A Review of ECO Performance with Emphasis on FDI

The ECO (Formerly Regional Cooperation for Development=RCD) was established in 1985 as a trilateral organization of Iran, Pakistan and Turkey to promote multi dimensional regional cooperation to create conditions for sustained socioeconomic growth in the Member States. Following the amendment in the Treaty of Izmir (as the legal framework for the RCD), ECO was fully launched in early 1991. In 1992, the Organization was expanded to include seven new members, namely: Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. The date of the Organization’s expansion to its present position, 28th November, is being observed as the ECO Day. Over the past 13 years the member states have been collaborating to accelerate the pace of regional development through their common endeavors. Besides cultural and historical interdependence, they have been able to use the existing infrastructural and business links to strengthen their major economic decisions. ECO has started several projects in priority sectors of its cooperation including energy, trade, transportation, agriculture and drug control. In this study, we evaluate the performance of ECO with emphasis on Foreign Direct Investment (FDI) and propose the appropriate policies for its future. Despite of this reality that ECO members have great similarities, but they are politically disaggregated. We try to consider economic and political factors simultaneously. Based on formal data in 2004, ECO members had over than 380 million people (almost 6% of world population) that mean a potential market with EU market size. However, the per capita GDP in $US was $1548 that constituted about one-fourth of world average. Also, the unemployment rate in the region was relatively high (5.8%). This trend may be worsening because the average population growth rate (1.7%) is higher than world average. On the other hand, total FDI in the ECO countries was 9 billion dollars in 2004(only 1.4% of total FDI in the world). So, to appraisal the FDI trends in the ECO countries, we need to consider the main factors affecting FDI. Some of these factors are per capita GDP, exchange rate, openness ratio, inflation rate, external debt and ICRG risk factor. We will apply the econometric methods (Generalized Least Squares +fixed or random effects) with panel data over the 1992-2005 period. In this regard, the related tests including unit root test, Hausman test, Normality test… will be provided. It is expected that increases in per capita GDP, openness ratio and exchange rate(as devaluation form) will raise FDI, but inflation rate, accumulated external debt ,economic and political risks will decrease the FDI in the region. Based on our conclusions, ECO members can benefit from their different relative advantages including large market for own and foreigners, tourism, historical and cultural linkages, idle capacities(including young and unemployed people) and various natural resources(mineral and non-mineral resources); and reach to sustainable development if they manage their possibilities and potentials; and provide the context to attract FDI without considering some dilemmatic political or religious resistances and pressures.