Enticing Investors

AuthorCalvin McDonald, Volker Treichel, and Hans Weisfeld
PositionAdvisor/Senior Economist/Economist in the IMF's African Department

To make a serious dent in poverty, Africa must attract more foreign capital

The nearly 750 million people who live in sub-Saharan Africa (SSA) are among the world's poorest. To foster the economic growth required to create jobs, raise living standards, and hasten development, SSA nations need to attract more foreign capital, which, by enhancing imported technology and the transfer of know-how, has proved instrumental in raising productivity in many countries.

Many of these nations have taken steps to lure investors. They have changed fiscal and monetary policies to create a more stable economic climate. They have reformed markets and increased legal protections for investors. Still, to many potential investors, the business environment remains uninviting because of corruption, a poor infrastructure, few skilled workers, and generally lax governance.

Falling behind

Over the past 25 years, foreign direct investment (FDI) in the region has increased substantially, from $11.8 billion in 1980 to $25.6 billion in 1990 and to more than $101 billion in 2004 (see Chart 1, top panel). Moreover, as a percent of GDP, the stock of FDI in SSA increased from 10.2 percent in 1980 to 29.4 percent in 2004. A new source of funding has emerged as well-from a small number of investors who are interested in adding to their portfolios debt securities issued by governments in the region.

But SSA has lagged behind the rest of the developing world in attracting investment. For developing countries, there has been a sharp increase in the flow and the stock of FDI-both increased by a factor of 16 from 1980 to 2004, with Asia's share up significantly and Latin America's by a small margin (see table). But since 1980, SSA's share of total FDI flows has declined. The region currently accounts for just 1 percent of global flows, half the level in 1980 (see Chart 1, bottom panel), and has fallen behind that of other low-income countries-in particular in Asia-that have implemented broad structural reforms. This analysis excludes South Africa, a large middle-income country with different characteristics than the small, poor countries that make up the rest of sub-Saharan Africa.

[ GRAPHICS ARE NOT INCLUDED ]

Moreover, the vast majority of FDI to the region went into the primary sector, particularly the exploitation of mineral and petroleum resources. The 24 countries in SSA classified by the World Bank as oil-and mineral-dependent have, on average, accounted for close to three-fourths of annual FDI flows over the past two decades. With the discovery of new oil fields in Chad and Equatorial Guinea, all of the top 10 SSA recipients of FDI in 2004 have large mineral and petroleum resources. From 1980 to 2004, the stock of FDI in oil-exporting countries in SSA rose from 4.6 to 46 percent of their...

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