Economic Development in Africa Report

1990-5122 (online)
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The Economic Development in Africa report analyses major aspects of Africa´s development problems and policy issues of interest to African countries. It makes policy recommendations for action by African countries themselves and by the international community to overcome the development challenges that the continent faces.
Also available in French, Chinese
Economic Development in Africa 2005

Economic Development in Africa 2005

Rethinking the Role of Foreign Direct Investment You do not have access to this content

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18 Nov 2005
9789211556391 (PDF)

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Africa’s particular combination of geographical, historical and structural features has traditionally attracted Foreign Direct Investment into enclaves of export-oriented primary production with limited linkages to the rest of the economy. This situation has not changed much in recent years and has contributed to undermining a self-sustaining and dynamic investment process. This Report calls for a rethinking of the one-sided emphasis on attracting FDI and its replacement with a more balanced and more strategic approach tailored to African socio-economic conditions and development challenges.

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  • Abbreviations
  • 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).

  • FDI to Africa: Facts and fables
  • Adjustment failures, FDI and the African growth story revisited
  • Some sectoral experiences with FDI in Africa

    None of the discussion to date should be taken to imply that FDI should be abandoned in designing development strategies for Africa. But it does suggest that existing approaches to attracting FDI in the expectation that these will kickstart domestic capital formation and strengthen productivity performance have not been successful. As such, future efforts to harness the potential contribution of FDI require a shift in perspective to how it can better serve development goals in light of the structural constraints and resource gaps facing the region. The place to begin that discussion is probably at the sectoral level.

  • Rethinking the FDI policy framework for Africa

    According to conventional wisdom, the low level of FDI flows to Africa is symptomatic of the region’s failure to integrate into the global economy and a principal reason why its growth performance labours under a narrow export base and low productivity levels. High production costs and distorted investment incentives, which discourage the entry of foreign firms (even where profitable opportunities are available) and bias those that come towards less productive activities, have been attributed to a history of misguided policies and listless reforms. Accordingly, African policy makers are encouraged to redouble efforts to establish a competitive investment climate by integrating more closely into the global economy and becoming more transparent and inclusive in their reform efforts. These reforms promise to attract foreign firms, although heightened competition for FDI also leads to calls for more vigorous, and on some counts better-targeted, promotion measures, as well as the fashioning of laws and policies on intellectual property, tariffs, corporate governance, taxes, labour relations, and technological and sectoral development to match the needs of foreign investors. One recent review of the evolving picture of policy towards FDI recognized that this marks a return to the policy environment of the 1950s (Safarian, 1999). This was a period when much of Africa (and the developing world) was poised to challenge its distorted pattern of insertion into the international economy.

  • Conclusions

    In order to achieve the Millennium Development Goals by 2015, Africa needs to grow at an annual rate of at least 7 per cent. While several countries have posted such growth rates since the mid-1990s, these results have been episodic, with few being sustained over long periods, and remain closely bound to changes in external conditions. Since the end of 2003, these changes have included a favourable rise in commodity prices, in particular for fuels and minerals. But dependence on commodities for sustained growth has proven to be a mixed blessing in the past, in part because commodity booms tend to have been shorter than subsequent slumps, and because such booms, particularly when improperly managed, have had a distorting effect on other parts of the productive economy. Accordingly, and even if commodity markets can offer African producers a more favourable future, policies are still needed to address structural constraints that have hindered diversification of the economic base.

  • Appendix tables
  • Notes
  • References
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