At an average of 2,5% of gross domestic product (GDP), levels of foreign direct investment (FDI) flows into Africa are not as low as generally believed, especially relative to Africa’s market size compared with the rest of the world, according to World Bank chief economist and senior director Alan Gelb. However, South Africa in particular has recently recorded FDI flows that are well below their potential.
Speaking on the last day of the World Economic Forum’s (WEF) Africa Economic Summit in Maputo, Mozambique, Gelb noted that African FDI inflows are only slightly lower than the 3,1% of GDP recorded on average in Asia. And although about 40% of FDI into Africa is directed at extractive industries such as mining, oil and gas, 36% goes into services, and in some African countries FDI appears to be higher than the data indicates.
“FDI could potentially double from current levels in Africa, but it is not as low as people think relative to the size of African markets,” he told participants in a seminar aimed at identifying barriers to FDI in Africa.
David Bridgman, programme manager at the United States Multilateral Investment Guarantee Agency, agreed, observing that Africa is getting “about the right share” of worldwide investment based on its share of the global economy.
More than a dozen African countries, such as Tanzania, Uganda, Mozambique and Mauritius, are in the process of reforming rapidly and have succeeded in attracting significant amounts of investment, he pointed out. These countries need support to broaden and deepen their reform efforts, while the continent’s two powerhouses, South Africa and Mozambique, are still dealing with internal issues to improve their international competitiveness and will soon begin to attract more offshore investment, he believed.
Augusto Lopes-Claros, chief economist and director of the WEF, noted that it is encouraging that so much FDI is now flowing into services such as tourism on the continent, and that there is a general perception that there has been much improvement in the business and economic environments across Africa that will attract further investment.
A recent WEF study has also shown that FDI into Africa is the most profitable compared with that in other developing regions, including Asia and Latin America.
“WEF surveys show that legal restrictions on FDI in Africa are no longer much different to those in any other countries, and the returns are generally higher from that investment,” he revealed. “But on the ground and in practice Africa does have more red tape and hidden barriers to trade and investment.”
Market size, both internal and external, is an important determinant of FDI as well, he added, which is why there have been so many large inflows into Europe (ahead of European Union enlargement), Brazil, Mexico and China in the past decade.
This is an important area for Africa to focus on improving through boosting regional trade, as most African countries have small internal markets.
Regarding South Africa, Gelb noted that recent FDI flows into the continent’s largest economy have been well below their potential. This, he believed, is due to the major economic and political change experienced in the country over the past decade.
“South Africa must determine where its role is in the world economy, as it is positioned between rich and poor countries now,” he observed. “It is not competitive in most of the labour-intensive sectors.”
South African Minister for Public Enterprises Alec Erwin acknowledged that the country is falling short of the government’s FDI target of 2% of GDP, currently averaging 1,5%. However, he said, the government will only look to raise this target if the economy can lift its value-creation and increase its complexity.
He also noted that South Africa’s level of savings, at 15% of GDP, is also too low. This is due principally to the large inequality in income distribution that exists, which is a top priority for the government to correct.
Approximately 550 leaders from all sectors of society are participating in the three-day summit, the 14th annual WEF Africa gathering but the first to be held in Mozambique. This year’s theme is Engaging Business in Development. — I-Net Bridge