Aid-Foreign Direct Investment Linkages: A Case Study of Aid and Foreign Direct Investment in Uganda.

Taylor, Leslie G (2010) Aid-Foreign Direct Investment Linkages: A Case Study of Aid and Foreign Direct Investment in Uganda. PhD thesis, Lancaster University.

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Abstract

Whilst many hold to the orthodox view that aid can promote the take-off to long-term self-sustaining growth and development in recipient countries as Rosenstein-Rodan (1961), Chenery and Strout (1966) and others have hypothesised, it is far from being realised in SSA economies. This has provoked concern for the effectiveness of donor policy and the appropriateness of recipient macroeconomic orientation. In the main the argument revolves around the aid effectiveness debate. This can be decomposed into its constituent elements: allocative efficiency and effective utilisation. The facts are poor countries and those in SSA in particular have received large inflows of foreign aid. In fact, According to Easterly (2007), Western donors have provided some $2.3 trillion dollars of development assistance over the period from independence in the 1950s/60s to the present; yet with a few exceptions, they are generally poorer in per capita GDP terms in the 2000s than they were in the 1970s. However, reforms SSA economies since the early 1990s have transformed the political and economic landscape of the continent and this reflected in the re-engagement of the international business and development communities. However, the flow of FDI to these countries is still low in absolute terms (1.QA6 per cent of world FDI inflows with 26 middle-income counties accounting for 95 percent inflows)and the remaining 5 percent distributed across 140 LDCs. This low level of private inflows to poor developing countries is well below that required to generate widely agreed the annual average growth in GDP of 6 per cent for a considerable period of time (UNCTAD, 2000) to tackle their high level of poverty and under-development. The size of this challenge is highlighted by the decline in economic growth and trade of the region's economies over the last three decades. For instance, only 2 of 39 SSA economies (UNCTAD, 2000) were better off in the 1990s on growth and trade than they were in the 1970s. Again, according to UNCTAD (2000) the 1980s was associated with a decline in annual average growth to 2.2 per cent from 3.5 per cent in the 1970s. The trade deficit for the region exceeded 4 percent in the 1980s compared to less than 1 per cent in the 1970s. According to the UN Office of the High Representative for the LDCs and Landlocked DCs and Small Island Developing States, LDCs' exports accounted for only 0.6 per cent of world merchandise trade in 2004. The international development community has sought new ways and means to improve both the effectiveness and volume of inflows to these countries. Both justification for and the means of achieving these are articulated in the "Paris Agenda" on Aid effectiveness and the earlier Pearson Commission (1969) which established a need for developed countries to donate resources equivalent to 0.7 of their Gross National Income (GNI) to poor developing countries. The Zedillo Report of theHigh Level Panel on Financing for Development estimated the sum of public funding to these countries to achieve the required rate of growth to achieve the 6 growth rate of GDP and reduce aid dependency and poverty at $50 billion (2001). The Gleneagles G-8 agreed to provide this sum at its 2005 ministerial meeting in Scotland by 2011. However, there is serious doubt that this target will be achieved and current financial and budgetary crisis in donor countries adds to this concern. This thesis is therefore focused on the empirical evaluation of the AID-FDI relationship. As little of the FDI associated with the international activities of Multinational Enterprises (MNEs) go to LDCs, the linking of Aid to FDI may address concerns for higher inflows of FDI where aid creates the infrastructure required by MNEs. The Aid-FDI convergence may also address general concerns for Aid effectiveness through 1) enhanced effective utilisations and 2) improves allocation. The Aid-FDI may also be an appropriate solution to poor infrastructure endowment in LDCs in its catalysis of higher level of private sector participation in the infrastructure sector. This provides an opportunity to demonstrate the Aid-FDI interaction i.e. its co-financing of private and public investments in LDCs such as Uganda. With an anticipated relationship between aid and FDI, the primary data for this research was gathered through interviewing a selected sample of Uganda's principal development partners (taken from the OECD DAC list of major donors). This was complemented by questionnaire survey of foreign investors i.e. UK firms operating subsidiaries in Uganda, and the Uganda Investment Authority for their view and experience with the aid-FDI interface. (Abstract shortened by ProQuest.).