Foreign investment is often regarded as a positive aspect as well as a sign of confidence in the stability and future of the recipient country. However, investments have often proven risky even within the boundaries of a given country, imagine beyond such boundaries. Here, let us briefly explore a few, but significant, and often catastrophic, examples from the past.
The early phases of the 100 Years War (1337-1453) between England and France impacted not only the economy of the respective countries, but also that of Italy. King Edward III had received enormous loans from the Italian banking firms of Bardi and Peruzzi to finance his war and honour earlier loans he had made with other parties. Unfortunately, his chronic defaulting on repayments precipitated a dramatic financial crisis in the commercial cities of northern and central Italy. From 1342 to 1345, the managers and executive officers of both the Bardi and Peruzzi banks were arrested for bankruptcy and released on condition of renouncing all claims to interest, while the English crown canceled massive debts to the Peruzzi.
During the late 1460s, the mighty Florentine Medici Bank in London had made huge loans to King Edward IV and to the British nobility. Eventually, the War of the Roses was unfavourable to most of the major Medici borrowers, and the succeeding Tudors never paid off the debt left by their predecessors. When the Medici’s London branch completed its liquidation, in 1478, it had to swallow a loss of over 51,000 gold florins (equivalent to 392 pounds of pure gold) – a truly astronomical sum for the time.
Throughout the 1880s and until 1913, foreign investment played a leading role in the industrialization of Russia. Significant capital influx from France, England and, to a lesser extent, Belgium and Germany accounted for 40 percent of Russian industrial investment. Such a massive input of foreign investment was looked upon as a sign of confidence in the Russian economy, but it was also a vehicle of foreign interference in the decision-making process of a vast empire. By the end of the 1800s, most Russian industries were dependent on foreign capital, foreign technology, foreign entrepreneurship, and as a new century was born, Russia had accumulated the largest foreign debt in the world. Deja vu?!
Nevertheless, the stock markets of London and Paris continued to channel the money of the wealthy to St. Petersburg. By the outbreak of World War I, Great Britain had invested some 3 billion francs in Russia, representing 2.6 percent of her foreign investments. However, France outperformed everyone with 12 billions of francs invested in Russian securities, representing over 26 percent of her foreign investments. Then came the Great War and then the 1917 revolution, and with it the repudiation by the new regime of any foreign debt.
The story found its bizarre denouement in the summer of 1986, when the Russian Foreign Minister Eduard Shevardnadze met Prime Minister Margaret Thatcher in London and agreed to settle a large portion of the Czar’s debt to Britain, amounting to about 1 billion dollars. The French, cela va sans dire, are still waiting for their billions.
While Europe was at war, foreign investment brought death and repression to Haiti. In 1915 the United States President, Woodrow Wilson, responded to complaints from American banks to which Haiti was deeply in debt, by occupying the country. The American occupation of Haiti lasted until 1934 and has been described as “self-interested, sometimes brutal, and causing problems that lasted past its lifetime.”
Interestingly enough, until the early 1900s, the US, now a champion for the rights of foreign investors, was adamant in regulating foreign investment rather heavily. Furthermore, when Great Britain, France, and Germany became net capital-importers after the Second World War, they introduced a lot of formal and informal regulations on foreign investment.
Hopefully, history has thought us not to repeat the same mistakes. Foreign investment has its good sides, but it produces other less agreeable side effects. It is like salt, in moderation it makes our food rather tasty; nonetheless, too much of it makes the whole experience less than palatable.
Guest Editorial by Giorgio Migliavacca