Foreign Direct Investments Rules in Morocco and the Democratic Republic of Congo - Term Paper Example

International Business Law - Foreign Direct Investments rules in Morocco and Democratic Republic of Congo Broadly speaking Foreign Direct Investment refers the direct invest into the economy of another country. There are various factors which will attract an investor; these factors may include tax exemption, specialized economic zones, preferential tariffs, political stability and infrastructural subsidies and many more. On the other hand there could also be some barriers to this foreign investment which may include protection of local investors and political instability. All of the above mentioned characteristics could be managed by a set of regulations, where the economies of the host country may attract foreign investment in the lagging areas of the economy and on the same time protect the local investor. In the following paragraphs we will critically examine these characteristic of Foreign Direct Investment keeping in view the rules for such investment in Morocco and Democratic Republic of Congo. 1) Foreign Direct Investments rules in Morocco: Morocco is an ethnically and culturally diverse society. Operating a free market economy, where in spite of the current Arab Spring robust growth has been seen and the prospects of the respective economy are very good for the coming years. Increase in the domestic demand and progress in the agricultural and non-agricultural sectors are the major attractions for Foreign Direct Investment (FDI). There are various regulations passed by the Moroccan Government in order to boost the foreign investment which will be discussed below: 1.1) Adoption of a New Constitution: The Moroccan Government had adopted a new constitution in order to stable the political situation of the country. This step was taken to address the social demands of the region which tend to swing due to the Arab Spring. This change in the policy had bore fruitful results and attracted the investors of neighboring European countries like France and Spain. The government allowed the Prime Minister of the country to adopt investor friendly policy while keeping in view the civil rights of the local population. This created an environment which is suitable for an investor, and on the other hand addressed various social and political claims (Doing Business in Morocco, 2012). 1.2) Structural Changes: Due to various social disparities and inequalities and also due the absence of the effective labor market the rate of unemployment among the fresh graduates had increased. The government had announced and implemented various reforms to deal with this challenge, which includes the introduction of the private sector investment in the sectors of training, education, human capital development and career planning/counseling. The Moroccan Government planned to create over 150,000 new jobs each year in order to reduce the rate of un-employment and unrest among the young population of the country. Along with that the government also plans to create and develop private sector jobs for this chunk of the population, as most of which desire to join the civil/public service due to the job security and related short/long term benefits. Therefore the government aims at stronger economic growth and implementing proactive public policies to integrate this unemployed section of the society (Doing Business in Morocco, 2012). The policy makers had planned to reform and institute entrepreneurial structural reforms, which would allow foreign investment in the country to create better paying jobs and thus improving the standard of living. And on the same time government established various training institutes, as the biggest problem these unemployed graduates face is the lack of training or skill due to which they find it difficult to enter into the job market, where with the help of foreign expertise these unemployed young population of the country could polish their skills. It is due to these policies that Morocco is operating the world’s biggest French call center in the world. The Government also ambitiously reformed the structure of higher education system with the help and involvement of the private sector. This allowed various investing opportunities for the modern world, as this one sector of the country was lagging investment and on the same time any foreign investment, whether capital, expertise or technology, would bring development in the Moroccan economy (Doing Business in Morocco, 2012) 1.3) Expansionary Fiscal Policy: Due to the changing political and social situation of the region the government planned and executed an expansionary fiscal policy. That aims the investment in the public sector of the country by the government. Like any country which adopts expansionary fiscal policy, Morocco too require the flow of funds from the foreign and domestic partners in order to meet the needs of the public sectors expenditure. The adoption of this policy was laid upon the rules of macro-economics, where the government planned to invest in the public sectors that would create jobs and liquidity in the market. The rate of inflation would increase due to the heavy imports of the raw materials which would be offset by the higher incomes of the population, as now more job opportunities have been created. As the income of the population increase so the expenditure made by them increase which keeps the circulation of cash in the economy, and hence prevents the retention of money in limited pockets. As the result of more supply of money the central bank of the country had reduced the rate of interest, which attracted foreign currency into the country. This flight of capital helped the government to strengthen its balance