negative impact of fdi on the host country-a surge in crime rate in india

8/13/2019 Negative Impact of FDI on the host country-a surge in crime rate in India

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Global Journal of Finance and ManagementISSN 0975 - 6477 Volume 3, Number 1 (2011), pp. 123-136 Research India Publicationshttp://www.ripublication.com/gjfm.htm

Negative Impact of FDI on the Host Country : Surge

in Crime Rate in India

G.T. Manjula

School of Economics and Management

South West Jiao Tong University111, 1stSection, Northern Second Ring Road,Chengdu, Sichuan 610031, ChinaE-mail: [email protected]

Abstract

This paper examines the causal relationship between FDI inflows and totalcrime in India by using classical econometric methodology. The paperattempts to study the direction of causality between the two variables. There is

sufficient evidence of FDI inflows in to India causing uneven economicgrowth leading to rising income inequality and social unrest. These negativeeffects are leading to surge in crime rate. First, a multivariate regressionanalysis was conducted to see the effect of FDI on total crime, taking fourexogenous variables, i.e., FDI as a percentage of GDP, GDP in US dollars,GDP per capita and FDI net inflows in million US dollars and total crime asendogenous variable. Though the over all model was significant, the crimeincidence due to FDI net inflows showed a weak positive influence. Toexplore further a univariate regression analysis was done with total crime as aregressand and FDI net inflows as regressor. The results did not make anysignificant difference from the multivariate regression results except showing

that there was some indicative influence caused by FDI net inflows on totalcrime though it is not a strong evidence of causality between the two variables.But knowing that a multitude of factors cause the occurrence of crime andgiven the fact that a certain percentage of crimes go unrecorded, this resultneed not be ignored and the issue deserves further exploration.

Keywords: Crime, GDP, FDI, Time series, inequality.

IntroductionForeign investment moved across countries in search of profit for the last 300 years.


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In this process, flags followed foreign investment giving rise to colonial era. But therecent surge in foreign direct investment, (FDI), has been encouraged by the processof globalization. Globalization has encouraged flow of FDI on an unprecedentedscale. Such massive flow of FDI to developing countries, (which are now calledemerging economies), has helped increase investment funds available for thedevelopment of their economies. FDI has helped transfer new technology to thesecountries. FDI has increased employment opportunities and raised the level of wages.It has encouraged exports and made available foreign exchange resources therebyhelping them to balance their foreign trade account.

On the negative side, FDI has helped the rich countries to exploit the preciousnatural resources of the developing countries like Latin America and Africa. FDI hasnegatively impacted the environment of the host countries like destroying vast areas

of forests in Latin America and Africa. Apart from such visible negative impact, FDIhas encouraged illegal economic activities like drug trade, trade in arms, crime,money laundering, corruption, tax evasion and fraudulent financial transactions. It istrue that all these illegal economic activities did not start with globalizationper se,butthey have increased in their magnitude beyond comprehension because of the flow ofenormous amount of FDI across the boundaries of countries in the wake ofglobalization process.

Scholars have attempted to study and quantify both the positive and negativeimpact of FDI inflows on host countries. Some studies showed that there was inverserelation between FDI inflows and growth rate of GDP. But this was attributed to theflow of FDI into the process of exploiting natural resources of developing countries.

Later studies have shown positive relation between FDI inflows and GDP growthrate.( See for detailed review of literature, Sahoo, (2006, pp.26-27).

However, several studies have confirmed the negative impact of FDI flows on theenvironment particularly the forest cover, air quality and water resources ofdeveloping countries. Some studies have also attempted to study the relation betweenflow of FDI and illegal and criminal acts. I have attempted in this paper to statisticallyprobe into the relation between FDI inflows into Indian economy and surge in crimein India.

Crime rate in India has increased significantly and is becoming a threat to Indianeconomy and society in the recent years. Particularly after the introduction ofstructural economic reforms in India, the process of globalization encouraged large

scale outsourcing of BPO. BPO and Information technology activities spread andexpanded in four major cities of India, i.e., Bangalore, Chennai, Hyderabad and Pune.These business activities required night shift work and large number of femaleworkers were employed. These workers became increasingly exposed to criminalassaults. Such crimes on women have increased over time. This is the impactglobalization and the resultant FDI inflows.

