Dr. Wolassa Kumo
Introduction

Economic theories state that FDI inflows contribute to the economic performance of a host country in a number of ways: First, the FDI inflows represent additional resources which can be used to build additional physical capital and create more employment. Second, by increasing the size of capital stock, FDI increases a country’s output and productivity by encouraging more efficient use of existing resources. Finally, the inflows of FDI can improve the local skills and promotes technological knowhow thereby enhancing the overall economic growth and development.

However, empirical evidence in support of these theories is not always straight forward. Macroeconomic and cross-country studies suggest a strong positive correlation between FDI inflows and economic growth, although there is no consensus on the direction of causality. Microeconomic evidence is much more unclear and results vary across firms, sectors and countries implying that under certain conditions, FDI can be an engine of growth. Benefits from FDIs therefore depend on the type of the inflows, and the absorptive capacity of a host country among other things.

In any case, global FDI flows showed consistent and rapid growth between 2004 and 2007. During this period, the global FDI grew by 155%, from $717.7 billion in 2004 to $1,833.3 billion in 2007. Developed countries received most of these FDI flows during this period. In 2007, 68.1 percent or $ 1,248 billion of the FDI went to the developed economies. The United States was the largest recipient of FDI followed by United Kingdom, France, Canada, and the Netherlands while the EU region attracted almost two thirds of the total FDI inflows to the developed countries (UNCTAD, 2008).

However, the 2008-2009 global economic and financial crises radically altered the pattern of global FDI flows with emerging and transition economies becoming the major destinations of FDI flows in 2010 for the first time.

Global FDI Flows in 2010

The global FDI flows declined by 39% to $1,114 billion in 2009 from $1,700 billion in 2008. The FDIs stagnated in 2010 with marginal 1% increase to $ 1,122 billion from the 2009 level (UNCTAD, 2011). The stagnation in global flows was accompanied by a further contraction in FDI flows into developed countries while the flows into developing and transition economies increased representing over 50% of the total global FDI flows in 2010 for the first time.

In 2009 developed economies received 50.8% or $565.9 billion of the total global FDI flows while the developing economies received 42.9% and the transition economies of South-East Europe and the Common Wealth of Independent States receiving the remaining 6.3 % of the 2009 total FDI flows. The Russian Federation alone accounted for 55% of the total FDI inflows to the transition economies.

However, in 2010, FDI flows into developed economies contracted by 7% compared to 2009. The European Union was the worst hit with FDI inflows contracting by 20% in 2010. Among the developed economies, Japan saw the biggest decline in FDI inflows in 2010 with FDI contracting by a whopping 83.4% due to major disinvestments. With 66.3% contraction in FDI, Ireland, whose economy was ravaged by the financial crisis, witnessed the second highest FDI contraction among the developed economies due primary to uncertainties about sovereign debt. The recent EU bailout is expected to assist Ireland’s economic recovery. FDI inflows to Germany and France declined marginally. Unlike other major industrialized nations, the United States, the world’s largest economy, enjoyed a robust expansion in FDI inflows in 2010. FDI flows into United States increased by 43.4% in 2010. The United States received over 35% of the total FDI flows into the developed world in 2010 followed by France, which received 10.9% of the total FDI flows into the developed countries, as a distant second. The Nobel Laureate President Barack Obama is not doing bad after all in spite of the repeated predictions of doomsday by his political opponents.

On the other hand, FDI flows into developing economies increased by 9.7% in 2010. Developing countries received 46.8% of the total global FDI flows in 2010 while transition economies received 6.3% of the total global flows. The two groups of economies together received 53.1% of the global FDI flows in 2010. For the first time, developing and transition economies overtook advanced economies as major destinations of the foreign direct investment.

The fastest growing and the world’s second largest economy, China, received the bulk of the FDI flows into the developing world. China received nearly 20% of the total FDI flows into the developing world and its FDI inflows surpassed $100 billion mark in 2010 for the first time. Hong Kong (China) is the second largest FDI receiver with $62 billion in 2010. In terms of the growth in FDI flows into developing economies in 2010, the best performers however are Malaysia, Indonesia, Singapore, and Hong Kong (China), with annual growth rates of 410%, 163%, 123% and 29% respectively. FDI flows closly track performances in economic growth among other things. In this regard, South, East and South-East Asia will continue to drive global economic recovery and growth for many years to come. However, FDI flows to South Asia declined in 2010 mainly due to decline in FDI flows into India by 31.5%.

