Stronger institutions are key to attract FDI to Africa, says seminar
By John Yarney, consultant, Communication Officer, ECA
26 September 2005

African governments need to enhance and build institutions that will attract more foreign direct investment (FDI).

This is key to helping Africa improve its capacity to balance import spending and export earnings, said participants of a workshop on Capital Flows and Current Account Sustainability in African Economies, held last week in the Ghanaian capital, Accra, sponsored by the United Nations Economic Commission for Africa (ECA).

“An enabling environment is fundamental to a sustainable current account,” Augustin Fosu, Director of the Economic and Social Policy Division (ESPD) of the ECA said at the two-day workshop organized by the ECA for 60 participants, which ended on 22 September.

“An enabling environment will increase the FDI and maximize the impact of the flows on African economies,” Fosu elaborated.

Most Africa economies have relied heavily on commodities exports and public capital flows, which are unpredictable. Economists point to FDI as the most stable inflow of resources before aid and remittances, but FDI to Africa remains low at about 1.7 per cent of global FDI inflows in 2002.

South Africa has seen remarkable FDI flows and experienced a sharp once-off increase in 1999 approximately 42 per cent of GDP.

“Reducing political risk, ensuring property rights, most importantly bolstering growth in market size, as well as wage moderation, lowering corporate tax rates, and ensuring full integration of the South African economy into the world economy all follow as policy prescriptions from our empirical findings,” said Johannes Fedderke, Professor of Economics, Cape Town University, South Africa.

One of the workshop participants, Professor Fedderke studied the impact of FDI in South Africa, and what triggers flows of capital to that economy.

Loius Kasekende, Deputy Governor, Bank of Uganda shares similar views on how critical institutions and banking play in attracting sustainable levels of private investment:

“It is important to develop institutional as well as legal frameworks that provide investors with certainty,” he said. “Strong banking systems will increase the willingness of foreign investors to hold portfolio or fixed assets in African countries. Most importantly, reforms should be continued to provide groundwork for more robust regional stock markets in Africa.”

Besides institution-building, to attract capital, Kasekende proposes export promotion and diversification; prudent fiscal management; improving governance and accountability mechanisms surrounding external finance; improved mechanisms for the collection of data on total debt flows, and a debt strategy and regular debt sustainability analysis.

“An important factor that led to the accumulation of unsustainable levels of external debt was poor debt management and imprudent borrowing practices of the debtor countries," said Kasekende.

"To attain external debt sustainability it is important to strengthen Africa’s debt management capacity and to implement prudent policies on both non-concessional and concessional borrowing,” he said.