It is a common knowledge that there is in fact a direct link between poverty andcrime. Crime is an important consequence of poverty. Most of the studies haveconcentrated on the relation between poverty and crime, economic growth and crime.But enough attention is not paid to find out the impact of FDI on crime. This paperhas tried to address this issue.


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Negative Impact of FDI on the Host Country : Surge in Crime Rate in India 125

A few decades ago crime rate could be related as an inevitable result of poverty.But since 1990s with the liberalization of economic policies and encouraging private

sector economic activity in India, considerable progress has been made in looseninggovernment regulations, especially in the area of foreign trade and investment. Manyrestrictions on private companies were lifted, and new areas were opened to privatecapital. The new industrial policy of 1991 ushered in a series of policy measureswhich liberalized FDI inflows into Indian economy.Over the years due to a steadyliberalisation of the current account transactions, more and more sectors have come tobe opened up for foreign direct investment and portfolio investment facilitating entryof foreign investors in telecom, roads, ports, airports, insurance and other majorsectors. India has attracted huge FDI and that has helped achieve high rate of growthof its GDP. The cumulative impact of liberalization, privatization and globalizationhas been to raise the income levels of all sections of the society though at varying

rates. Indias spectacular economic growth over the past decade has raised per capitaincomes substantially, which has increased the size of the middle class and raisedtheir income level. This has been attributed partly to the FDI inflows into the country.At the same time the increases in income levels has been highly uneven across thecountry, and also within individual states. Thus Indian economy is faced withwidening income and wealth inequalities which are a fertile ground for the crime tothrive.

So, if crime rate is related to poverty in the context of such impressive economicgrowth in a country, one would expect that crime rate should decline. But the crimerate in India is increasing along with the increase in the countrys GDP as well as percapita GDP. This paradoxical situation is a sufficient justification to explore the

possibility that FDI could be helping economic growth in the country favoring onlycertain regions, sectors and groups of people resulting in widening incomeinequalities and creating uneven job opportunities and thereby, as backlash, increasingthe crime rate in the society indirectly.

India has been able to attract huge FDI due to the factors such as being liberal, andlargest democracy which enjoys political stability; second largest emerging market(US$2.4 trillion); skilled and competitive labor force; highest rates of return oninvestment; large GDP and market potential; English language facilitating easy andhence low cost of communication, low labor cost , low taxation, lower environmentalprotection regulation and independent judiciary to arbitrate commercial disputes.

It is true that India permits FDI in certain sectors only. FDI is not permitted in

defence related activities, railways, multi-product retail trade and agriculture. Thereare also sectoral caps in the entry of FDI. Even so, there is a growing realization torelax such restrictions on the flow of FDI. What is disappointing is that FDI has flowninto certain sectors and regions where there is availability of the necessaryinfrastructure, availability of skilled workforce, adequate power supply and access totechnology. Thus FDI takes advantage of the countrys natural resources to earn highrate of return, leaving behind the underdeveloped areas which deteriorate further dueto neglect of the domestic private sector as well as the government. The povertystricken masses remain poor thus creating a sense of social injustice, frustration due tounemployment which feeds criminal ideas into their minds motivating them to seekvengeance against the better off and/or resort to crime as a means of survival.


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$4,222 million in 2001 and thereafter slightly increased to $3754 million and fell to$2171 million in 2005.

Chart 2 in Annexure shows that crime incidence has been increasing steadily from1991 to 2005, except for a slight dip now and then. Crime incidence reached its peakin 2004 to about 1.8 million in the same year when the FDI inflow was quite high at$3754 million, compared to previous years.

