Reliance on foreign direct investment has distorted African development, UN says

The persistent colonial legacy of relying on foreign direct investment has distorted African economic development and locked in low value-added, limited reinvested earnings and volatile inflows, yet it is being seen as an answer to today's problems, the United Nations Conference on Trade and Development (UNCTAD) says in a new report.

"In the face of inadequate resources to finance long-term development in Africa and with poverty reduction and other Millennium Development Goals (MDGs) looking increasingly difficult to achieve by 2015, attracting foreign direct investment (FDI) has assumed a prominent place in the strategies of economic renewal being advocated by policy makers at the national, regional and international levels," it says.

"The idea that Africa is a reluctant host to foreign capital is a myth," UNCTAD adds in "Economic Development in Africa: Rethinking the Role of Foreign Direct Investment 2005."

Despite a major policy effort, including the liberalization, privatization and deregulation recommended for attracting FDI, the continent has received only a very small portion of global flows; a little over an annual average of 2 per cent between 2000 and 2004, down from 4.4 per cent in the 1970s.

African countries must look at the cost-benefit perspective, gauge the impact of FDI on local costs and profitability, the sizes of spillovers and linkages and the extent of import dependence and profit repatriation. In extractive industries, environmental and social costs also need to be fully factored in.

Meanwhile, incentives for foreign firms can amount to a kind of subsidy, displacing policies to nurture local firms and encourage domestic investment. The outflow of profits may be so high as to make FDI a substantial cost. Production by foreign firms is less of a benefit if it displaces local firms, while extra exports may require a considerable increase in imports, with uncertain outcomes for the country's balance of payments, it says.

The high profits on FDI in Africa that is often touted reflect its concentration in the capital-intensive extractive sectors, it says. Domestic capital accumulation, including that in the public sector, must be revived and certain thresholds of industrial capacity, skill levels and infrastructure development have to be crossed before FDI begins to work harder for development, the report says.

The report's author is Professor David Olusanya Ajakaiye, Director of Research of the African Economic Research Consortium (AERC).