In Latin America, Mexico, Peru and Chile were the best performers with FDI growth rates of 52.9%, 44.7% and 43.4% in 2010 respectively while Brazil is the largest receiver of FDI receiving $30.2 billion in 2010.

Globally, the United States remained the top receiver of FDI flows in 2010 followed by China, and Hong Kong (China) in the second and third position respectively. Except the United States advanced economies lost their positions as the three leading destinations of FDI in 2010.

FDI Flows to Africa

During the high growth years anchored by the commodity price boom, i.e. 2001-2007, FDI flows into Africa increased rapidly. FDI flows into Africa reached an all time high of $87.6 billion in 2008 from a mere $14.2 billion in 2002. However, the decline in economic growth caused by global financial crisis and the plunge in commodity prices sharply reversed the trend in 2009. The FDI flows into Africa declined by over 33% in 2009 to $58.6 billion. While the growth in FDI flows into Asia and Latin America recovered in 2010, FDI flows into Africa continue a down ward spiral. It declined further by 14.4% in 2010 to $50.1 billion, the lowest level for four years.

The decline in FDI flows into Africa has been driven by the flows into four major FDI recipients: South Africa, Egypt, Nigeria and Morocco. In 2009 FDI flows into Morocco, South Africa and Egypt declined by 56.6%, 24.6% and 13.9% respectively. As a result, Morocco lost its status as a major receiver of FDI in Africa and Nigeria emerged as second largest receiver of FDI after Egypt in 2009. However, in 2010 FDI flows into Nigeria collapsed by over 60% while those into South Africa plunged by 78%. Only Egypt maintained a marginal increase in FDI to stay as a leading destination in the African continent. However, South Africa remains to be a major destination of portfolio investment in the continent driven primarily by near zero yields in advanced economies.

While UNCTAD did not give any reason for such drastic contractions in FDI flows into South Africa and Nigeria, this is likely to negatively affect economic development and job creation agenda of the respective governments.

However, the 2011 World Bank Prospects for Development report paints a bright future for sub Saharan Africa. With better than expected pace of recovery from global economic crisis and with annual average economic growth expected to be in excess of 5% between 2010 and 2012, several sub Saharan Africa countries are better positioned to attract more FDI inflows in the coming years. The investment climate in Africa is improving, and many countries have improved their macroeconomic policies and debt sustainability; as a result many are increasingly talking of several African countries being on the verge of an economic takeoff (World Bank, 2011).

Historically, FDI flows into Africa have exclusively focused on extractive industries but this has changed since recently. At present FDI inflows have diversified into the service sectors particularly telecommunications and banking sectors. For example, the recent offer of Walmart to acquire South Africa’s MassMart is an equivalent of 13 times the pre-tax earnings of the latter and represents a significant injection in FDI into Africa.

“Africa is also becoming an attractive destination for portfolio investment flows. Countries like Ethiopia, Ghana, Nigeria, and Rwanda are identified by several fund managers as possible destinations for Africa-centric investment funds” (World Bank, 2011).

Expectations of increased FDI inflows to Africa are boosted by the South-South cooperation or Africa’s emerging economic partnerships particularly with China, India, Brazil, Malaysia and Turkey in recent years. For instance, the mid 2010 acquisition of the Africa business of the Kuwait based telecom company, Zain Telecom for $10.7 billion by an Indian telecom giant Bharti Airtel represents the largest South-South acquisitions ever. Zain operates in 17 African countries.

Given its vast natural resource endowments and population of over a billion, Africa has a great potential to become one of the leading destinations of FDI in the near future. However, the realization of this potential depends on the size and sustainability of economic growth, continuity of economic reforms and political stability. The current events in Cote d’Ivoire, Tunisia, Algeria and a host of other countries have a potential of derailing Africa’s dream if not amicably resolved soon.

References

•   UNCTAD (2008). World Investment Report 2008. Transnational Corporations and the Infrastructure Challenge. Overview. United Nations, New York and Geneva, 2008.

•   UNCTAD (2011). UNCTAD Global Investment Trends Monitor No.5 , January 17, 2011.

