Investing in Conflict Affected Economies

Ashby Monk

Apropos to yesterday’s post on frontier markets and Mubadala’s possible investment in Afghanistan, the Multilateral Investment Guarantee Agency (MIGA) has just released its 2010 World Investment and Political Risk report. And this year’s edition is quite interesting, as it focuses on the many challenges in attracting investments into conflict affected and fragile economies (CAFs).

This is a topic for which large institutional investors and SWFs have been particularly interested, as many would-be investment targets, thanks to natural resource endowments or infrastructure needs, are often bypassed due to a variety of political risks. Interestingly, despite the limitations, CAF countries still manage to attract their fair share of investments. I’ve copied (and clarified) some of the relevant findings from the report:

  • CAF countries have absorbed between 5 and 8 percent of FDI into developing countries over the past half decade.
  • FDI flows into CAF countries are heavily concentrated in a few countries. During 2006–2009, the five largest recipients accounted for 60 percent of FDI flows to CAF countries, compared to 54 percent for all developing countries.
  • FDI to CAF economies has flowed primarily into resource-rich countries. These resource rich economies accounted for 72 percent of inflows.
  • Sub-Saharan Africa—which accounts for 23 out of 43 CAF economies and most of the 18 resource-rich ones—absorbs more than two-fifths of FDI flows into CAF states.
  • The United States is the largest source of foreign investment into CAF economies, with a stock of FDI valued at around $11 billion as of 2008 (0.4 percent of its global outward stock).
  • China’s FDI stock in CAF states stood at roughly $5 billion in 2008 (or 9 percent of its global outward stock).

The CAF countries are actually doing better than I might have thought, given the difficulties facing investors in these jurisdictions.

I was surprised to see that war and terrorism rank relatively low among investor fears. According to MIGA:

“This rank may reflect that in CAF countries, the main asset–given the importance of the primary sector—is the mineral underground, which is not prone to losses caused by violence.”

The investors surveyed instead felt that government intervention was a bigger constraint:

“‘Changes in regulations’ not only ranks first among investors’ concerns in CAF countries, but also is most frequently responsible for losses in these investment destinations.”

All this bodes well for MIGA, which is one of the main purveyors of political risk insurance. Indeed, MIGA sees a bright future for itselfAnd, personally, I think that’s a very good thing.

I’m all for developing new and innovative ways — be it governance policies or risk mitigation strategies — to bring private investment into these troubled countries. As I’ve said before, a thriving private sector is crucial for domestic political stability and international security. And it sounds like MIGA’s Executive Vice President Izumi Kobayashi agrees:

“Conflict-affected and fragile economies suffer from cycles of political violence that are hard to break and from a high probability of relapse into conflict. Steady economic growth and rising incomes following conflict can lead to a substantial reduction in the risk of relapse. FDI is an important element in helping to break that vicious cycle by supporting economic growth and development through the transfer of tangible and intangible assets, such as capital, skills, technological innovation, and managerial expertise.”

More to the point, though, there are plenty of amazing investment opportunities within these capital starved jurisdictions if your’re willing to get a bit creative. With that, I turn it over to you, SWFs!

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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