Africa: Escaping the Paradox
It is common in conversation for people to project their opinion that Africa will become ‘the next big economy of the world’. Their reason for this opinion tends to focus on current investments which they believe will make the region integral to the global economy. However, it is not this easy to generalise the continent’s incoming investment. FDI is said to generally move from regions with low returns to regions of high returns. Africa has return rates of around 11% (global average: 7%), yet Sub-Saharan Africa between 2010 and 2016 was given only 1.87% of net FDI globally. This paradox arguably stands in between the region and the rapid growth that punters claim will make Africa the next major economy.
FDI into Africa is seen to be a massive risk with the rewards seemingly ignored. This small share in global FDI isn’t, however, due solely to the risk-heavy nature of the region. FDI into Africa fluctuates annually, on a large scale, the result of a plethora of reasons. For instance, the fall in consumer demand in Europe since 2015, alongside the commodity bust, caused 2 years of significantly lower FDI. The next year (2018), FDI rose again by 13%. The constant fluctuations make it very difficult to map the investment landscape in the region and this is becoming even more difficult. In the early 2000s it was fairly accurate to say investment in Africa focused solely on the extractive industries. This can no longer be said so easily.
Discovering the Paradox
There are a number of factors which should make Africa the perfect environment for FDI. There are abundant natural resources in most of its countries, there is a huge, inexpensive labour pool and the continent is very open to trade. Sadly, all these attractions have to be qualified by the conditions which deter foreign interest. Corruption, a lack of a skilled workforce, high borrowing rates and credit instability all have a negative impact on interest from overseas. This is also not helped by the reliance on stability in foreign economies as mentioned earlier. The biggest issue however, remains the lack of physical, legal and financial infrastructure. The UN posits there being an infrastructural deficit of an estimated USD900 billion. (World Investment report, UNCTAD, 2019 (WIR))
Looking at the trade-off between these negative and positive determinants, the UN (in the ‘State of African Cities 2018: The Geography of African Investment’, 2018), realised that low wages are not the key motive for multinational firms to venture abroad. Rather, they seek cities and countries that sustain large populations, good standards of living, sound financial markets, and competition in terms of producing and marketing exclusive products.
This is contrary to what is often projected as the major reasons for FDI. In reality cheap labour is worthless if that force is skill-less. More importantly, cheap labour cannot compensate for the lack of infrastructure; to have any success an investor is forced to pump a lot of money into the transport and communication links around its business. This is something many businesses simply are unwilling to stake vast sums upon especially with political risk being very high.
The paradox stems from here: in order to develop the region needs FDI, but to attract FDI the region needs to be more developed. The reason for stagnation is a result of the past investment strategies in the area.
Historic Investment
Historically, investment in Sub-Saharan Africa has been orientated around the extractive industries. As noted, many countries on the continent are resource abundant and many people think this is the only reason for investment in the region. Looking to history there is some evidence for this. Since the ‘Scramble for Africa’ when European colonial powers entered the continent in the 19th century, the nations of Africa, like their resources, have been viewed as commodities. With rich mineral deposits and oil reserves the region was seen as an ideal pillar to support industrial Europe. This outlook meant the economies of each country focused on extraction and exporting. The result of this was a huge deficit in internal investment with foreign powers - first governments, then transitioning into private corporations - moving revenue back into European economies. As a result the transport links, legal and governmental structure, communication links and educational infrastructure continued to be underfunded. This is now what is scaring companies from investing.
The situation for Sub-Saharan Africa is worse than the north of the continent which, due to heavy oil reserves and a cultural heritage more in line with the European powers, were able to benefit from a significant quantity of foreign investment. Sub-Saharan Africa was not given the same respect and many suggest that the FDI paradox can simply be explained by the inheritance of a cultural bias which views the as area solely as valuable for extraction. Many nations in the region still have economies which focus on extraction and mineral resources of course remain a big draw for FDI. Corporations such as Switzerland-based commodities behemoth Glencore, for instance, purchased two mining assets in the Democratic Republic of Congo at US$1bn in 2017. However, the climate is changing.
State of Current Investment: The times are changing!
The FDI landscape is no longer is as simple as it was in 1914. In fact, over the last 4 years there has been a decrease in FDI into the resource industry. This, the UN predicts, is a trend which looks likely to continue over the coming years. This has been matched by a general sectoral shift towards the manufacturing and services industries. Notably, from the total sum invested into Greenfield FDI projects, under 25% was pumped into the primary sector- most going to North African oil reserves. The biggest investment was into the services industry followed by the manufacturing industry. Greenfield investment importantly makes up three quarters of the investment into the region and is one of the reasons there is hope for the future of the area.
By its very nature, greenfield investment involves the development of infrastructure. There is however controversy over some of this investment; most evidently around the Chinese ‘Belt and road Initiative’. This project is part of a Chinese trade plan connecting the country to the rest of the world. It seems beneficial to all parties, allowing Sub-Saharan Africa the infrastructure it desperately requires. Nonetheless, this investment is seen as a form of neo-colonialism which only promotes the dangerous cycle of extraction which has been formed over the last 200 years. It is true that China, in carrying out these projects, uses a majority of Chinese workers, mitigating the financial benefits for African nations. The other fear is that these African nations are at risk of falling into a debt trap; this is a line often projected to make China seem like an exploitative colonial power. The IMF, however, claims only 8 of the 71 countries in the scheme are at risk of being in a debt trap and only 1 of these is in Africa.
Potentially a bigger issue for the region is the concentration of investment in only 4 cities: Lagos, Nairobi, Abuja and Johannesburg (the last even collapsing over the last year due to political instability). These cities receive virtually all the new investment being put into the services and manufacturing sectors, leading to a growing fear that the region will develop an urban elite who hold the power and wealth over a poverty stricken population who will increasingly suffer from reducing investment in the primary sector. This can already be seen to be occurring; in Nairobi labourers make around US$5 a week, yet a litre of milk costs US$2.50. This makes the cost of living impossible for the majority of the country. At the same time, there are high end fashion malls opening containing European high end fashion brands-one even hosting a champagne and caviar bar!
On the other hand, there is a belief that improved services will help to grow the consumer market and this will trickle down from these major cities when governments have the capital to invest in development projects. Importantly, there is the hope that the increase in communication services will help to increase educational prospects and therefore combat the lack of a skilled workforce. There is some evidence for this, given Africa since has become the 4th largest investor in the region after Western Europe, Asia and North America, though most of this remains between the aforementioned four cities.
It is yet to be seen if there will be a positive outcome from the changing nature of FDI. The paradox may be beaten by the increase in greenfield investments and with the growth of the service industry. One eventuality is that Sub-Saharan Africa may in the future be seen as another consumer market before a pile of resources. Alternatively, the change may lead to the separation of social class, making the disparity in wealth even larger. It is even unclear whether there will be a complete deficit of FDI in the coming years, the UN predicting that East Africa will have rapid growth in FDI over the next three (WIR). It similarly predicts either a plateau or reduction in FDI in the rest of the region. All that can be shown, ultimately, is that it is now inaccurate to claim Africa is only invested in for resources.