of payment. Though the exports of the country reduced as compared to the imports, but the impact of this disparity was offset by the vibrant local demand and remittance of foreign currency in the coffers of the central bank of the country. This also proved beneficial for the revenues of the government, as the collection of taxes also increased due to this robust economic movement. That enables the government to reduce the budget deficit, invest more in public sector project and create more jobs. Due to this positive outlook of the economy the foreign investor brought more capital into the economy. (International Monetary Fund, 2011) 1.4) Balanced Monetary Policy Despite the dynamic economic reforms of the government, The Bank Al-Maghrib (BAM) the central bank of Morocco was successful to keep moderate rate of inflation in the year 2012 (www.magharebia.com). While there are projections that the rate of inflation might increase in the current year, that is why the central bank had plan to keep a balance between rate of interest, rate of inflation, supply of money and the amount of debt-to-GDP. These reforms if properly enacted could attract investment, because despite of these emerging changes the Moroccan Government managed a steady real GDP growth rate which indicate steady and stable progress of the economy and that of the amount invested. (Country Strategy Paper, 2005) 1.5) Adopting an Open-Economy Strategy towards Foreign Market: In order to boost the foreign trade and FDI the Moroccan government had adopted open-economy strategy towards foreign markets. Morocco signed various free trade agreements with European Union, Arab Countries, the USA and Turkey. European Union remained the main trading partner of Morocco, and similarly most of the foreign investment is also attracted from this region. As Morocco being a culturally diverse society could easy emerge with these western investors. (Country Strategy Paper, 2005) 1.6) Debt Policy: From the last decade the Moroccan Government had been pursuing rigorous debt management policy which focuses on the prepayment of the heavy debt and conversion of foreign debt into investment. The government planned to reduce the expensive foreign debt, by the means of negotiating favorable refinancing terms that would convert the debt into investment in the international market, and thus led to the new horizon of public private partnership. Along with that Morocco prepaid its expensive foreign debt and reduced the burden of debt service. This proactive debt management policy which had borne results and created liquidity in the local market and reduced the rate of interest and thus helped the government to reduce its domestic debt (International Monetary Fund, 2011). 1.7) Reforms in Business Environment To attract and retain foreign investment Moroccan authorities had been working on the identification and implementation of various reforms, which are to be prioritized according to the need (Association dedicated to the Promotion of Entrepreneurship in Morocco). This includes: Regulations to facilitate investment in Businesses and Entrepreneurship. Introduce simple administrative procedures. Reduce/control corruption and nepotism through the introduction of a central authority. Establishment, promotion and facilitation of mediation training centers, for the training of professional mediators. Making Morocco more attractive to foreign investors. Publicizing the national heritage and assets, and the business friendly environment of the country. 1.8) Implementation of a Performance-based-System This includes modernizing the human resource management, simplifying the administrative procedures and developing E-administration, better budget management (Doing Business in Morocco, 2012). Government had adopted various measures for the implementation of these policies such as: Announced competitive examinations for the administrative seats in the public sector Establishment of a centrally administrative anti-corruption hotline Development of decentralized local political system, promoting social harmony and inter-regional solidarity. 2) Foreign Direct Investments rules in Democratic Republic of Congo Democratic Republic of Congo (DRC) is a sparsely populated country with respect to its area, as it’s the second largest country in Africa after South Africa. DRC is rich in minerals and possess large deposits of diamonds, gold, cobalt, copper, wood and crude oil. Due to the internal turmoil of the past three decades there had been political instability in the country which had affected the economy of this country. We will characterize the rules governing the foreign direct invest in the Democratic Republic of Congo in the following paragraphs. 2.1) Reforming the Budgeting Program In the past decade the government of DRC took various steps to improve the governance of the government. That involves the abolishment of various taxes that have been redundant along with the illegal levies imposed by various groups during the time of the civil wars. Though the government still could not achieve the desired results, to strengthen the local institutions and harmonize various provinces of the country to ensure political stability. There were various factors which contributed towards the poor implementation of the program, as the government had to divert its attention to various other problems which demand immediate remedy i.e., famine, malnourishment, provision of drinking water and sewage (Doing Business in Congo, Dem. Rep. 2012). 