•   World Bank (2011). Sub-Saharan Africa may stand to gain more international capital flows in coming years. Prospects. January 21, 2011.

 Author: Tongkeh Joseph Fowale
Introduction

Africa entered the 21st century with immeasurable optimism, hope and the promise of a bright future after decades of chaos. This new-found optimism in the hitherto “forgotten continent” was rooted on developments unfolding within Africa and on the international scene. “African renaissance” as this resurgence came to be called, was inspired by the birth of the African Union (AU) and the New Partnership for African development (NEPAD). These new instruments of African power ushered the continent into a new century, and also signalled a new dawn in Africa’ relations with the outside world. This internal revolution coincided with the renewal of interest in Africa by great powers.

The prospects and challenges of African development in the 21st century have been (and continue to be) shaped by two conflicting forces. The first pressure emanates from outside players wrestling for Africa’s strategic and natural resources. This external pressure largely defines the pattern of trade, aid, investment and development in Africa. The second push comes from within Africa as the continent struggles to mobilise its resources in pursuit of development. “African solutions to African problems” as this new drive is called, attempts to give an African orientation to Africa’s developmental challenges which revolve around political instability, conflicts, poverty, disease, economic stagnation and lack of infrastructure.

Another significant cause for optimism in Africa in the Third Millennium was the coming of the Millennium Development Goals (MDGs) in September 2000. This ambitious scheme which has been adopted by 190 nations outlined eight critical goals which fundamentally touched on the roots of Africa’s developmental challenges. These goals include; the eradication of poverty and hunger, the achievement of universal primary education, the promotion of gender equality and the empowerment of women, the reduction of child mortality, the improvement of material health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability and the development of a global partnership for development.

The MDGs highlighted the need to co-ordinate global efforts in lending a hand to Africa and to bring the continent into the orbit of what French President Nicolas Sarkozy called a “globalized world” at the September 2008 UN Meeting on African development. “The globalized world needs Africa,” he said. “It would be a delusion to envision Europe’s prosperity without working for the emergence of a major economic partner.” Sarkozy’s hope-laden message is quite similar to those echoed repeatedly by many world leaders aimed either at placating or comforting Africa. President George Bush earlier in February 2008 inspired hope in the continent when he declared “Africa in the 21st century is a continent of potential.” Behind these loud promises of hope, there is also a large vacuum of undelivered promises to Africa.

A decade of undelivered promises

For all its efforts at development, for all its pleas for assistance, and in its struggle to escape from plaguing poverty, Africa has received several responses, among them undelivered promises This “… rhetoric or fancy accounting” as Takumo Yamada, spokesman for Oxfam International described it, has left serious repercussions on Africa’s way out of poverty. Though the balance sheet of African development shows positive improvements, these gains cannot be consolidated with Africa’s efforts alone. Commending Africa’s struggle for development, UN General Assembly President Miguel d’Escoto observed, “Brave as its nations may be — and we know that they are brave indeed, — Africa cannot move ahead on its own.”

From the MDGs of 2000, through the aid promises of the G8 at Gleneagles in 2005, to promises made at bilateral and multilateral levels, Africa has been fed to the full with rhetoric. While traditional problems of political instability, violent conflicts, economic stagnation, poverty, disease and malnutrition continue to baffle the continent, Africa still has to make room for words. With the emergence of new global challenges such as the world food and fuel crises, the world financial crisis, and climate change, there are looming fears all around the developing world that the developed countries will hide behind such excuses to renege on pledges made to Africa.

UN Secretary General Ban Ki Moon raised such concerns when he called on the developed countries to come to Africa’s rescue. “No one is more alarmed than you at the current trends which indicate that no African country will achieve the Millennium development Goals by 2015.” Ban cited the colossal $267 billion spent by OECD countries last year alone on agricultural subsidies to highlight his call for increased attention to Africa. It becomes even more pathetic to realise that these subsidies are part of Africa’s development frustration.

