FDI

Africa should target FDI from developing economies

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This article first appeared in my column with the Business Daily on February 24, 2019

Often when the term Foreign Direct Investment (FDI) is said in Africa, images of investors from Europe and North America are the first to come to mind. And this is with reason; according to UNCTAD, the top three sources of FDI for Africa are the USA, the UK and France. China holds the fourth largest stock of FDI in Africa followed by South Africa, Italy, Singapore, India, Hong Kong and Switzerland. And while FDI flows to Africa slumped to USD 42 billion in 2017, a 21 percent decline from 2016, UNCTAD forecasted inflows to Africa to increase by about 20 percent in 2018 to USD 50 billion. UNCTAD notes that while companies from developed economies still hold the largest FDI stock, developing economy investors from China and South Africa, followed by Singapore, India and Hong Kong (China), are among the top 10 investors in Africa.

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(source: https://unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=461)

Clearly African governments want more FDI, and there is an opportunity to diversify FDI strategies from targeting just Europe and the USA. While it is important to retain the interest of the top investors, there is also room to better consider the requirements of investors from developing economies such as China, India, South Africa as well as other African countries such as Nigeria (who focus almost exclusively on Africa). Thus while the anchor investors from the US and Europe are crucial, it is also important that Africa leverage at least two unique advantages that investors from developing economies bring with them.

The first advantage of investors from developing economies, is that they understand the reality of investing in countries with governments who are not very transparent. The reality is that it is difficult to find an African government where investors will not, as some point, have to contend with rent seeking behavior of some government officials. Often the perception of corrupt governments can put off traditional investors, but when one comes from a country where that is also a visible reality, this factor is less of a deterrent. This is not to say that corrupt requests from government should be entertained, but rather, the fact that this reality is faced in their own countries means that such a culture in much of Africa will not serve as a shock and limit interest.

Secondly, Africa’s private sector is highly informal, a reality that is also reflected in Asia and other regions with developing economies. According to the ILO, the workforce employed in the informal economy is over 85 percent in Africa; this figure is 68.8 percent in Arab States, 68.2 percent in the Asia-Pacific, and about 55 percent in Latin America. This is an advantage because it means investors from these regions understand the challenges that come from investing in a country where most of the private sector labour functions outside formal structures. Used to negotiating contracts and performance expectations in a culture dominated by informality, investors from developing economies are used to planning for unforeseen events linked to informality, and may possibly have a higher appetite for risk because informality is a part of the reality in their own economies and thus not labelled as an unusual risk factor.

In short, the multipolarity of FDI sources targeting Africa is likely to grow as developing economies expand their capacity to invest outside their economies. Thus, Africa has to develop its capacity to meet the investor requirements of an increasingly diversified source of investment and leverage the unique advantage each brings to the table.

Anzetse Were is a development economist

China taking over manufacturing in Africa?

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This article first appeared in my weekly column with the Business Daily on September 10, 2017

Earlier this year, McKinsey and Company, released a report on Sino-African relations that assessed the activities of Chinese businesses in Africa as well as Sino-African economic partnerships. There are about 10,000 Chinese-owned firms operating in Africa today and about 90 percent of these are privately owned debunking the myth that Chinese business activity in Africa is dominated by State Owned Enterprises and overly influenced by state craft. Of particular interest is understanding how the Chinese presence is informing industrial development, a chronically underdeveloped sector on the continent.

31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. Chinese factories are focused on Africa’s domestic markets, 93 percent of revenues come from local or regional sales in Africa.

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(source: https://cdn.static-economist.com/sites/default/files/images/print-edition/20140208_MAP001_0.jpg)

One third of Chinese firms report profit margins of over 20 percent in 2015. In manufacturing this is attributed to ample pricing headroom in Africa; prevailing market prices for manufactured products are so high that Chinese firm earn comfortable profits and their profit levels are higher than those of African firms. Interestingly although manufacturing is capital investment and commitment heavy, 31 percent of firms made investment decisions within a week. 67 percent of firms investments are self-financed and Chinese companies are optimistic about the future of the African market with most firms indicating plans for expansion.

