The Impact of Foreign Direct Investment on Human Development Index in GCC
Table 1: Global Foreign Direct Investment, Net Inflows (BOP, Current US$)
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Figure 1: Global Trends in Real FDI Inflows 2007–2020 (billions of US dollars (Source: UNCTAD, 2021)
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Figure 2: GCC Trends in Real FDI (Source: UNCTAD, 2021)
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Relationship between FDI and HDI
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The inflow of Foreign Development Investment (FDI) into host countries brings considerable benefits, such as a direct external source of capital, the transfer of advanced technologies, and better management practices. Capital is regarded as the driving force of economic growth and development, and hence the FDI bringing in the capital in the countries allows further economic growth and development (Mollaesmaeili et al., 2012). Notably, the Human Development Index (HDI) has been a fundamental gauge of a country’s economic development. The HDI is primarily a statistical tool used to measure the overall achievements regarding social and economic dimensions. The two dimensions are determined by establishing the people’s health, education attainment levels and living standards (Sharma & Gani, 2004). It is essential that an understanding of the effects of FDI on human development shown through the HDI is done the same way the assessments are done concerning economic growth.
This essay intends to examine the effect of Foreign Direct Investment (FDI) on human development measured by the Human Development Index (HDI) for the Gulf Cooperation Council (GCC) countries, specifically Saudi Arabia and UAE. According to Shah (2018), there is a positive relationship between economic growth, infrastructure, and human capital’s availability with FDI. These are fundamental factors considered in establishing a country’s life expectancy, education levels among its people and the per capita income to be used in selecting the HDI (Gökmenoğlu et al., 2018). An understanding of the impact of FDI in the two GCC countries in variables such as human development is necessary since the knowledge obtained guides policymakers in developing optimal macroeconomic policies and strategies.
Foreign Direct Investment In GCC
According to the UN’s Annual World Investment Report (WIR), the foreign direct investment inflows in GCC countries increased by 12.4% in 2021 from $27.7B in 2020. These considerable increases were facilitated by the inflows in Saudi Arabia, Oman and the UAE. The GCC region was a global anomaly considering that FDI inflows declined by 35% globally due to the numerous adverse effects of the COVID-19 pandemic (The Economist Group, 2021). This decline reflected the prevailing policies focused on enlisting foreign investment to aid in diversifying the oil-diversifying nations and accelerating their implementation in 2020 as a response to the fiscal strains that rose from the health pandemic and the affiliated slump in oil prices (The Economist Group, 2021). The UAE remained the preferred destination, attracting 71.7% or $19.9B in inward investment and exceeding outflows to $18.9B. In the region, Saudi Arabia’s FDI increased by the highest rate, precisely 20.2% to $5.5B, thus affirming the substantial ongoing drive focused on harnessing foreign capital to attain the Vision 2030 objectives.
Table 1: Global Foreign Direct Investment, Net Inflows (BOP, Current US$) (Source: The world Bank, 2022)
2009 1.44738E+12
2010 1.92641E+12
2011 2.36629E+12
2012 2.08467E+12
2013 2.21093E+12
2014 1.95189E+12
2015 2.68079E+12
2016 2.74464E+12
2017 2.21804E+12
2018 1.06847E+12
2019 1.49807E+12
Figure 1: Global Trends in Real FDI Inflows 2007–2019 (billions of US dollars (Source: UNCTAD, 2021)
From Figure 1, it is evident that Global foreign direct investment (FDI) flows have experienced consistent increases since the 2008 financial crisis. Notably, the inflows did decrease slightly in 2012 and 2014 after which they bounced back in the subsequent years. In this decade, massive decline in FDI flows happened in 2018 by almost 20%. The drop, the third in as many years, brought FDI flows back to the low point reached after the global financial crisis, with the decline concentrated in developed countries where inflows fell by as much as 40% to an estimated $451 billion.
Figure 2: GCC FDI inflows, 2000–2017 (in USD billion) (Source: IMF, n.d.)
