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Foreign Direct Investment and Institutions: Is there a method to Zimbabwe’s ‘Look East’ policy?
01/01/2016 00:00:00
by David Mutori
 
Foreign Direct Investment ... David Mutori
 
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FOLLOWING on from my previous article which explores the potential impact of informal institutions on Foreign Direct Investment, this article seeks to discuss another key issue called governance/institutional distance (gap). Businesses and investors need strong formal institutions in order for them to thrive. Formal Institutions ensure fairness and minimises arbitrary decisions in business disputes

As the quality of Zimbabwe’s institutions deteriorated, the government announced a ‘Look East’ policy. The policy is meant to have been announced in an effort to shore up a struggling economy and manage sanctions that had been imposed by the ‘west’. The ‘look east’ policy was a change in national trade and investment policy from emphasis on the west to the east.

When the policy change was announced, the general consensus was that this shift was caused by the fact that the west was critical of the Zimbabwean government and had imposed sanctions against the country whereas the east was happy to keep a blind eye on what was happening in Zimbabwe.

Given the deterioration in the formal institutions in Zimbabwe at the time, I wondered whether the government announced this shift in policy having noticed that investors from countries with strong formal institutions were less likely to risk investing in the country anyway.

Institutional distance is the similarities or differences between quality of institutions in two different regimes, the host and the home country of the potential investor. The idea behind the theory of institutional distance is that investors are reluctant to invest in a country where the quality of institutions is far too different (mostly inferior to the home country); by implication this means that investors are more comfortable investing in countries with institutions that are comparable to the home country.

This may mainly be because accurate forecasts and predictions are easier to achieve in familiar environments. For example, British investors are likely to balk at the idea of being asked to partner with the Zimbabwean Armed Forces (and cede 51%) in a business venture whereas a Chinese investor may not hesitate at that opportunity because that might be normal practice in China. This implies that the bigger the institutional differences, the less likely it is for the investor to invest in the host country.



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According to World Governance Indicators, Zimbabwe’s governance/institutions have deteriorated very significantly in the last two decades (see chart 1 below). The indicators are based on responses to surveys on people’s perception of the rule of law, control of corruption, government effectiveness, voice and accountability, political stability and regulatory quality.

Responses are gathered from a number of survey institutes, think tanks, non-governmental organizations, international organizations and private sector firms and score allocates. The estimate of governance ranges from approximately -2.5 (weak) to 2.5 (strong). Chart 1 below looks at the average scores since 1996. I have added the scores of other countries around Zimbabwe for comparison.

 

Odd one out: Quality of Zimbabwe’s institutions compared to neighbouring countries

Chart 1 above shows that, while Zimbabwe’s institutions were considered comparable to Zambia’s in the late 1990s, they have suffered considerable decline since the late 1990s. The condition of Zimbabwe’s situation is compounded by the fact that those of her neighbours have remained fairly constant or improved. Zimbabwe’s institutions are perceived to have improved slightly during the GPA years. Since then the governance institutions seem to have stagnated but at a very low base.

Following the theory of institutional distance/gap, the rapid decline in Zimbabwe’s institutions means that the country would have been drifting away from the radar of potential investors from countries with better institutions. This means that investors from countries with better institutions become less likely to take their chances on the country.

I interrogated the east vs west idea in order to explore the possibility of a thought process in the government’s look east policy. To do this, I looked at the average World Governance Indicators institutional scores for a number of countries in the east and west that have been mentioned in the context of Zimbabwe’s quest for FDI. I have also included some countries around Zimbabwe as a comparison. The countries selected for analysis are Australia, Botswana, China, India, Iran, Japan, Namibia, South Africa, Russia, UK, USA, Vietnam, Zambia and Zimbabwe.

Chart 2 below is a representation of 2014 average institutional scores for the countries arranged in order of scores. I have highlighted the ‘west’ countries in blue and the ‘east’ countries in red. Regional (comparison) countries have been highlighted in green with Zimbabwe shown in gold. Although Australia is geographically in the east, it has been highlighted in the same colours as countries from the west because this is the context in which it is mostly identified.


Outlier: Zim institutions' perceived to be very poor compared to neighbouring countries

The graph above shows that so-called ‘western’ countries have institutions that are considered strong while most of the countries in the east have institutions that are considered weak, even weaker than the majority of countries around Zimbabwe. Countries around Zimbabwe are in the middle while Zimbabwe itself is an outlier with institutions that are considered to be very weak.

As Zimbabwe’s institutions have deteriorated, the distance between her institutions and those of the west increased. Starting from a position above Zambia in the late 1990s, the deterioration in Zimbabwe’s institutions means that the gap with the west and, indeed, its own neighbours has increased. The country’s institutions are perceived to be closer to the ‘east’ block. Following the institutional distance theory, this means that potential investors from the west have become more sceptical of investment opportunities in Zimbabwe.

Based on the above, it would seem that Zimbabwe abandoned attempts to attract trade and investment with the west when it realised that the prospects of success was low.

David Mutori is a former chief operating officer of a group of luxury safari camps (based in Zimbabwe, Botswana and Zambia) and Zambezi river white water rafting guide. He writes in his own capacity on topical structural issues that affect the development of Zimbabwe. He can be contacted by email on mutorid@gmail.com or Twitter on @DavidMutori 


 
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