Chinese firms are also generating local employment as 89 percent of employees are African; this figure is 95 percent in the manufacturing sector. 61 percent of firms upskill African employees through professional training and/or apprenticeships, an indication that Africa is poor at educating Africans with skills relevant for employment. In terms of management, 44 percent of managers are African, this figure is 54 percent in the manufacturing sector. Chinese firms contribute to African markets mainly by introducing new products, services, technologies and methods.

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(source: kessbenfm.com/kfm-data/china-in-africa.jpg)

The report is clearly optimistic of Chinese firm activity in Africa, for example more content is focused on detailing the benefits than to delineating the costs; one wonders why. And the costs are significant, there are concerns of Chinese firms engaging in dumping where they sell products in export markets at prices below those in domestic markets. This may be leading to ‘unfair’ capture of export markets from African firms. Breaches of labour regulations are more common among Chinese firms than in other foreign-owned firms. These include inhumane working conditions, work without contracts, exceeding legal limits on work hours and threatening to fire workers who refuse to work in unsafe conditions.

Clearly Chinese firms will continue to make inroads into Africa and the continent will accrue many benefits from this but will also have to vigilantly manage the costs. With regards to industrialisation, it will be interesting to see how African industrial policy will be structured to encourage a stronger indigenous presence in the sector given the ability, innovation, efficiency and commitment of Chinese manufacturing firms, firms which also benefit from African trade deals as they are domicile here. Chinese firms make it clear that there is a lucrative domestic market that indigenous firms have failed to fully tap and thus African firms have a lot to learn from Chinese firms. If trends continue, a situation may emerge where African industrialisation is owned and dominated by Chinese firms. While this is welcome in terms of contributions to Africa’s development, can it then be termed ‘African’ industrialisation?

Anzetse Were is a development economist; anzestew@gmail.com

The Implications of Brexit on Africa and Kenya

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On Friday morning the world awoke to the news that the UK had decided to leave the EU.

The same day saw currencies, stocks and bonds plunge across Africa, and a slump in oil and other commodities. From an African point of view, the immediate aftermath of Brexit has exacerbated problematic trends in international markets which have already hit African growth prospects. African currencies slipped against other currencies like the USD and Yen but of course gained against the GBP. Further, in the aftermath of Brexit, some African Eurobonds plunged with yields rising for Nigerian, Ethiopian and Rwandan Eurobonds.

If one were to trace some of the short and medium term effects of Brexit on Africa, the departure of the UK from the EU complicates African access to EU markets. Countries and businesses that were using the UK as a point of entry for their goods into the EU will have to find new partners in mainland Europe. Further, any trade deals that African countries had with EU will have to be renegotiated with the UK as a standalone entity. Although it is unlikely that the UK will effect drastic departures in terms of trade deals with African countries, the process of re-negotiation will take a period of time during which African exports to the UK will be negatively affected due to the uncertainty in the limbo period.

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Closer to home, Kenya’s horticultural sector, particularly cut flowers, will suffer. Flowers are one of Kenya’s top exports and the UK is a major export destination. Thus again any trade deals that Kenya had negotiated with the EU will stall with regard to the UK because of Brexit; and this may well translate into losses in the short to medium term for those firms. Another example of how Brexit will negatively inform access to EU markets for African goods is the case of Kenyan tea. If Brexit leads to the tightening of access to the EU markets for UK goods, Kenyan blended tea exports will suffer because the UK has been a major re-exporter of Kenyan tea into EU markets. UK appetite for Kenyan tea was informed by this re-export function thus with Brexit, the UK may possibly lose easy access to EU markets which may lead to a cut in the volumes of tea the country imports from Kenya.

If one looks at the effect of the weakening of the GBP, Africa will be affected. Firstly, African exports to the UK will be more expensive for UK consumers and this may dampen their appetite for African products. Further, with a weaker GBP, Kenya will become a more expensive tourist destination which will negatively affect a sector that has already been under-performing as the UK is an important source of tourists for Kenya. On the other hand, a weaker GBP will be good news for an import economy such as Kenya as imports from the UK will be cheaper.

