only one country in Latin America: Colombia. If this wasn’t bad enough for Colombia’s industry, China’s current FDI goes to Colombia’s raw material sectors that serve to manufacture the products that Colombia would later purchase.
Some changes in policies are crucial if Colombia would like to enjoy the benefits of its record-high FDI. For instance, appropriate governmental and banking policies, as well as policies attracting the right kind of FDI. But the most important element spurring a sustainable economic development is savings; as China knows only too well.