The weakness of the state limits foreign investment

By 2030, the World Bank predicts that two-thirds of the world’s people in extreme poverty will live in fragile and/or conflict-affected states. The global Covid-19 pandemic has only exacerbated this vulnerability and its consequences are numerous: increasing poverty, especially among children, the deterioration of the education and social protection system, climate and population change, the dramatic increase in violent fighting, as well as the largest crisis of forced dismissal ever recorded.

Situations of vulnerability affect several countries in the Middle East and North Africa (MENA) region, where four out of ten people live in fragile states shaken by economic, geopolitical and social crises. Two states in this region, Yemen and Syria, are among the three states considered the most vulnerable in the world, while others such as Djibouti, Egypt, Lebanon, Libya, Iran or Iraq, are on high alert regarding their level. of fragility according to the latest ranking based on the 2021 Fragile States Index (Fragile States Index) published by American think tank Fund for Peace.

Our empirical study of seventeen countries in the MENA region during 2002-2018, recently published in the Canadian Journal of Administrative Sciences, confirms the fact that vulnerability discourages investors. The contextual elements characteristic of the region also contribute to strengthening the negative impact that can have a weakness on the attractiveness of foreign investment.

A multidimensional fragility

There is no specific definition associated with the concept of “fragile states” also called failed. The latter was born in a context that was both security, marked by the terrorist attacks of September 11, 2001, and economic, along with development policies advocated by intergovernmental organizations regarding non politically stable countries and countries in a situation of extreme poverty.

In terms of security, the most vulnerable states are those countries in a situation of violent conflict or civil war where the state can no longer ensure control over its territory and provide basic services to its population. At the economic level, the weakness of States refers to economies caught in a “poverty trap”. Taken together, the security dimension and the economic vulnerability dimension have resulted in one of the most prominent categories of fragile states, such as “low-income countries under stress” (low -income countries under stressLICUS) introduced by the World Bank in 2002, and now refers to countries in situations of vulnerability, conflict and violence (fragility, conflict and violence (FCV) settings.).

Beyond this highly institutional approach, state vulnerability is now defined by the Organization for Economic Co-operation and Development (OECD) in a multidimensional framework as “the combination of risk exposure and insufficient capacity. of state, system or community government, capture or mitigate these risks.Vulnerability can have devastating consequences such as violence, institutional breakdown, displacement of people, humanitarian crises or other emergency. “

Thus, we can identify five main dimensions of weakness:

  • the economic dimension: State vulnerability to risks posed by macroeconomic shocks
  • political: risks arising from political decisions related to corruption or instability of the political regime
  • security: State vulnerability to the risk of terrorism and organized crime
  • social: risks posed by social inequality
  • environment: State vulnerability to environmental, climate and health risks.

State fragility is usually measured by a composite index, such as the Fragile States Index (Fragile States IndexFSI), Global Governance Indicators (World Management IndicatorsWGI) from the World Bank or State Fragility Index (State Fragility IndexIFC) of Center for Systemic Peaceeven though these indicators do not always cover the various dimensions of fragility that we have just mentioned.

“Resource Curse”

Countries in the MENA region, already affected by the consequences of the terrorist attacks on September 11, 2001, have seen their institutional instability worsen following the events of the “Arab Spring”, after the ten years. The change of political regime in some countries in the region, the exacerbation of violent rivalry with others along with the drop in oil prices, have contributed to the decline in investor confidence and, consequently, greatly reduced attractiveness. attract these locations.

In this context, companies tend to choose a location that gives them a stable environment that allows them to take advantage of the advantages offered by the host country, increase their efficiency and reduce their costs. production.

However, some elements in the context suggest that political weakness and instability do not necessarily discourage all investments, especially in raw materials. In fact, the availability of natural resources in these countries tends to reduce the negative impact of deterioration on foreign direct investment (FDI).

However, the results of our study, mentioned above, show the opposite. The availability of raw materials, especially oil and natural gas reserves in the Persian Gulf countries, seems to be experienced as a barrier associated with the “resource curse” that some MENA countries may have experienced when the extraordinary rents earned from the production and export of the oil caused conflicts and contributed to damage to the diversity of economic activities and the development of other sectors of activity.

Similarly, we have observed that the low level of democratic governance in these countries contributes to amplifying this negative impact in a region that is largely dominated by autocratic regimes. This is because the absence of democratic institutions guaranteeing the protection of civil and political freedoms makes it more likely to deprive foreign investment of local political elites.

In conclusion, business leaders should consider the vulnerability of the state more than the factors that contribute to their choice of location, especially in the MENA region. At the same time, governments should pay particular attention to putting in place the policies and reforms necessary to establish political, social and economic stability to ensure and attract foreign investors.

They should do this more at a time where security risk will be significant in the coming years, as Robert Greenway, director of the Abraham Accords Peace Institute, testified, pointing out that “The Middle East will go through time. .the hardest in its history.

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By Dora Triki, Associate Professor of International Management, ESCE International Business School; Alfredo ValentinoAssociate Professor, ESCE International Business School at Anna DimitrovaAssociate Professor of International Affairs, ESSCA School of Management.

The original version of this article was published in The Conversation.