Foreign direct investors highly value stability, both political and economic. That’s because their investment horizon is usually 10 to 20 years, if not more, and there is no easy route out when it goes badly wrong. Just look at the ongoing struggle of Raiffeisenbank and Citibank to extricate themselves from Russia since 2022. 

Some political risks can be quantified, as political science has proven since the 1950s. The chances of a successful coup are highest in illiterate, low-income countries, while a civil war has hardly ever happened in rich countries. It’s one reason why few investors build factories in the Sahel region of Africa, and the vast majority of FDI flows from rich countries into other rich countries. 

FDI’s creation of jobs, exports and gross domestic product (GDP) growth means it can reinforce a virtuous circle, whereby a stable country becomes more stable. And of the course the opposite applies in the Sahel, which attracts little investment and so the region stays poor.  

The instability of the Arab Spring played a big role in deterring FDI to those countries, and the jobs that would have helped the region stabilise. More than a decade later, there’s no secure democracy left in the Arab Spring countries, while Morocco — which avoided instability — has won more than its fair share of FDI.  

So what should we make of the leaderless protestors who in July cancelled a budget in Kenya and forced a change of government, and who in August sent Bangladesh’s prime minister fleeing into exile? 

Will it stop the FDI flow that has made Bangladesh a textile, clothing and shoe powerhouse? Will it deter investment into Kenya, one of Africa’s biggest FDI recipients? Political change, and the democratic accountability and improved governance their protagonists often seek, are likely to be welcomed by foreign investors over the long term. But the short-term risk is that new leaders buy support through fiscal profligacy. 

Take the example of Tunisia, where the Arab Spring forced a change of government in 2011. Over the next decade the country’s budget deficits soared to 5.8% of GDP. This rising debt undermined its economic outlook, with Unctad data showing its FDI inflows as a percentage of GDP slumped to 2% in the decade after its revolution, down from between 4% and 10% from 2006 to 2009. 

The lesson for new leaders in Bangladesh, Kenya and elsewhere, is that responsible fiscal policy must be maintained. Eastern Europe’s success after the fall of communism is partly because they succeeded in doing so. The Arab Spring’s failure to deliver prosperity or democracy is partly because they did not. 

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This article first appeared in the October/November 2024 print edition of fDi Intelligence