By Amadou Sy*
Foreign investment in Africa has undergone remarkable growth in recent years. However, this trend raises a number of questions not only about the sustainability of the flow of capital to the continent, but also its contribution to the improvement of the daily lives of the people of Africa. The debate is of course far from over, but I sat down to answer some of the most frequently asked questions.
1. Is it true that foreign investors are flocking to Africa?
Indeed, there has been a decade-long increasing trend of foreign investment into sub-Saharan Africa. We highlight the following three notable points.
- The flow of foreign private capital has multiplied by five times in the last 10 years. Growth of investment has increased from $14 billion in 2002 to $67 billion in 2012. This demonstrates a great investment interest, especially if one takes into account the financial crisis of 2008. The flow of foreign private capital now exceeds the disbursements of official development assistance (ODA). Foreign aid increased from $18 billion to $43 billion over this same period. Taking into consideration growth rates, capital flow has increased by almost 20 percent per year against 12 percent annually for aid.
- This growth of capital investment is partly driven by China and other member countries of the BRICS (Brazil, Russia, China, India and South Africa). These countries now account for more than one-quarter of capital investment to the continent and this trend is moving upwards.
- The composition of investment focus has also changed. In recent years, some countries have had access to international capital markets for the first time. These countries include South Africa, Angola, Côte d’Ivoire, Gabon, Ghana, Namibia, Nigeria, Senegal, Seychelles and Zambia. Additionally, foreign investment in local capital markets in the form of purchases of stocks, bonds and treasury bills is growing rapidly.
2. A report by the United Nations Conference on Trade and Development reveals that a growing number of investors are now counting on Africans themselves—Africans as consumers. Is it correct to speak of the emergence of the African middle class?
At the outset it should be noted that there are different ways to define “middle class” in Africa. For certain economists like my colleague Homi Kharas, the middle class is defined as the number of households with average daily income per capita between $10 and $100 in terms of purchasing power. According to this definition, middle class Africans represent 32 million people (2 percent of the world’s middle class population) with a total overall consumption of $256 billion. This population growth is expected to exceed 107 million people with a total consumption of $827 billion by 2030.
On the other hand, according to the African Development Bank, a daily consumption per person of from $2 to $20 is enough income to be considered as middle class. That equates to 350 million people (or 34 percent of the African population) in this category as of 2010 up from 126 million (or 27 percent of the African population) in 1980. For other analysts, a range of $15 to $20 would be a better criteria due to the fact that an income amount of $2 is far too close to the defined poverty line.
What is certain is that the growth of the African middle class could be the highest in the world, and this is what is attracting foreign investors. The World Bank estimates that the strong economic growth of African countries (of more than 5 percent per year) is driven by the consumption of household goods. We can therefore expect investments targeting the mobile phone market as well as electronic products and banking services. We are already seeing shopping malls developing very quickly in many African capitals.
3. Many Africans argue that increased investment and economic growth do not translate into benefits in their daily lives due to the persistence of unemployment as well as the high cost of living and poor quality of public services, including the high price of electricity and water. Is this still the case? If so, why?
Foreign direct investments (FDIs) do not create enough jobs because, apart from the case of South Africa, they are primarily intended to finance projects in the natural resources sector (oil, gas and mining). There is a high concentration of these investments flowing towards South Africa and natural resource-rich countries, which together receive three-quarters of all current FDIs. The mining and petroleum sectors require primarily skilled jobs that our governments have not been able to provide in sufficient numbers.
Throughout Africa there is very little growth in jobs, and we foresee a necessity for foreign private sector job creation and involvement in local small and medium enterprises (SMEs). This requires foreign investments that are more closely associated with the transfer of knowledge and skills. There is also some relative progress in the area of information and communication technology and some large foreign companies such as Microsoft, Huwaei and Google have actively invested in training. There is even talk of a “Silicon Savannah” in Kenya.
There is also significant investment potential within the agricultural sector, which, if exploited, could lead to large-scale job creation. Africa has more than half of the world’s arable land, but due to lack of infrastructure, farmers can lose more than half of their production bringing their products to market. The share of industry in Africa has also declined since the 1960s, and the development of the agricultural sector could happen in conjunction with that of the industrial sector. The success of horticulture in East Africa is a good example.
It is important to remember that foreign investments are only one component of external flows to the continent. Such flows should also include remittances from Africans abroad (on average, $22 billion per year over the 2000-2012 period and more than 10 percent of GDP for some countries like Nigeria and Senegal). We must also add public developmental aid. Many fragile countries that are emerging from conflicts continue to depend on official development assistance (ODA) and remittances. There is a need to redefine the role of public aid so it can catalyze productive investment towards employment opportunities and infrastructure. South-South cooperation should also be strengthened.
Finally, external flows from abroad are lower than tax revenue collected by African governments. Ultimately, we must not lose sight of the fact that an improvement in fiscal management is indispensable for growth. In this context, we must also reduce illicit financial flows that escape national taxation and take place when some foreign companies use financial schemes to offset their tax payment.
4. Therefore, this growth of foreign investment is primarily driven by urbanization, the emergence of the new middle classes and the natural resources boom. But will this growth be sustainable? There are still crises occurring in Africa!
The evolution of the growth of foreign investment in Africa depends on a number of internal and external factors. In terms of external factors, an increase in U.S. interest rates (a measure of risk-free return) tends to slow down or even reverse portfolio flows.
This is the case right now in Ghana, Nigeria and South Africa, with the increased volatility in recent weeks in the short-term financial markets, including in the foreign exchange and equity markets. A sharp drop in the price of raw materials and commodities would have severe effects on long term investment such as FDIs.
But, for the moment, the numerous discoveries of gas in Mozambique, oil in East Africa and gold in Burkina Faso attract investors and should support FDIs. On a very positive note, Ethiopia managed to attract some FDIs in the industrial sector and in the renewable energy sector. Given the emphasis placed on infrastructure projects by the authorities in many African countries and international initiatives, such as the Power Africa Initiative launched by U.S. President Barack Obama, there is also a strong demand for foreign investment in this sector.
Regarding crises in Africa, it is true that they can have a negative effect on foreign investment, but this is not always the case. Bad news for a particular African country can affect other countries in the continent. Conflict and insecurity discourage potential investors, especially those who are interested in sectors other than natural resources or those who are not entirely familiar with Africa.
However, recent conflicts in Africa are confined to a few unfortunate areas. The Central African Republic (CAR) has never been a very important destination for foreign investors. In Mali, the conflict is now contained and the southern part of the country can rebound quite quickly. In Côte d’Ivoire, some investors have informed us that they achieved more profitable business in Abidjan during the crisis than in neighboring Ghana. In contrast, in South Sudan, the crisis has affected oil production and foreign companies have removed non-essential staff. But let us not forget that oil companies continued their operations in Angola even during the Cuban intervention in 1988.
*Source Brookings.Amadou Sy is a senior fellow in the Africa Growth Initiative and currently serves as a member of the Editorial Board of the Global Credit Review. His research focuses on banking, capital markets, and macroeconomics in Africa and emerging markets.@ASYBrookings