Foreign Direct Investment (FDI) and trade in Africa
What has changed in Africa’s fundamentals over the past decade or more that is driving investment higher? How has investment in Africa changed over the past decade or more in terms of the sectors targeted?
Africa is increasingly able to draw attention from the global stage in terms of attracting investment. Taking a step back in time, as the 1980s drew to a close, several geopolitical convergences conspired to create a new and challenging space for African countries. The most fundamental of these shifts was the collapse of the Soviet Union and the liberation of its east Europe buffer. It was not perhaps so much the collapse of the Soviet empire as the disintegration of the bi-polar Superpower configuration that spawned a so-called “Cold War” and an intense competition between the West (mainly the United States) and the Soviets for influence in just about every nook and cranny on the planet.
This oversimplified set of circumstances created the opportunity for dictatorships to flourish – packaged as they were in the long-term benefit for the people as a whole – and for others, such as South Africa, to cloak its refusal to grant democratic rights under the guise that the democratic demands were Soviet-inspired and designed to turn the country into a Soviet surrogate. The 1980s signalled the last dying thrashes of a doomed ideology while in Africa just three countries enjoyed full democratic rights and a peaceful open society – Botswana, The Gambia and Senegal, while only seven had any system of representation at all. Mauritius could be added to the ”list of three” even though it was just barely “African” in the 1980s in terms of the broad definition, ie culture, traditions and direct links. These tended to be mainly Asian, so ‘democratic’ societies in Africa by 1989 tended to exclude Indian Ocean countries.
The ripple effect of the Soviet collapse swept across Africa, helping to create the conditions necessary for ending conflicts in Angola and Mozambique among others, in helping to force South Africa to grant Namibia independence and in setting up a new wave of demands for political freedom, representation, government by the people and transparency. With those demands came some freedoms and then some more; democracy took hold and civil society began to blossom – free media, judicial independence, rights and obligations unheard of in most African countries just a few short years before. The pressure to transform was irresistible and with political transformation came economic transformation – state-centred structures and policies were swept aside and while elements of this legacy linger, private ownership and entrepreneurship have replaced the idea that the state will and can provide. North Sedan South Sedan Democracy In Africa 1989 2011 That in turn created opportunities for outsiders to invest in and take a share of the growing demands for goods and services in several key countries and to take a share of the wealth potential generated by an expanded and expanding infrastructure network not only on a country-by-country basis, but across the continent. In addition, the massive resources of the continent, its oil, minerals, and other raw materials were suddenly more available and accessible than at any time during the so-called “Cold War” era and that too sparked massive foreign extraction investment that more lately has turned to downstream beatification, as well as leaving a more lasting impact.
When looking at the last decade or more, some of the key reasons for increased investment in Africa over the period have been a favourable outlook for economic growth, improving business environments, market-driven reforms in many cases done with guidance from the International Monetary Fund (IMF), and a general lowering in the sovereign risk profile of African countries. In many cases also, as more economic data on countries became available, it became easier to measure (and with a greater degree of certainty) the economic risk of investing in African countries, and made it possible to monitor this risk on a continuous basis. In many cases too, an improving political climate paved the way for a reduction in economic risk. Improved government policies have allowed better scope for the private sector to grow. Macroeconomic policies became increasingly targeted at stability, enhancing the ability of many African countries to deal with short-term shocks.
Increasingly, investors have become aware not only of the risks of investing in Africa, but the risk of not investing in the continent. They have become more focused on where in Africa to invest, as opposed to whether to invest or not. Increased awareness of the potential size of the African consumer market, and a number of significant discoveries of oil and minerals in recent years which have again highlighted the natural resources potential, have all played their role to attract additional investment to the continent. Concurrently, an increased interest from foreigners and local governments alike to address the continent’s infrastructure challenges has seen increased investment in roads, rails and ports.
We expect to continue to see very strong investment in the oil and gas sectors in Africa. The discovery of oil off the coast of Ghana in 2007 again excited key global energy players and once more hinted at the enormous resource potential of Africa. Additional recent discoveries of gas off the coasts of Tanzania and Mozambique further endorsed the appeal of investment in Africa’s energy potential and in March this year Kenya discovered some oil, although the commercial viability still needs to be determined. Whereas at the end of 2010, Africa had 120 billion barrels of proven oil reserves, it is projected that another 100 billion barrels of oil are offshore Africa, only waiting to be discovered. Furthermore, enormous agricultural potential exists on the continent – while at the same time two recent global food price increases have highlighted the vulnerability of the world’s population.
About David Okwara
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