More broadly, if Brexit triggers a UK recession, there will be a more medium to long term problems with which Africa will have to contend in a context where African growth is at its slowest for decades. Not only will there be dampened appetite for African exports thus muting trade, FDI from the UK will also be negatively hit, the latter of which is particularly bad news for Nigeria for which the UK was the largest source of FDI in 2015. Further, remittances from Africans in the UK are likely to drop if the UK economy slides into a deeper recession. In terms of development assistance, it is unlikely that a new, post-Brexit government would drastically alter UK’s commitment to spend 0.7 percent of its gross national income (GNI) on development aid, but a struggling UK economy would translate to a decline, in absolute terms, in the amount of aid Africa will receive.

https://i1.wp.com/www.travlang.com/money/uk10.jpg (source: http://www.travlang.com/money/uk10.jpg)

Another key negative effect of the UK leaving the EU is that the country has been a proponent of African interests on certain issues in the EU. For example, the UK has been a voice in the EU calling for a reduction of EU subsidies to farmers, subsidies that negatively affect African farmers by keeping the price of EU agricultural produce artificially low. With the UK leaving the EU, the interest of African farmers will no longer have a voice in the bloc. Secondly, a decision was recently made to cut EU funding to the African Union mission in Somalia (AMISOM) by 20 percent; the UK opposed this. The departure of the UK from the EU means that African countries will have to look at the EU anew and identify which countries can be pulled in as allies on key issues.

However, Brexit can be seen as good news in this context because the UK will no longer have to live with EU decisions and regulations concerning Africa with which they don’t agree. Indeed, the UK Minister to Africa said Brexit will allow the U.K. to “focus more on our bilateral relationships with Africa” allowing the country much more flexibility when interacting with Africa than was possible while working under the EU.

It will be interesting to see what the post-Brexit UK government African strategy and policy will look like. In terms of Kenyan interests, given the deep and longstanding ties the country has with the UK, aid, trade and investment are likely to continue. In fact, an analyst made the point that in all of Africa, perhaps Kenya may benefit the most from Brexit as the UK may be particularly eager to establish bilateral ties with Kenya after leaving the EU, giving Kenya exceptional leverage.

Anzetse Were is a development economist; anzetsew@gmail.com

India: A growing footprint in Africa

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This article first appeared in my weekly column with the Business Daily on November 22, 2015

It is widely known that China has been making significant inroads into Africa over the past two decades and a great deal of energy has gone into analyzing Sino-African economic interaction. However, another country has been making big moves yet barely any attention has gone into analyzing India’s growing footprint on the continent. Last month the Third India Africa Summit took place in New Delhi, clearly signaling India’s interest in the region.

(source: http://mahersamajworldwide.com/wp-content/uploads/2015/11/India-Africa.jpg)

Carlo Lopes of the UNECA makes an important point when he recently stated that Chinese foreign direct investment (FDI) stock is less than 1% of the country’s total global investment yet India invested as much as 16% of its outward FDI, valued at $70 billion, in Africa in 2013. Further, Africa is responsible for 26% of India’s total inward FDI stocks at $65 billion, more than Brazil, China, the Russian Federation and the USA. Analysts make the point that Indian FDI to Africa is concentrated in oil, gas and mining, and investment in the manufacturing sector is focussed on automobile and pharmaceutical firms. Most of the Indian FDI in African countries is through Greenfield investments and joint ventures. India’s growing investment in the region is seen to be motivated by a blend of factors such as socio-cultural ties particularly due to a healthy Indian Diaspora on the continent estimated at over 2 million, host country policies, regional integration agreements, bilateral investment treaties as well as GDP growth in Africa. An interesting point to note however is that India’s FDI into the continent is focused on a limited number of countries; in 2012 95 percent of India’s total FDI stock went to Mauritius alone partly due to its favourable tax treaty with India.

In terms of trade, the IMF estimates that the value of India’s exports to Africa have increased by over 100 percent from 2008 to 2013, and the value of India’s imports from Africa also grew dramatically from 2008-2013 by over 80 percent. This year Indo-African trade it is expected to be about USD 70 billion. African exports to India have been growing annually at 32.2% while Indian exports to Africa grew annually at 23.6%. Sadly in terms of trade composition, a vast majority of exports from Africa to India are raw materials such as crude oil, gold, raw cotton, and precious stones. Indeed, while India’s merchandise imports from Africa totalled $447.5 billion in 2015, oil imports accounted for $116.4 billion and gold was $34.4 billion Exports from India to Africa mainly consist of high-end consumer goods such as automobiles, pharmaceuticals, and telecom equipment. Trade between Kenya and India stood at USD 4.23 bn in 2014 and the country has been jostling with China as Kenya’s top trade partner.

