Rethinking the Foreign Direct Investment Process and Incentives in Post-Conflict Transition Countries

Yelpaala, Kojo | January 1, 2010

Burdened by the remnants of conflict, continuing threats of security lapses, significant market failures and weak institutions, post-conflict transition countries can hardly be described as normal economies. The task of transforming them into vibrant, productive, and self-sustaining economies is no simple assignment. Constructing the blueprint for reconstruction and economic development requires creativity of the first order. Conventional theories or pure neo-liberal market driven policy levers preached by the Washington Consensus Group are not likely to be productive. The design of the investment regime for development should therefore focus on non-conventional policy constructs. Contrary to the received theories, the history and evidence of conventional foreign direct investment (“FDI”) as an engine of growth and development in developing countries has been disappointing. It is doubtful whether such FDI can play the necessary transformative role in countries facing more extraordinary economic and political conditions than other developing countries. What post-conflict transition countries need for their transformation is an industrial strategic policy architecture that emphasizes domestic, value-added, high-value investment demand targeting specific sectors and projects. Non-conventional FDI policies should then play a complementary role to the domestic investment demand for economic development. One type of non-conventional FDI that can play a meaningful role in post-conflict transition countries is the project finance model that incorporates irreversible build-operate-and-transfer (“BOT”) or similar operations with the potential for the greatest development impact. The BOT will be supported by a Post-conflict Guarantee Fund and operated by sponsors for a limited time period. Any necessary FDI incentives can then be constructed and directed at actual impediments to achieve the specific developmental objectives of each country.