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Does FDI lead to development in Africa?

Due to their many socio-economic problems, most African countries have become desperate in trying to find solutions. The problems vary from high unemployment, poverty and lack of technology. To overcome these problems, most of these countries have undertaken IMF-World Bank-sponsored economic reforms. The liberalisation programmes have entailed, among others, relaxing their trade regimes and privatising state-owned enterprises.

They have also introduced incentives in order to attract foreign direct investment (FDI). These incentives include relaxing the regulatory framework, generous tax holidays and establishing investment promotion agencies to attract FDI. With the liberalisation of their economies, conventional wisdom expects a rise in FDI.

One of the main outcomes of using incentives to attract FDI is the increased competition among African countries. This has led to countries embarking on what some observers call ‘a race to the bottom’ – trying to outdo each other with the most generous of incentives. I’ve been to many investment forums on various African countries in London since the early 1990s where each country describes itself as the best investment destination in Africa, offering the best and most generous incentives. Each country belongs to a regional grouping with a market of millions. The tunes are always the same but with different players.

I am not against FDI. After all, Malaysia’s economy was almost at par with Ghana’s when both attained independence in the same year – 1957. Malaysia’s stable political environment has produced a friendly economic climate that has attracted FDI and sustained her growth. FDI has played a key role in facilitating the transfer of technology and skills to domestic businesses, access to international markets and capital formation in that country, making Malaysia the formidable economy that it is today.

Africa has now awakened to those realities and is making the right efforts to transform their economies like Malaysia has done. The efforts appear to be paying off as FDI inflows to Africa had been rising strongly since 2002, reaching $3 billion over 2007, a 47.2 percent increase on 2006 and their highest historical level. In 2007, $2.4 billion was directed to North Africa and $30.6 billion to sub-Saharan Africa. Africa’s share of global FDI flows registered a significant decline to 2.9 per cent of global FDI in 2007, down from 3.2 per cent in 2006. Even according to recent estimates, while global FDI may have fallen by up to 20 per cent in 2008, flows to Africa have remained resilient, growing by 16.8 per cent to $61.9 billion over 2008, despite the slowdown.

The rate of return of FDI in Africa has been increasing since 2004 and, at 12.1 percent, was the highest among developing host regions in 2007. According the UN Conference on Trade and Development (Unctad) 2009 World Investment Report, FDI inflows rose to another record level of $88 billion in 2008, despite the global financial crisis, resulting in an increase of FDI stock in the region to $511 billion. Behind a large share of the rise in FDI lies surging prices for raw materials, particularly oil, which fuelled a boom in commodity-related investment. High raw-material prices also helped maintain outward FDI flows from Africa, which remained stable at USD 6.5 billion in 2007.

But African leaders must go a step further and emulate Mahathir bin Mohamad, who as Malaysian prime minister from 1981 to 2003, courted foreign investment, to a large extent, on his own terms. Caution should be exercised when African governments open their doors to FDI. As one economist said, ‘FDI is not in business for development, but to make profit, whereas governments are supposed to ensure development.’ The fact that the goals of both government and investors are not the same does indicate that it becomes a very difficult task to direct FDI in a way that will lead to development.

Those who are radically opposed to FDI see it as some form of re-colonisation. They see the same agenda of foreigners going to Africa to take control of our resources and using them for their own development. They see rising unemployment and an increasing concentration of wealth in the hands of a few privileged elite, with the majority of the people still lacking basic amenities like potable water, food, shelter and medical care.

So does FDI bring development and growth as the conventional theory espouses? Or is it growth that attracts FDI? Either way, African governments, when accepting FDI, should assess the kind of development the country needs and target the appropriate investment. FDI must only be allowed to operate under certain nationally determined conditions and conform to certain performance requirements that will ensure a positive impact on development.

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