(source: http://financialtribune.com/sites/default/files/field/image/06_Pilot%20launch.jpg)

India is also becoming an important lender to the continent, USD 8bn was provided in Lines of Credit (LOCs) to Africa between 2008 and 2011 and Africa constitutes 53 percent of India’s operative LOCs. The LOCs finance a range of sectors ranging from agriculture, food processing, rural electrification, IT and infrastructure.

As the Brookings Institute states, although Indo-African economic relationship is burgeoning, there is clearly much more room for growth if the country wants to be as significant as China and the USA on the continent. Indeed as China reorients itself and undergoes some difficulty, India can become a very important partner for Africa. From an African perspective, African countries should focus on diversifying their exports to India, tapping into the technological expertise in India and leveraging that for African development and being more proactive in attracting FDI from India.

Anzetse Were is a development economist; email: anzetsew@gmail.com

Burundi should ask Kenya about the cost of chaos

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This article first appeared in my column with the Business Daily on May 18, 2015

Last week, there was a coup attempt in Burundi linked to President Pierre Nkurunziza’s bid for a third term.

For heaven’s sake, has the region not learnt that, one, there is a delicate political balance underpinning regional stability and, two, political stability is a prerequisite for economic development? Whether one agrees with Mr Nkurunziza or not is not the issue but, as usual, the region and particularly the people of Burundi will accrue the collateral damage of this political instability.

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(source: http://i.telegraph.co.uk/multimedia/archive/03304/bur-01_3304500b.jpg)

Academic research has established that recurrent episodes of social unrest affect households and their incomes, and that political instability plays a large role in economic underdevelopment. Burundi should dig a little and look into all the research done on how Kenya’s post-election violence (PEV) cost the country, not only in lives, but also economically.

One can argue the economy has not fully recovered. In fact, it would be useful to do an audit of just what PEV cost the economy as an illustrative example for the region. According to The Economist, PEV led to financial losses of approximately Sh22 billion (£145 million), around one per cent of the country’s gross domestic product. Further studies estimate PEV had long-term effects and over the period 2007-2011 per capita GDP was reduced by an average of Sh8,200 per year, which is massive considering Kenya’s per capita averaged about Sh94,000 during the period.

Another study suggests that in 2009, the GDP was estimated to be about six per cent lower than if the chaos had not occured. Further, in 2007 (before the violence) foreign direct investment (FDI) stood at Sh70 billion and dropped almost 75 per cent to Sh18 billion in 2008. The latest figures (2013) put FDI at Sh50 billion. Clearly, Kenya is yet to fully recover.

Studies strongly indicate economic growth for countries with a high propensity of government collapse is significantly lower; even frequent Cabinet changes can reduce the annual real GDP per capita growth rate by 2.39 percentage points according to studies. Internal political instability (not associated with outside threats like terrorist groups) is particularly harmful through its adverse effect on total factor productivity growth and by discouraging physical and human capital accumulation. More specifically political instability cost Kenya international trade and reduced the country’s capacity to earn foreign exchange, especially in the cut-flower sector.

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(source: http://310627192.r.worldcdn.net/media/k2/items/cache/3f396c7768363e7b7d9739b221e18487_XL.jpg)

During the PEV, the short-term effect was a 24 per cent reduction in flower exports, a 38 per cent reduction in exports for firms in conflict-affected areas and a 50 per cent increase in worker absence. However, there were long-term consequences as well in that flower exports to the EU went from a growth rate of approximately three per cent annually to minus 2 per cent, a loss of Sh4 billion in 2010 alone.

The reality is that the relatively brief PEV led to significant shifts with long-term repercussions for international trade for the country; in the cut flower industry there was a decline in trust in Kenya on the part of the EU.

In short, it is clear Kenya and the region simply cannot afford political instability. It will be interesting to see how the attempted coup in Burundi plays out economically, but it will not be good news.

Ms Were is a development economist; email: anzetsew@gmail.com; twitter: @anzetse