Trends in Total Crime Incidence and FDI Inflows into India from

1990 to 2005If we observe the Table 1 closely we notice that all the three variables, i.e., GDP percapita, FDI inflows and total crime incidence, have steadily increased from 1993 to

1998, which gives an impression that FDI inflows helped increase economic growth(measured in terms of GDP per capita) and growth of GDP in turn influenced thecrime incidence. However, if we closely examine the Table 1 for the years from 1999to 2005, we find certain intriguing patterns. FDI inflows declined for the years 1990to 2000, while the GDP per capita and total crime incidence increased. Though therewas fluctuation in the FDI inflows and total crime incidence, GDP per capita shows asteadily increasing trend throughout the period from 1993 to 2005. The year 2005 hadthe highest FDI inflows into the country to the tune of US $4,222 million and therewas a corresponding increase in GDP per capita. But the total crime incidencedeclined by 1,776 compared to previous year. However, this decline was only for asingle year, compared to the trend observed for five years from 1993 to 1998 which

shows increase in all the three variables.As it was argued earlier that poverty can be an important cause for crime, Table 2,

in Annexure below shows that from 1990 to 2005 there has been a decline in thepercentage of population below poverty line. This decline indicates that with therising economic growth, poverty has declined which should push down the total crimeincidence. But according to the data presented in Table 1 there is an increasing trendin total crime incidence with increase in economic growth and decline in poverty.

Although a study, (Chakraborty and Nunnenkamp ,(2006), on FDI has pointed outthe advantages and has provided sufficient evidence to show that FDI promoteseconomic growth in the host country, another study,(Kumar,2007), relating to Indiahas found that FDI has only benefitted manufacturing and service sectors. In the caseof India, though FDI inflows benefit in terms of transfer of technology andmanagement know how, all these concentrate only in certain sectors such asmanufacturing that too concentrating in some locations and neglect other sectors, andthis creates an uneven distribution of economic benefits in the society.

The data presented in Charts 1 to 6 and Table 2 clearly show that with the rise inGDP per capita, the total crime incidence has also shown an increasing trend and thepoverty rate seems to have declined noticeably as shown by the estimates of thePlanning Commission of India. Although Indian economy has grown steadily over thelast two decades, its growth has been uneven between different social groups,economic groups, geographic regions, and rural and urban areas. See for details about

growing inequalities after liberalization Jayadev, et al, (2007), and Vakulabharanam,


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(2010). Does this in any way indicate that increasing income and wealth inequalitieshave increased the total crime incidence in India?

I have tried to investigate and find an answer to this question by subjecting therelation between FDI inflows and total crime incidence in India to statistical tests.

Statistical AnalysisThe argument of this paper is that FDI inflows into India cause uneven economicgrowth creating negative impact on the society thereby leading to increase in crimeincidence.

For this purpose I have used the variables: FDI inflows in to the country and GDPin US $ (2009 prices), and tested how they impact crime incidence. This statistical

analysis looks at the direct effect of FDI inflows on total crime incidence in Indiausing regression analysis. In the first stage, regression is run on total crime as anendogenous variable with four exogenous variables: FDI as a percentage of GDP,GDP in US$ million, GDP per capita in US$ and FDI net inflows in US $ million. Inthe second stage a univariate regression between FDI net inflows and crime is run tosee the direct impact of FDI net inflows on crime. In both the regressions I have usedone year lagged models.

Multivariate ModelThe hypothesized form of the crime rate function takes the following form for

measuring the influence of FDI on crime:

CRIME=(FDI_PGDP, GDP_US, GDP_CAP, FDI_NET)Where,CRIME = Number of IPC crimes per00,000 populationFDI_PGDP= FDI as a percentage of GDPGDP_US= GDP growth measured in US dollarsGDP_CAP = GDP per capita in US$FDI_NET = FDI net inflows in millions of US $.