This same EU which invests considerable energy and resources on subsidies to farmers, made a pledge of $15 billion to ACP countries under the Cotonou Agreement in 2000. Eight years on little is yet to be realised. President Abdoulaye Wade of Senegal sounded his frustration with Europe, the West and the G8 over undelivered promises to Africa in very harsh terms. “I achieved more in my one hour meeting with President Hu Jintao — during the G8 meeting in Heiligendamm than I did during the entire orchestrated meeting of world leaders at the summit — where African leaders were told little more than that the G8 nations would respect existing agreements.” Continued he, “It is time for the west to practise what it preaches.”

When former British Prime Minister Tony Blair diagnosed Africa’s problem as “a scar on the conscience of the world” in 2005, expectations ran high that under his stewardship of the G8 Africa’s salvation was in sight. Under Blair’s leadership, the G8 vowed to “more than double aid to Africa,” backing this up with a promise of $25 billion worth of aid to the continent by 2010. Three years on, only $4billion of this money has materialised. “Does any body seriously think the 21 billion-dollar gap will be met in two years?” asked Glennys Kinnock, Chair of the ACP-EU Parliamentary Assembly. Citing the current financial crisis as a possible excuse for developed countries to renege on their promises to Africa, she insisted “If the strongest economise need stability, the weakest economies need dependability.”

As African leaders continue to make their pendulum swings east and west in search of develop assistance, they always return with briefcase-loads of promises. President George Bush promised a “Lazarus effect” on the continent when he came visiting in February 2008. China had promised salvation to Africa in the form of a “win-win” relationship. The EU with a waning influence on Africa, continues to make overtures in the form of Economic Partnership Agreements (EPAs). Japan promised to make the 21st century “a century of Africa” through an agricultural revolution. India promised to transform the 21st century into a “Century of Asia and Africa.” President Sarkozy offered to be more transparent to Africa and cried out loud that “the suffering of the black man is the suffering of all men.”

It would, however, be grossly misleading o underestimate the role of external assistance in Africa’s development efforts. Africa’s current 6% growth rate, the reduction of conflicts, new democratic strides, the growth of trade, investment and infrastructure all owe significantly to new opportunities provided by outside players. Europe despite its declining trade with Africa, still remains a significant development partner. America’s Agricultural Growth and Opportunities Act (AGOA) and the Millennium Challenge Corporation (MCC) have opened up vast trade and investment opportunities for Africa. Her role in advancing democracy, checking terrorism and contributing towards fighting AIDS and malaria are highly commendable efforts. China and India, the new “Southern drivers” of the global economy are the new forces behind Africa’s new growth patterns. These Asian powers have also made invaluable contributions in the area of infrastructural development in Africa.

These contributions notwithstanding, as long as the outside players continue to attach strings to their assistance to Africa, as long as the continent continues to be viewed as a place to be robbed in the name of aid or trade, as long as Africa is seen as a charity case, as long as their economic relations with Africa are shaped by ulterior motives, the MDGs will have little meaning. When trade with Africa becomes trade in arms, when the continent is militarised for any reason whatsoever, when promises of aid become practises of plunder, every effort will boil down to conflict and misery, the same ills the MDGs have vowed to check. Observed Ban Ki Moon, “The recent spate of conflicts over food and natural resources show that our security depends on building prosperity in the developing world.”

Africa’s fragile trade regime and the challenges of development

Among Africa’s countless economic problems, its fragile trade regime stands out distinct. According to a report published in September 2008 by the United Nations Conference on Trade and Development (UNCTAD), the continent has not only lost its share of global trade in the last twenty five years, but the level and composition of its exports have not changed significantly.

The UNCTAD report which examined the effects of recent trade liberalization policies on African observed that these policies have not had any impact on intra-African trade. According to the report, intra-African trade accounted for only eight percent of total African trade in 2006, a figure much lower than in other regions.

The causes (and consequences) of Africa’s poor trade performance are many. Heavy dependence on primary products makes the continent very vulnerable to fluctuating commodity prices. Poor infrastructure leads to heavy transportation costs. Bad weather conditions result in crop failure hampering food production and trade. Low levels of technology and mechanization lead directly to very low productivity. Diseases such as HIV/AIDS and malaria and typhoid take a heavy toll on Africa’s youthful population leading to a shortage of manpower in production. Conflicts in the continent seriously hamper. Western agricultural subsidies send a direct and dangerous ripple effect on African farmers. This is further worsened by the erection of tariff barriers against African products in the markets of developed countries.

