Sunday, October 19, 2008

What African nations must do to encourage FDI and trade

Isakpa, Phillip; Business Day (Nigeria) 2008-07-23

The African continent has been its own nemesis in terms of FDI (Foreign Direct Investment) flow because according to studies, while gross returns on investment can be very high, the effect is more than counterbalanced by high taxes and a significant risk of capital losses.

Other ways in which Africa continues to shoot herself in the foot is by encouraging macroeconomic instability; losing assets due to non-enforceability of contracts; and witnessing physical destruction due to armed conflicts.

Further factors such as the perceived lack of stability of national economic policies, poor quality of public services, and closed trade regimes are seen in Africa.

This problem is only made worse where lack of democracy or other kinds of political legitimacy make the system of governments prone to sudden changes. This means there is a lack of effective regional trade integration efforts, and hence national markets remain small and grow at a modest pace (and in some cases, even contract).

Consequently, while other economies continue to grow, Africa has imploded, decelerating for the most part of the 1980s and 1990s.

It is possible, however, for Africa to begin articulating ways to encourage FDI and trade at international talk shops and fora, but it could achieve more by ensuring that their respective internal economies are conducive to investment as they position themselves for trade.

Incontrovertible gains can be made by attracting FDI. A study conducted by the OECD in 2002 noted that FDI triggers technology spill-overs, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development, all of which contribute to higher economic growth. Economic growth is the most potent tool for alleviating poverty in developing countries.

Furthermore, beyond the strictly economic benefits, Foreign Direct Investment may help improve environmental and social conditions in the host country by transferring “cleaner” technologies and leading to more socially responsible corporate policies, among other things.

FDI must be complemented with appropriate trade policies to encourage the local economy to find its bearing on the side of competitive advantage. Encouraging trade has the potential to re-focus the continent’s over-reliance on natural resources, single products, and primary production.

A change in this mindset will lead to a diversifying economy, an ingredient that has spurned the much needed jobs in other economies. In this regard, much can be learned from Asia and Indonesia in particular, where they raised their game from a primary producer to exporter of top quality finished products to the rest of the world.

Nigeria currently faces a most auspicious period as the world is focused on Africa. Having attracted more than half of the continent’s FDI, the country is in a situation that seems set to improve, particularly with the favourable forecast by Goldmansachs, Standard and Poor’s and Fitch, the world's most reputable think tanks on the global economy.

Such positive reviews need to be used to steam roll reforms, open the economy further, and avoid further policy reversals. “These are sure-fire prescriptions for more capital inflows and a burgeoning trade stream.”