Diversifying foreign investment in Africa

More diversification and better reinvestment of natural resource revenues can ensure that foreign investments in Africa contribute to inclusive growth.

Total Inward Foreign Direct Investment (IFDI) in Africa rose impressively from USD14.6 billion in 2002 to USD50 billion in 2012, according to UNCTAD data. But African countries can do more to increase IFDI’s contribution to inclusive growth, without which Africa’s demographic advantage of having a young and growing population will become a heavy burden.

Most of Africa’s IFDI goes to the natural resources sector: mining, oil, and gas.¹ But concentrated in this way, its positive effects on job creation, technology and skills transfer, backward linkages and economic growth are limited, and therefore less likely to generate inclusive growth.²

Countries can help make IFDI more inclusive by changing the current economic model through two interconnected measures: attracting FDI to opportunity sectors outside mining, oil and gas, and connecting the natural resource sector with other economic sectors.

Diversifying IFDI

Africa’s potential comparative advantages lie in labour-intensive manufacturing, agro-processing and knowledge-based services like information and communication technology and finance. To attract FDI in these areas, African countries must address their infrastructure deficit.

Across the continent, bad infrastructure imposes a hidden cost on business and offsets the advantages of youth and low wages, thereby deterring IFDI in labour-intensive manufacturing. Africa Infrastructure Country Diagnostic estimates that the continent needs USD93 billion in annual investment to make its infrastructure adequate. Currently, the region receives USD45 billion annually for infrastructure (USD30 billion domestically and USD15 billion from external sources), leaving a gap of USD48 billion. Power, transportation, water supply and sanitation, and telecommunications will matter most in diversifying IFDI. Telecommunications infrastructure in Africa has improved significantly, thanks to mobile phones, but the other areas are still severely inadequate.

A primary imperative is to find new sources of finance. Recent developments in China-Africa cooperation are encouraging, with the Chinese government pledging to double its Africa funding to USD20 billion, mainly to support infrastructure, agriculture, manufacturing and small and medium-sized enterprises. Likewise, the commitment by US president Obama, during his 2013 visit, to allocate USD7 billion for Africa’s energy sector is also encouraging.

In addition, African governments should continue to pursue public-private partnerships (PPPs) and regional infrastructure investments. The West African Gas Pipeline Project is one recent regional infrastructure project, consisting of a 681-kilometre pipeline to transport natural gas from Nigeria to Benin, Ghana and Togo. Similar initiatives are being pursued in other sub-regions, with the promise of economies of scale and reduced costs for individual countries. As infrastructure projects themselves create jobs for young people, this is a win-win approach.

The natural resources sector

The natural resources sector is capital-intensive and isolated, but this does not have to be the case. There will be intense global competition for scarce natural resources and Africa will remain a major supplier of oil and other minerals to the rest of the world for an extended period. Paul Collier, Oxford economist and co-founder of the Natural Resource Charter, emphasizes that Africa’s mineral resources are significantly underexplored compared to, say, Europe’s. African countries can take advantage of this situation to institute fiscal regimes that will allow them to extract more revenues.

Revenues from extractive industries can be reinvested into more impactful and inclusive sectors of the economy, including agriculture, education, and infrastructure. Countries should also introduce appropriate local content requirements for employment, skills and technology transfer, joint-venture projects and ancillary services in mining contracts. These steps will help connect the natural resources sector with the other economic sectors, and accelerate IFDI’s contribution to inclusive growth in Africa.

Several strategies can be utilized to increase IFDI’s contribution to inclusive growth, but strategies aimed at attracting more diverse investment and facilitating the connection between the natural resources sector and the rest of the economy have large potential to accelerate IFDI’s contribution to inclusive growth in Africa. However, each country should define its strategies according to its specific conditions and circumstances.

Footnotes