This unfavourable trade structure was highlighted earlier by South African President Thabo Mbeki who frowned at the nature of Sino-African trade. “The challenge is that you could — develop a relationship between China and the African continent which in reality isn’t different from that developed between Africa and the former colonial powers.” He made the same call at the Japan-Africa Summit in Yokohama in May 2008 when he insisted that Africa’s future economic development should be based on trade not aid. “Without discounting the importance of trade” Mbeki said, “improved terms of trade are critical to ensure [Africa's] full integration into the global economy.”

Among the many changes in Africa’s trade structure advocated by Mbeki was the call for greater access to new technologies at affordable prices and investment in research and development, technology and innovation as key instruments in enhancing African trade and ensuring economic growth. Tanzanian President Jakaya Kikwete spoke the same language at the Fourth Tokyo International Conference on African Development (TICAD 1V) calling on Japan to increase its trade with Africa. “What remains to be seen” he said, “is increased trade and investment between Africa and Japan ….”

What prospects for the MDGs

2015 is the target year of the Millennium Development Goals. Halfway in 2008, Ban Ki Moon has made it clear that the goals cannot be realised with the current trends. What makes this prospect bleaker is the number of new challenges facing the developed countries especially the current global financial crisis. Africa as usual stands at the receiving end of these odds.

The current trend also shows that without any major changes in its relations with its “development partners,” Africa has to pay the price not only for their economic problems, but for their further development as well. For example, the EU, caught up in the middle of its integration and economic crisis is trying to force a bitter pill down the throats of Africa in the form of Economic Partnership Agreements. Fearful of loosing Africa to its perceived rival – China, the U.S. is embracing a military approach towards Africa in the name of an Africa Command (AFRICOM). China on its part has embarked on a wanton exploitation of Africa’s raw materials backed by a counter-productive arms trade and also raising environmental concerns in the continent.

Though the MDGs touched on pertinent issues affecting the continent, they significantly avoided the perennial problems of migration, brain drain, capital flight and ethnicity which threaten the growth, peace and stability of Africa. No discussion about African development can be complete without paying regard to Africa’s youths, a large proportion of whom are, or will become migrants in search for decent lives. This youthful population also constitutes the cream of Africa’s intellectual wealth and therefore the engine of its future development.

Conclusion

Development is a process rooted in time and space. Every development process requires resources (human and natural). The external factor is also significant. Among these however, the human resource is the most important. President Bush did not miss the point when he observed “Africa’s most valuable resource is not its oil; it’s not its diamonds, it’s the talent and creativity of its people.” It is only when Africa’s “development partners” realise the need to make Africa’s human wealth more productive that the MDGs would have scored a point. To think that promises and hypocrisy can bail Africa out of poverty would be wishful thinking and the consequences will be shared by all. Bush again, “We have seen that conditions on the other side of the world can have a direct impact on our security.”

Climate change for example is a vivid illustration of how Africa has had to pay for the crimes of others. Said Ban Ki Moon, “it is sadly ironic that the poor who contribute the least to global warming suffer most from its ill effects.” It was in this light that the UN boss reminded the world that investing $72 billion yearly to achieve the MDGs, to pull “millions out of extreme poverty in Africa looks like good value.” The promises, the prospects and the challenges of the Millennium Development Goals stare at Africa, they stare at the world. “Paternalism has got to be a thing of the past,” said President Bush. “Joint venturing with good, capable people is what the future is all about.”
Sources

Resources:

• Associated Press “Text of Bush on Africa,” Available at — http://ap.google.com/article/ALeqM5iBAo1yCOOLr02NJfYtgrYmyZQKxAD8UQESG00

• Executive Intelligence Review Japan Pledges To Eradicate — Hunger in Africa in 10 Years, June 6, 2008 Issue.

• FINANCIAL TIMES “Africa-China Trade” Thursday, January 24 2008, p.6

• Millennium Challenge Corporation Fact Sheet. “MCC and Africa: A Growing Partnership for Success.” September 3, 2008. Available at www.mc.gov

• Offah Obale, “Africa’s Export Performance still Dismal, Says UNCTAD, IPS. — Tuesday October 7, 2008.

• United Nations General Assembly, Sixty-third General Assembly High-Level Plenary on Africa, GA/10748, New York, September 22, 2008.