As the U.S. economy slows, foreign direct investment (FDI) is turning down. Commerce Department figures show that FDI sank by 60 percent in 2001 and is off to an even weaker start in 2002.

Why? The recession that began in March 2001. A resumption of the recession would be a “double dip” for the economy, according to Stephen Roach, Morgan Stanley’s chief economist.

At any rate, the U.S. slowdown is a big contributing factor to the downturn in the world economy. Nations that rely on the U.S. being the “buyer of last resort” are hurting. One example is the economies of Latin America that are falling apart.

The continuing fall of the U.S. stock market has made an economic “double dip” a distinct possibility. Accordingly, a dark cloud being cast by Wall Street’s woes on investor confidence is front page news. At the same time, Congress seems unaware of the decrease in FDI, a vital part of capital spending.

FDI has helped to fund the construction of the buildings and factories in which workers produce goods and services. This has spurred economic growth. FDI helps U.S. consumers and corporations.

Most of the FDI has come from investors in rich nations. In 2001, Canadian investors led the way in FDI with $16.9 billion. British investors accounted for $16.6 billion, followed by Switzerland, $15 billion; the Netherlands, $13.2 billion; Germany, $12.8 billion, and France, $5 billion.

Accordingly, FDI played no small part in the U.S. economic boom during the 1990s. And then FDI slowed. The recession had arrived.

“The foreign contribution to the nation's capital spending in the 1990's rose to nearly 9 percent of all capital outlays in America's private sector in 1999 from less than 5 percent in 1986,” reported The New York Times of August 4. “The economy boomed because of the rapidly rising capital spending, particularly in telecommunications and high technology. And then the plunge in capital outlays set off a recession last year.”

In the U.S., the car is central to the national economy. This has attracted FDI for Toyota and Hyundai factories in America. The latter carmaker will soon open its first operation in the nation.

But foreign investment in auto plants is basically the exception that proves the recessionary trend. The New York Times continued: “[A]part from autos and a few other specialty areas, capital spending by foreign companies is by nearly every estimate falling from the high of $136.3 billion reached in 1998 and again in 1999, the most recent years for which data is available from the Bureau of Economic Analysis.”

Foreign investors put capital where it accumulates more capital in the U.S. and worldwide. So goes the "law" of FDI. This is a normal part of the business cycle.

Yet in the U.S., some said the “New Economy” of the 1990s had rendered the business cycle to the pages of history. The soaring stock market and the dreams it conjured of ever-rising share prices no doubt colored such claims. In hindsight, they were hype.

Against this backdrop, the world economy is now experiencing a synchronized slowdown. Slow/no growth has gone global. And the investor classes in the rich nations are pulling back from the U.S. economy, the world's biggest.

But diagnosing the problem is easier than offering a cure. Some investors are in a bit of distress. Consider a report in the Washington Post of August 5.

"Investors have come to the conclusion that the economy is not growing anywhere near as vigorously as they had hoped for," said Henry Herrmann, president and chief investment officer at money-management firm Waddell & Reed in Overland Park, Kan. "We need job growth, business investment and earnings growth, and we are just not seeing it."

Investment capital demands stable, steady returns. This is not currently happening. Instead, the circuit of capital invested to bring more capital is stagnating.

In the meantime, the national economies that comprise the global system don’t exist in isolation from current events. One event is a U.S. buildup to a military attack on Iraq. This would have far-reaching effects.

Investors should recall the 1991 Gulf War, which killed 250,000 Iraqis. A U.S. recession also followed. Then and now, America’s foreign interest is more than a military matter.

Meanwhile, there is much talk about corporate governance on Capitol Hill. Congress rushed to create legislation against fraud in the corporate suites. Where is the candor from Washington about declining FDI and slowing economic growth?

Seth Sandronsky is an editor with Because People Matter, Sacramento's progressive newspaper. Email: ssandron@hotmail.com

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