2.2) Changes in Fiscal Policy: During the year 2011 the government implemented an economic program named PEG-2 in order to restore the depressed economic condition and get the economy out of this hyper-inflationary environment. For the proper implementation of which government took various measure. The first goal of this economic reform was to maintain the value of Congolese Franc, to support the poor section of the society and reduce food inflation within the country, this pivotal step had been implemented and the audit conducted by the International Monetary Fund (IMF) confirms it. Based on the success of this initial success of the program IMF agreed to support the country’s country (Lambsdorff, 2006). Government maintains the budgetary discipline in the year 2012 and keeps the economy on the track by maintaining the macro-economic factors. And on the other hand authorities allowed tax exemptions of various food items in order to curb the inflationary trend in the local markets. This allowed various international food related industries to directly link themselves with this lucrative business as the food prices are raising worldwide. 2.3) Infrastructure Improvement Infrastructure of the country had been badly thrashed by the civil wars of the last three decades. And no economy prevails without proper infrastructure; keeping view this need government exempted the tax on the imports of cement and other construction related materials. The step was mandatory in order to strengthen the economy and attract foreign investment. The authorities focus on the reconstruction roads, railway lines, airports and resume/reconstruct means of communication. The establishment of new schools, colleges, universities and professional training institutes is also part of the infrastructure reforms. Constructions of healthcare facilities, hospitals, clinics and urban health development program were initiated in the urban and less developed regions of the country. Construction of wells, water filtrations plants and sewage system and its maintenance was also supported by the infrastructure reforms. As DRC possess majority of the sweat water resources of Africa the government also plans to construct irrigational canal to restore and develop the agriculture sector and reduce its dependency on the import of food items (Polgreen, 2008). 2.4) Monetary Policy Government successfully planned to reduce the inflationary pressures arising from the steep increase in international food prices, for the purpose of the local authorities decided to peg the Congolese Franc with U.S dollar and therefore injected a large sum of dollar amount into the economy acquired through various quasi-finance activities. This helped to soothe the foreign exchange rate of the country. Most of the finance was acquired in dollar denominated debt. Resultantly the rate of inflation reduced within the country and similarly the rate of borrowing. With provided investment opportunity in the un-tap areas of the economy such as mining, foresting, construction and human resource development (Doing Business in Congo, 2012). 2.5) Improve Integration into World Trade: DRC possess various expensive minerals, which are of great demand in the international markets and the prices of same are increasing with each passing day. The Government of DRC had decided to utilize these resources for the development of the country and offsetting the expenses incurred on the items imported by the country which mainly are capital and manufactured goods (Simon, 2007). So with the aid of the World Bank DRC in the year 2010 drew its trade policy, salient features of the policy are as: Reform and simplify foreign trade. Stimulate exports Increase the public revenues linked with foreign trade. Reduce custom duties. Increase public-private partnerships. 2.6) Debt Policy After a successful negotiation with the major creditors (France, Italy, Netherland, Belgium and the USA) in June 2012, DRC was able to cancel a large part of foreign debt under the Heavily Indebted Poor Countries (HIPC) initiative. This proved to be a major economic support for this war ridden country. The savings made from the cancellation of the debt made it possible for DRC to invest the money used for debt service and repayment to more needy areas of the economy like health, education, agriculture, infrastructure, power and communication. Along with that France also agreed to finance a fund for environmental protection, and various other developed nations agreed to support various public sector projects initiated by the government, thus the economy of DRC is receiving direct foreign investment from these donor countries and organizations. But on the other hand the domestic debt of DRC keeps on increasing. So the danger of indebtedness still remains as the country might need foreign debt in order to get rid of the internal debt, this would negatively impact any foreign investment (Polgreen, 2008). Conclusion Keeping in view the above, it could be concluded that there are some similarities in the rules adopted by the countries discussed above such as public-private partnership, reforms in fiscal and monetary policy, disciplined budgetary policy and investment in infrastructure. The results and impact of adopting these rules gave different results in both of the countries, reason being the geo-political situation of these countries. The results of the same rules adopted in Morocco were more successful as compared to DRC was because of the political stability ensured by those in the power, whereas DRC could also achieve the same success by ensuring political stability in the country. Sources "Association Maroc Entrepreneurs." Maroc Entrepreneurs: CrÃation De Votre Entreprise Au Maroc. 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"Moroccan Economy Expected to Grow by 6.2% in 2008." Magharebia. N.p., 5 June 2008. Web. 10 Feb. 2013. . Polgreen, Lydia. "Congo’s Riches, Looted by Renegade Troops." New York Times. N.p., 15 Nov. 2008. Web. 10 Feb. 2013. . Read More