In 1985, Mozambique attracted almost no inward investment; in 1997 it attracted $695m. This remarkable leap had come just seven years after a 15-year civil war had left the country in tatters. The war resulted in over 750,000 deaths, one million refugees and the economic collapse of a country which formerly boasted an established infrastructure, growing industry and ample natural resources. How did a country torn apart by fighting, disease and lawlessness become one of the recovery stories of southern Africa?

Enabling investment

The government of Mozambique, under President Chissano, was elected in free elections in 1994 and set about providing an enabling investment climate. This included privatisation of over 900 public enterprises including the entire banking sector, liberalisation of price and trade regimes, the restructuring of tax and tariffs and the establishment of a market-based foreign exchange system. These provisions, in addition to Mozambique’s borders with the rest of southern Africa and port access to India, have all contributed to the turnaround.

However, according to Jacques Morisset, an economist for the Organisation for Economic Cooperation and Development (OECD), other factors aided the attractiveness of Mozambique as a investment location. These included the high profile of President Chissano in international relations, particularly in promoting FDI in southern Africa and the implementation of a single project which has created significant spin-offs, namely, the Mozal aluminium smelter, located just outside Maputo, the largest investment project in Mozambique to date, worth $1.3bn. Efigenia Timba, of the Mozambique board of investment, agrees that the Mozal project has attracted additional investments. Initiatives such as the Maputo Corridor, a regional private-led initiative linking the port of Maputo to Witbank in South Africa, have been launched since the smelter opened in 2000.

Regional agreements

Membership of regional agreements such as the South African Development Committee (SADC) and Common Market for Eastern and Southern Africa (COMESA) has also helped to attract high levels of investment. In a recent report, FDI Confidence Index, produced by American consultancy AT Kearney, results revealed that nearly two-thirds (61% of those surveyed) of executives singled out global or regional trade initiatives, or lack of, as affecting their investment decisions. The Mozam-bican government has also ratified the SADC Trade Protocol, which is paving the way for free trade and a single market in the region. Domestic consumption due to external aid flows, has helped to sustain domestic demand and therefore maintain economic growth despite Mozambique being one of the poorest countries in the world.

Further potential

According to deputy chairman of the Confederation of Indian Industries (CIIs), Mr K Kutty, the country holds vast potential and Indian companies plan to export textiles, garments and agricultural produce to Mozambique, to be reprocessed and exported to other countries on a tariff-free basis. Mr Kutty also sees an opportunity for investment in infrastructure development and joint ventures in the agro-industry sectors such as rice, tea and wood products, as well as in more value-added investment in IT, training and tourism.

Mozambique, therefore, is a good example of how economic liberalisation, a democratic political system and social stability have led to increased investment despite the legacy of war.

Reg Rumney, director of political risk consultancy BusinessMap in South Africa, says: “Without big markets and high rates of economic growth, as in China, liberalisation of the economy is a good place to start. Foreign investors are attracted by privatisation, not only because it unlocks investment opportunities but also because it signals a commitment to the free market”.

Mozambique and Uganda have both shown how swift recovery from desperate situations is possible. But some countries are also successful in attracting FDI even as the bullets fly – Angola, for example. Angola has been at war for 25 years, and although a cease-fire was agreed earlier this year, companies still need specialist protection, particularly those that work in oil and diamonds. Nothing has deterred investment. Angola has the highest FDI flows among lower-developed countries and the second highest in Africa in absolute terms, according to an UNCTAD World Investment Report released in September.

Mr Kenneth Kwaku, chief representative of MIGA in Johannesburg, refers to the situation as the “Cabinda Syndrome”. Cabinda is a province in Angola in which Chevron Texaco is located. The company has a town whose 1200 residents are cordoned off from the rest of Cabinda by minefields and barbed wire. The end of the war has not made any difference; employees are still not allowed to stray from the compound because of guerrilla groups and rebels. Due to this, FDI in other sectors has been less forthcoming. “Offshore oil accounts for the huge inflows of FDI into Angola, but it is a classic ‘enclave’ economy, where most of the money stays within the enclave. Apart from brave investment by Coca-Cola in a bottling plant, we have, as yet, found little else but investment in oil fields,” states Mr Rumney.

Free trade zones

In the aftermath of war, Angola is looking into the development of a free trade zone, according to Peter Ryan, vice-president of the World Feder-ation of Free Zones. Mr Ryan sees free zones as an important tool for the economic development of a country affected by corruption or terrorism problems. “They provide a safe enclave where utilities are provided and investors are guaranteed that their inputs will not be sequestered”. He points to Sri Lanka as an example, its first free zone was built in 1980 and contributed substantially to the growth of the economy. Colombo is now one of the biggest ports in South East Asia despite the country being under the threat of violence from groups such as the Tamil Tigers.

