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United Nations (UN)

Economic development in Africa: Rethinking the role of foreign direct investment

United Nations Conference on Trade and Development

United Nations (UN)

2005

SARPN acknowledges the United Nations (UN) as the source of this document.
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Introduction

In the face of inadequate resources to finance long-term development in Africa and with poverty reduction and other Millennium Development Goals (MDGs) looking increasingly difficult to achieve by 2015, attracting foreign direct investment (FDI) has assumed a prominent place in the strategies of economic renewal being advocated by policy makers at the national, regional and international levels. The experience of a small number of fast-growing East Asian newly industrialized economies (NIEs), and recently China, has strengthened the belief that attracting FDI is key to bridging the resource gap of low-income countries and avoiding further build-up of debt while directly tackling the causes of poverty. Since the Asian crisis, while on the one hand a more cautionary note has been sounded about premature financial liberalization, on the other hand calls for an accelerated pace of opening up to FDI have intensified, on the assumption that this will bring not only more stable capital inflows but also greater technological know-how, higher-paying jobs, entrepreneurial and workplace skills, and new export opportunities (Prasad et al., 2003).

This is not an altogether new direction in development policy thinking, particularly in the African context. Immediately following independence, policy makers across the region hoped that attracting FDI, often with the bait of high tariff protection and generous incentive packages, would provide the catalyst for a “late industrialization” drive (Mkandawire, 2001: 306). And following the debt crisis of the early 1980s, the architects of structural adjustment also saw increased FDI as key to sustained economic recovery, this time in conformity with “market fundamentals”. From this perspective, the pursuit of responsible macroeconomic policies combined with an accelerating pace of liberalization, deregulation and, above all, privatization were expected to attract FDI to Africa (World Bank, 1997: 51; IMF, 1999).

Despite the efforts of African governments to comply with this policy advice, the record of the past two decades with respect to reducing poverty and attracting FDI has been disappointing at best. In response, a second generation of reforms, introduced in the late 1990s, has sought to address shortcomings in programme design and implementation by placing much greater emphasis on poverty reduction, combined with policy ownership, credibility and transparency. Here too, the promise of getting governance right has been greater flows of FDI, which, along with related measures to improve the investment climate, are expected to spur economic growth and thereby reduce poverty. In this latest attempt to forge consensus on African development, the contrast between relatively high returns on FDI in Africa and the persistently low level of actual flows is seen as not only indicative of past policy mistakes but also suggestive of the potential rewards awaiting the region if it can improve its governance image in the eyes of international business (World Bank, 2002: 102; Collier and Patillo, 1999). In this vein, a recent report by the OECD (2002: 8) attributes the “spectacular failure” of African countries to attract FDI to a mix of unsustainable national economic policies, poor-quality services, closed trade regimes, and problems of political legitimacy, thus advising governments to redesign their macroeconomic, trade and industrial policies to attract FDI. Recent surges of FDI to some countries have been taken as a sign that opening Africa up to international business can bring about a rapid and region-wide “economic renaissance”.1

This year’s report proceeds from the need to take a more critical approach to evaluating the size and impact of FDI in African countries. Building on past years’ reports, it first suggests that the exclusive emphasis on market-oriented reform and governance as determinants of the size of FDI flows to Africa is misleading. Once it is recognized that in most countries these flows tend to be more a lagging than a leading factor in the growth and development process, the role of FDI in Africa cannot be properly assessed independently of the disappointing record of reform programmes with respect to growth, capital accumulation and economic diversification. Indeed, while these programmes have been designed and promoted with the aim, inter alia, of attracting foreign investors, this record goes much further in explaining the region’s FDI performance than the governance failures routinely compiled to describe Africa’s poor investment climate.

Secondly, the report argues that FDI carries costs as well as benefits for the host country; consequently, policy makers must fully evaluate the impact of FDI if it is to become a complementary component of a wider package of development measures needed to raise growth, create jobs and diversify into more dynamic activities. Any such evaluation needs to take account of structural biases in African economies, including their longstanding dependence on commodity exports as well as a deindustrialization trend following the debt crisis of the early 1980s. The report suggests that failure to design policies with these challenges in mind runs the danger of recreating a pattern of FDI-led enclave development even if, as has recently been the case in the mining sector, FDI begins to flow to the region on a larger scale. Indeed, while programmes designed to deregulate the mining sector can claim some success in attracting FDI in recent years, a positive developmental impact has failed to materialize. Accordingly, the report calls for a rethinking of the onesided emphasis on attracting FDI and its replacement with a more balanced and more strategic approach tailored to African economic conditions and development challenges.


Footnote:
  1. Michael Camdessus, 2000, predicted such a “renaissance” from fidelity to the first generation of adjustment programmes; see also Fischer et al., 1998. David Hale (2005) anticipates a regional renaissance from attracting FDI into the commodity sector, where recent price movements are helping to improve investment prospects.


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