Note that the EMDCs represent the Emerging and Developing Countries while AE represents the emerging market averages.
In figure 2, the evolution of the FDI inflows into GCC countries between 2000 and 2017 is presented which shows that FDI inflows into GCC countries have weakened in
recent years by remaining on average below 2% of regional GDP, after moving powerfully upward in the early 2000s.
Human Development Index In GCC
According to the Statista research department, the HDI scoring for GCC in 2018 demonstrated that the UAE obtained a score of 0.866. The UAE was ranked highest among the GCC countries in relation to the HDI. all of the GCC countries except Oman were classified to generally have very high human development indexes. This ranking placed the UAE among the countries that had achieved “Very High Human Development” for their citizens and residents. It was ranked 34th in the index making it better than 155 countries. For the other GCC countries, Qarar was ranked 37th, Saudi Arabia was ranked 39th, Bahrain ranked 43rd, Oman ranked 48th, and Kuwait was ranked 56th.
The reasons why the UAE ranked high in HDI have been attributed to two primary social parameters, including life expectancy and education that have demonstrated considerable improvements over the years (Al Bawaba, 2018). These improvements arose from authorities’ sustained policies and focus on ensuring the country has state of the art education and health infrastructure. The government has been well-poised to become a significant hub in the GCC region regarding health and education (Al Bawaba, 2018). Furthermore, the country has been at the forefront in the Gender Development Index to signify the active role of the female gender and their empowerment in all aspects of life.
Notably, the GCC governments continually transform their human capital, especially by being the first countries to join the World Bank Human Capital Project. The project is a worldwide initiative focused on improving investments in people by contributing to three areas, knowledge skills and health (El-Saharty et al., 2020). Notably, the GCC countries are still expected to do more since even if their HDI are higher than the Middle East and North African regions in their entirety, they rank below their peers in the other areas that have similar per capita income. The relative ranking demonstrated poor learning outcomes, insufficient skill development and higher rates of health challenges that are slowing human development and hindering sustainable and equitable growth (El-Saharty et al., 2020). It has been suggested that the GCC countries attain further human development through an acceleration of improvement in learning, skills and health outcomes among their citizens.
Theoretical Effects of FDI on HDI
The HDI developed by the UNDP is a broadly used index in development literature due to being a comprehensive measure. It provides an objective well-being measure that all countries can incorporate, even the least developed countries (Tintion, 2012). This index will measure the country’s average development concerning equally-weighted dimensions, specifically economic performance via the per capita GDP, the education index that considers the adult literacy index, the gross enrollment index, and finally, the health index that considers life expectancy (Tintin, 2012). Fundamentally, the productivity gains and economic growth fostered by capital widening and capital deepening impacts from FDI provide governments with more room to invest in these three systems. The higher per capita income level means that the individuals can afford more education and health expenditures. Theoretically, the FDI is considered to have a more positive impact on the per capita income and education index and cause a longer life expectancy.
A considerable body of research has looked into FDI and HDI and precisely the effect of FDI on HDI. One of them, Sharma and Gani (2004), looked into the impact of FDI on human development by measuring the HDI scores for low and middle-income countries. The research indicated that FDI does have a positive effect on human development through economic contribution and development in infrastructure in the recipient nations with the subsequent growth in human capital. Another study, Blomstrom and Kokko (2001), found that the FDIC created a favorable atmosphere for developing human capital in the region studied. The study asserted that the FDI prompted increased training for the local employees hence improving education levels. Increased knowledge allowed them to use more advanced technologies in the production processes leading to further human development and economic growth.
Relationship between FDI and HDI
Figure 3: UAE’s Human development Index (Source: The Global economy, n.d.)
Figure 4: UAE Foreign Development Investment (FDI) (Source: Trading Economics, n.d.)
