By Connor J. Wangler
When one thinks of poverty eradication and development in Africa, the unfortunate fact is that the first image to pop into your head is one of slum dwellings and malnourished children fighting off Malaria. According to Zambian-born economist Dambisa Moyo, however, the continent has enormous potential to grow and, as such, offers an excellent opportunity for outside investment into local economies, or Foreign Direct Investment (FDI). The pumping-in of massive amount of dollars through expanding operations and production can carry critical benefits to African countries that can provide important resources for reducing extreme poverty: it creates jobs, introduces new technology, stimulates capital markets, and expands local businesses’ access to international markets.
Many investors, however, are discouraged by the economic circumstances throughout the continent. At first glance, African countries do have the enormous potential Moyo points out: low labor costs and unbounded investment opportunities. Why, then, have the dollars not been making their way into African economies? The answer is that, despite the favorable conditions, many African countries have failed at creating an encouraging environment. Dilapidated and corrupt legal and regulatory systems give little faith to investors that their time and money will be protected. Many governments have not properly courted potential investors into coming to their countries through incentives, such as favorable tax structures or land subsidies.
In this piece by CNBC Africa, Dr. Mark Abani, who works with investors and governments to improve investment processes, discusses how the Nigerian government has attempted to create a pro-investment environment.
Nigeria is currently experiencing an economic boom rich with investment from international corporations and governments. The country receives anywhere from $10-$12 Billion a year in foreign direct investment; however, this rate is starting to slow down for a variety of reasons, mainly its political and economic climates. First of all, Nigeria is home to Africa’s second largest oil reserves and, consequently, an enormous oil export industry. This is problematic, however, for investors looking for a stable market to enter. The reason being is that petroleum products account for 95% of Nigeria’s exports, making the country’s markets extremely vulnerable to volatile fluctuations, such as a sudden drop in commodity prices. Nigeria, therefore, is working to diversify its economy by focusing growth in non-energy manufacturing and knowledge-based services. Secondly, Nigeria is facing a mounting problem of political instability brought on by violent attacks from the Islamic-oriented terrorist organization Boko Haram. Foreign investors have been reluctant to expand their investments until the political climate settles and the safety of their assets can be assured.
For the past few decades, another source of foreign investment in Africa has emerged: China. Chinese firms, both private and public, have flooded the continent with billions of dollars of development projects. The problem that many have, however, is African countries going arm-in-arm with a country who they see as a violator of human rights. Dambisa Moyo recognizes the association with unfavorable human rights records that China carries, but, she argues, what China has been able to do in terms of growth is what is more important to Africans. Moyo cites China’s ability to elevate millions of its own citizens out of extreme poverty in a short amount of time as a reason to partner with the economic giant. She, and many others, also praise China’s willingness to invest in projects with “no strings attached.” This makes it easier for African countries to get the most “bang for their buck” from the deal because they are not restricted by conditionalities. Those favoring the US-West focus, however, say the restrictions placed on deals are necessary because they promote sustainable growth practices, such as environmental regulations put on infrastructure projects. Others, however, see the debate as stemming from bitter fighting between pro-West and pro-East forces. Yun Sun, a scholar at the Brookings Institute, argues this tensions weighs down potential growth and says it is more beneficial for all parties to collaborate.
While there is still much to be debated about how African countries attract investors, or from where they attract them, it is obvious that direct investment into expanding markets will drive economic prosperity. Foreign aid assistance and debt relief can help only so far; if we are going to eradicate extreme poverty in Africa, the people of African countries need to be empowered to do it themselves. They have shown again and again that they can build their economies and elevate their lives if given the opportunity to do so. That opportunity comes in the form of investment and Africa has a lot of opportunities for it.