Terrorism impact

As it is with war, so it is with terrorism. The impact of terrorism on an economy can be limited, as is the case with Israel. According to Dani Wassner, publications and economics information officer, Investment Promotion Centre, Israeli Ministry of Industry and Trade, the only sectors of the economy which have been affected are tourism, construction and agriculture – and these latter two due to restrictions on Palestinian labour as much as violence. He does add that there has been a decline in the last two years since the violence escalated but this matches the downturn in world FDI flows, particularly in the high-tech sector. The Bank of Israel estimated that during 2001, the cost to Israeli business of Palestinian attacks was approximately $2.6bn.

Israel’s high-tech cluster – the largest outside California – is continuing to attract both venture capital funding and direct investment. Mr Wassner emphasises that Israeli high-tech output has risen by an annualised 9% since April this year. This year has also seen substantial investments from Philips (Medical Systems) which has expanded its R&D facilities and Applied Materials which has invested $100m in a new facility. Hewlett-Packard is currently planning a $25m investment.

However, images of the bloodied victims of suicide bombers have taken their toll. Mr Wassner admits that many potential investors and foreign business associates are afraid to travel to Israel but these problems are overcome by Israelis travelling abroad for meetings.

But, all in all, a stable economy which has achieved growth through 50 years of conflict is still attracting investors, says Mr Wassner.

James Zhan, chief, Office of the Director, UNCTAD, argues that stability is not necessarily needed to attract FDI: “A stable environment does not matter, investment can happen whether or not there is financial, social or political instability”. Even a financial crisis, in certain circumstances, can lead to increased investment. After the collapse of the Asian tigers in 1997, some countries in the region benefited from the falling markets. FDI in Thailand and South Korea increased as the collapse forced economic restructuring. In Thailand, restrictions on foreign ownership in the manufacturing, retail and banking sectors and of land and leases were removed. As a result, the country attracted over $7bn-worth of investment in 1998. South Korea has attracted more than $10bn in FDI annually since 1999.

Indonesia

Indonesia, in comparison, has suffered as a result but this has been more due to policy problems than the lingering terrorist threat post-September 11 and before the Bali bombing which changed the investment landscape once again.

Immediately following the financial crisis, FDI flows remained steady and in 1998, flows were among the largest in the developing world at $4bn-$4.5bn. Since then, according to Economist Intelligence Unit (EIU) research and Mr Zhan, Indonesia has been the only country in the region to experience disinvestment. Since 1998, there has been billions of dollars worth of disinvestments. Political and social unrest have led to investors growing increasingly wary of Indonesia. In the first nine months of 2002, the country attracted 780 investment projects worth $5.4bn, compared with 1017 projects worth $6.1bn in the same period in 2001, according to the country's Investment Coordinating Board.

Political stability was improving under President Megawati but Caroline Bain, Indonesian specialist at the Economist Intelligence Unit, points to evidence that the domestic elite has more control now than under former dictator Suharto. This deters foreign investors as they are fearful there will not be a level playing field.

Ms Bain thinks lack of reform was the problem rather than a downturn related to the September 11 attacks on the World Trade Centre, Indonesia being predominantly a Muslim country. That was prior to the bombing by terrorists in Bali, however, which Ms Bain described as the “final nail in the coffin”.

An increase in terrorism and the threat of it is likely to deter some investors but not all. Natural resources still attract business. Damien Pearl, chief executive of GLOBAL, a corporate security firm based in London, has been busy since September 11. His main areas of work are Pakistan, Afghanistan and surrounding areas. “We always did operate there anyway as there has been an obvious threat from terrorism for some time, but demand for protection is higher now. Companies engaged in the exploration business have not been deterred”.

Domestic politics

In countries such as Kazakhstan and Azerbaijan, domestic politics is much more important for foreign investment. According to Mr Pearl, these resource-rich countries have much more pressing issues than those of religious conflict. More than one-third of Kazakhstan's FDI has come from the US, and that trend shows no signs of slowing. Much of the investment has been in oil. It can be argued that more investment will go into countries such as Afghanistan due to the stabilising presence of US troops. Multinationals are usually looking to expand into a new market and the troops provide a relatively stable environment in which to invest.

Investors are a determined and tough breed. Provided they can be sure that governments will not attempt to nationalise assets or prevent profit repatriation, other problems such as war and terrorism can be overcome.