Figure 5 : Saudi Arabia FDI
Figure 6: Saudi Arabia HDI (Source: Baumann, 2021)
Table 2: Saudi Arabia’s Hdi Trends Based On Consistent Time Series Data And New Goalposts (Source: Baumann, 2021)
An analysis of the FDI inflows and the HDI exhibited over the last ten years before 2019 in Saudi Arabia and UAE has demonstrated that the two variables have shown consistent increment. From 2005 to 2019, the HDI to Saudi Arabia had moved 0.770 to 0.854 with a concurrent increase in FDI inflows. FDI in Saudi Arabia averaged 3837.11 USD Million from 2006 until 2021, reaching an all-time high of 13829 USD Million in the second quarter of 2021 and a record low of 264 USD Million in the fourth quarter of 2017. In 2019, FDI in Saudi Arabia was around 1000 USD Million. In 2012, FDI in the UAE increased by 50600 AED Million in 2019 from 35300 AED Million. The same increase has been developed in UAE’s HDI as it moved from 0.83 in 2012 to 0.89 in 2019.
Generally, the Gulf countries have developed a holistic approach to diversifying their economies, which prompted the consistent increase in HDI and FDI. The UAE government adopted several measures, initiatives and regulations that focussed in developing a more conducive environment for foreign investment hence motivating the FDI growth (Haddad, 2018). Laws such as the new Companies law and a regulatory and legal framework in the UAE that continues to favor local over foreign investors would attract more foreign direct investments into the country (Haddad, 2018). Additionally, the streamlined access to oil resources, minimal energy expenses, the will to diversify their economy and a greater purchasing power constitute the primary strengths of the UAE that attracted the investments. These investments that come in the form of increased businesses, better job opportunities and remuneration, and an increased economic growth would benefit the country’s human capital since they now have higher disposable incomes earned (Haddad, 2018). Subsequently, these citizens are able to obtain and provide better educational opportunities to their dependents, access better healthcare while engaging in employment opportunities that fulfill them. Therefore, it is evident that an increase in FDI levels does increase the human development rates for UAE citizens.
Agencies such as Saudi Arabia’s Small and Medium Enterprise Authority focused on supporting small and medium enterprises have been fundamental in their diversification efforts, considering that their growth develops real economic value and jobs (Callen et al., 2014). Notably, the economic diversification efforts have entailed the countries being more willing to allow the foreign entities to invest in their countries. Therefore, the countries would experience a consistent increase in the FDI inflows, especially from the high-income economies. These FDI inflows have been significant since they work in conjunction with domestic organizations in creating economic value beneficial for the country’s economy.
Considering that these countries are endowed with abundant natural resources, these resources working in conjunction with the FDI inflows have aided the countries to develop considerably, especially concerning their citizens (Kabbani & Mimoune, 2021). The wealth obtained has been invested in improving their people’s lives, infrastructure development, and preparing their future without engaging in oil development. The FDI creates new employment opportunities among others as investors construct new companies in the countries. This increases income among the citizens employed in the companies and all businesses established due to the incoming foreign companies. This also leads to an increase in purchasing power for the locals. They obtain a higher ability to access better education and health services, which increases their life expectancy. Therefore, these countries are now characterized by modern cities and the infrastructure needed to serve them, which has been an unshakeable foundation for future economic development. Consequently, the countries would hence have higher human development index scores above 0.8. These hands have placed them collectively ahead of the Middle East and North African regions and on par with some European Union nations.
Conclusion
Statistics have shown that an increase in FDI inflows into a country will positively impact the country’s HDI. UAE and Saudi Arabia have demonstrated the situation within the GCC region to elaborate this positive relationship. GCC countries have been ranked among the high human development countries, one of the reasons being an increase in foreign investments that aid in economic development. Notably, the GCC region still has a long way to go so that its HDI can reach the levels of developed economies with similar per capita incomes among the people.
References
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Baumann, F. (2021). The Next Frontier—Human Development and the Anthropocene: UNDP Human Development Report 2020. Environment: Science and Policy for Sustainable Development, 63(3), 34-40.
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