I have used the following Basic Model for the multivariate regression:Y (Crime)t= 0+ 1 (FDI net inflows as % of GDP)t+ 2 (GDP in US$)t+ 3

(GDP per capita)t+4(FDI inflows in US $ (million))t+

The exogenous variables are lagged 1 year to overcome the problem ofautocorrelation that normally exists when time series data is taken in sequentialperiods and also on the assumption that crime takes a considerable time to show upand be measured. In other words, the process of FDI inflows takes time to createconditions for the crime to surge. Hence one-year lag is used. So the fitted equation is:Y (Crime) t=0+1(FDI_PGDP) t-1+2(GDP_US) t-1+3(GDP_CAP) t-1+ 4(FDI_NET) t-1+


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Crime = 1510548.032 87289.598 (FDI_PGDP) -1.744X10-7(GDP_US) +618.559(GDP_CAP) + 37.381 (FDI_NET)

Analysis of the correlation matrix shows that GDP per capita has highestcorrelation with total crime, (0.887), amongst other explanatory variables considered.All the exogenous variables considered seem to have moderately positive correlationwith the crime. We can notice the correlation between FDI net inflows and GDP inUS million dollars, a reasonably high correlation, which indicates that FDI increaseseconomic growth measured in terms of GDP. But there exists a strong correlationbetween GDP per capita and GDP in US million dollars, (0.99). This would implymulti-collinearity and explains the relatively low t-values for these two variables. VIFis greater than 10 for all the four variables as the two FDI variables are also strongly

correlated though less than the GDP variables.Analysis of the signs of the coefficients of the variables reveals mixed results. Wecan notice that 151, 0548 of the crimes are caused by other factors than the variablesconsidered. Increase in GDP per capita increases crime incidence. And FDI alsoincreases crime incidence though to a very small extent. FDI operates in many ways:

1. It creates uneven job opportunities causing household income inequality.2. Creates urban bias of public policy, which allows city-based elites to capture a

disproportionate share of economic opportunities creating social injustice andsocial tension.

3. Disparity in the distribution of wealth results in the poor and the lower middleclass to have limited ability to organize, influence policy and defend their

interests.4. Government s policy of privatization of public sector units creates resentment

among public sector workers.5. Extremely uneven growth in respect of different sectors like between

agriculture and non-agriculture sectors results in poverty in rural areas.6. Extreme mechanization reduces demand for manual labor, who in turn migrate

to urban slums. When they fail to find remunerative jobs in urban areas, thetendency is to resort to crime.

7. Both employee and consumer exploitation are on rise in private sector whichcreates backlash resulting in crime.

From our regression statistics: R2 = 0.866. So we can infer that 86% of thevariation in total crime is explained by the variations in the exogenous variablesconsidered. Adjusted r2shows that 81% of variation in Y (total crime) is explained byall X variables) used, taking into account the four variables used and sample size of15.

F value from the regression test yielded 16.168, and P value is less than alpha at0.05 indicating us to reject the null hypothesis of none of the variables can explaincrime and accept the alternative hypothesis that there is overall significance of themodel proving positive influence of FDI inflows on total crime incidence and there isevidence of at least one of the independent variables influencing the total crimeincidence in India.


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A univariate model with FDI inflows as exogenous variable and total crimeincidence as endogenous variable is run to overcome the problem of multicolinearitythat existed in the previous multivariate model.

Univariate ModelTo test the direct impact of FDI inflows on crime incidence, the following univariatemodel is used:

(Total Crime) t=0+1(FDI_net) t-1+ Total crime = 1650883.772 + 36.686 FDI_net inflows

This model does not violate any of the assumptions of linear regression and isover all significant and also with respect to individual exogenous variable FDI

inflows, it is significant when we check the t-statistic.1 from our analysis tells us that the total crime incidence increases by 36 on anaverage (a negligible magnitude ?) for each additional one million US dollar inflow ofFDI inflows. R square is 0.65 and correlation between FDI inflows and total crime is0.81 which is moderately high. From F-test and P-value the over all model issignificant. From T-statistic (4.9) FDI is quite significant in explaining the variationsin total crime incidence in India

Considering the crime occurrence in hundred thousands a year, 1 being 36 is notso significant though it shows that there is a positive effect. R square tells us that 65% of the variation in crime is caused by the variation in FDI inflows and correlationbetween FDI inflows and crime is moderately positive at (0.81).

