Is Africa The Next Economic Frontier?
On June 11, 2012, 1:02 PM by Benjamin Okyere
Many sources indicate that the continent is on its way up, but they must be assessed with caution.
Africa’s dog days may soon be over. According to the Economist, 6 of the world’s 10 fastest-growing economies from 2000 to 2010 were in sub-Saharan Africa. In terms of GDP growth, the Economist forecasts that in the next 5 years, the average African economy will outpace its Asian counterpart. Furthermore, international lenders including the World Bank, the IMF and the African Development Bank all have demonstrated confidence in the region via their 5%-plus growth predictions for 2012. And according to the Ernst and Young “2012 Africa Attractiveness Survey,” Africa received its largest ever share of global foreign direct investment (FDI) in 2011.
While many of the previously mentioned statistics suggest that the African economy is on its way up, the causes of and benefits for this marked increase in FDI are more complex and dynamic. The relationship between FDI, economic growth and larger development outcomes has been a contentious subject for decades, and the increasing prominence of non-Western FDI (in particular from China) has only sharpened this debate. Research shows that FDI may have a positive effect on economic growth, but it also depends on other crucial factors like infrastructure, the human capital base in the host country, the trade regime and the degree of openness in the economy.
Given its commitment to host countries’ economies and its tendency to resist short term changes in market conditions, some speculate that FDI has a positive economic impact in developing countries. However, many of these developing economies can restrict or resist foreign investments due to nationalistic sentiments or fears of modern day economic colonialism. Moreover, while these foreign investors may initially aid in productivity and technological improvements, once the original investment starts to turn profitable the capital goes back home and maintenance is out the window.
Despite these criticisms, FDI has many desirable features that can affect the quality of growth with significant implications for poverty reduction. It can reduce adverse shocks to the poor that stem from financial instability and help improve corporate governance. In Africa’s case, the Ernst and Young survey indicates that FDI projects in the region increased by 27% in 2011, pushing Africa’s share of the world’s investment to almost a quarter. This is ostensibly positive news coming from a so-called “backwards” continent usually associated with war, disease and corruption. However, FDI’s critics point out that its outcomes can also be markedly less positive, as it may provide financial support for corrupt regimes and incentivize rapid resource depletion without building sustainable economic linkages. Given the continuing trend upwards in African FDI, the questions about its impact are more relevant than ever.
With FDI supporting the exploitation of new resource reserves throughout the continent, one could argue that Africa is the next economic frontier. As the saying goes–high risks, high returns; and with the many risks in doing business in Africa, pioneers stand to make high gains as the risks of doing business are mitigated. The Ernst and Young Survey combines an annual analysis of investment into Africa since 2003 with the views of 505 global executives on how and where investment will take place in the next decade, and 73% of respondents anticipated that Africa’s attractiveness will improve over the next three years. However, the continent’s investment desirability remains somewhat of a mixed bag: many respondents still perceive Africa as “the least attractive” investment destination.
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