Does foreign investment help underdeveloped nations ?
By Justice Katju
This article has been motivated by reading this one on indicanews.com :
The assumption, and impression created by, the above article is that foreign investment necessarily benefits an underdeveloped country, and helps it to grow economically.
But is this assumption correct ?
Many Indian and foreign economists, as well as lay people, believe that for progress, India should encourage and facilitate foreign investment. They extol the virtues of foreign investment, but I hold a contrary view, and wish to present my reasons.
Adam Smith, the renowned English economist, in his seminal work, ‘The Wealth of Nations’ (published in 1776), advocated for open markets and relatively barrier-free domestic and international trade. Smith opposed constraints on domestic industry as well as protectionist policies against international competition.
Conversely, the German economist Friedrich List argued in his book ‘The National System of Political Economy’ (1841) that international free trade would lead to the subjection of less advanced nations by the more advanced manufacturing and commercial nations. He supported protecting domestic industries in less industrialized nations with high customs duties and quotas for foreign goods.
https://en.wikipedia.org/wiki/Friedrich_List
It is noteworthy that England was the world’s first industrialized country, achieving this in the 18th century’s first half. German industrialization began much later, necessitating state protection against British industry competition, otherwise, German industries would not have survived. This protection was envisaged by List as customs duties or quotas on British goods.
A giant can fight another giant. But a child cannot fight a giant. Therefore, a child must be protected and nurtured until it too becomes a giant.
Proponents of foreign investments often overlook the fact that these investments, while creating some jobs, usually destroy many more. The British East India Company, for instance, brought foreign investment to India, creating some jobs in railways, plantations, and textiles. However, it decimated the extensive handicraft industries, which had employed tens of millions under the Mughal Empire, making India a prosperous country under Mughal rule with about 28% of the world’s industrial output
.https://en.wikipedia.org/wiki/Economy_of_the_Mughal_Empire
There was extensive FDI during British rule, yet by 1947, India was left impoverished, with merely 2–3% of the world’s wealth and foreign trade, a stark contrast to its rich past under the Mughals, where it held about 28%.
Thus, FDI is ineffectual, and in fact harmful, if it does not benefit the Indian masses but only benefits foreign multi-national corporations. It can lead to the looting of India’s wealth, destruction of our domestic industries, and increased unemployment.
List highlighted that Britain’s industrialization was achieved under heavy protection (high customs duties, etc.). But once industrialized, Britain started preaching free trade to other nations, so as to benefit British industries. He famously remarked that without England’s highly protectionist policy, it would not have achieved such rapid industrial growth.
Germany, under Chancellor Bismarck, followed List’s recommendations, protecting its nascent industries from British competition, enabling rapid growth. The United States and Japan followed similar paths, the former’s stance even contributing to the Civil War, as the industrial North sought protection from British imports contrary to the agricultural South’s interests.
Considering India’s current state of industrialization, I believe we must adopt List’s theory. Our industries require protection to grow, such as imposing heavy customs duties on Western and Chinese goods or prohibiting them entirely to safeguard Indian markets for our domestic industries.
We must not permit unfiltered FDI, and instead keep it strictly restricted, and permitted only in sectors that support domestic industry growth and technology transfer, as the Chinese government did under Deng Xiao Ping and his successors.
This stance does not advocate for the return of the license-permit raj, which stifled our economy for years. I oppose most internal restraints, focusing instead on the question of free entry of foreign goods and investments into India, which should be significantly restricted.
Simultaneously, the state should specially assist our new domestic industries and entrepreneurs, emulating Japan’s post-Meiji Restoration government actions. Particular support and concessions must be directed at small and middle-level industries and young entrepreneurs, through measures such as low-interest loans, free technical advice, and long tax holidays.
Most industrialized nations achieved their status with governments supportive of domestic industries. India should emulate this supportive environment to foster its own economic growth.
Before concluding I may mention that a lot of tall claims have been made that India has the fastest growing economy in the world, and that in 3 years the Indian economy will be the third largest in the world, overtaking Germany and Japan
I would request such people to read these articles of mine, which will awaken them to realities :
https://indicanews.com/justice-markandey-katju-lies-damned-lies-and-statistics-in-india/
https://indicanews.com/justice-markandey-katju-there-are-two-indias-in-india/
https://indicanews.com/justice-markandey-katju-the-truth-behind-indias-explosive-gdp-growth/
https://www.linkedin.com/pulse/india-heading-revolution-markandey-katju
https://timesofindia.indiatimes.com/blogs/satyam-bruyat/a-french-revolution-is-approaching/