ConclusionThe above empirical analysis supports the view that FDI inflows into emergingeconomies do create conditions which breed crimes in urban areas. Although theresults trace a very small direct influence of FDI inflows, given the multitude offactors contributing to total crime incidence in India and limited number ofobservations, we can say that there is some possibility of FDI inflows impacting oncrime. And the argument that FDI inflows cause uneven economic growth anddisparity of wealth in the society leading to increased crime incidents tends to be quiterelevant in our analysis. This has been borne out by the increasing number and

frequency of criminal assaults on well paid female workers employed in BPO and ITbusiness activities. Bank robberies were rare in India until the process of globalizationspread to all urban centers. This surge in crimes in urban areas has been the result ofwidening income and wealth inequalities. Now we hear virtually every day bankATMs being ransacked in one city or the other. To emphasize, this surge in crimes inurban areas has been the result of widening income and wealth inequalities. While thelong-term solution to this surge in crimes should be found in achieving rapid andinclusive economic growth, in the medium and short-run governments in India shouldformulate unemployment relief measures and urban poverty alleviation schemes toprovide immediate relief to the urban unemployed youth.


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References

[1] Sahoo, Pavakar (2006), Foreign Direct Investment in South Asia: Policy,Trends, Impact and Determinants, ADB Institute , Discussion Paper 56,November.

[2] Chakraborty, Chandan and Nunnenkamp, Peter ( 2006), Economic Reforms,FDI, and Economic Growth in India, Montclair State University, NJ, USA.

[3] Kumar, Anil, (2007), Does Foreign Direct Investment Help EmergingEconomies ?, Federal Reserve Bank of Dallas, January 2007. EconomicLetter.

[4] Jayadev, Arun, et al,( 2007), Pattern of Wealth Disparities in India DuringLiberalization Era, Economic and Political Weekly, September, Mumbai.

[5] Vakulabharanam,Vamsi ,(2010), Does Class Matter? Class Structure andWorsening Inequalities in India, Economic and Political Weekly, July,Mumbai.

[6] Chaudhuri,S (2006), Partially Awakened Giants: Uneven Growth in China andIndia, The World Bank Policy Research Working Paper, Number 4069.

[7] Sharma, Kishore, (2000), Export growth in India: Has FDI Played a Role?,Charles Sturt University, Australia, July.

[8] Singh, Kulwinder,(2005),Foreign Direct Investment in India: A CriticalAnalysis of FDI from 1991 to 2005, Center for Civil Society, New Delhi .


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Annexure

Table1: Trends in GDP Per Capita, FDI Inflow and Total Crime Incidence in India.

Notes: FDI/PGDP: FDI as a percentage of GDP.FDI:Net US $m: FDI net inflows in US$ million.

Sources: Crime: The Registrar General of India,(Crime), http://ncrb.nic.in;FDI data: Department of Industrial Policy & Promotion, Ministry of Commerce and

Industry, GOI, New Delhi, http://dipp.nic.in/fdi_statistics,http://dipp.nic.in/fdi_statistics/India_yearwise.pdf

GDP per capita :International Monetary Fundhttp://www.imf.org;

http://www.indexmundi.com/india/ (data are in 2009 US dollars)GDP in US$ million: International Monetary Fund - 2009 World EconomicOutlook,World Development Indicators database.

Table2: Trends in Proportion of People below Poverty Line.

Chart1: Trend in FDI Inflow into India from 1990 to 2005.


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Chart2: Trends in Total Crime Incidence in India from 1990 to 2005.

Chart3: Trend in Par Capita GDP of India from 1990 to 2010.

Chart4: Trend in the Level of Per Capita GDP of India from 1990 to 2010.

Crime Incidence Versus FDI inflows in US$(Million)

0

500000

1000000

1500000

2000000

2500000

0 1000 2000 3000 4000 5000

FDI inflows in US $ ( million)

TotalCrime(IPC)

Incidence

Series1

Linear (Series1)

Chart5: Associations between Total Crime Incidence and FDI Inflows into India.


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Chart6: Percentage of People below Poverty Line in India.

Model[1] table


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Model [2] table


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negative impact of fdi on the host country-a surge in crime rate in india

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