AEC Participants Discuss Impact of Foreign Direct Investments on Poverty Reduction in Africa

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As part of the African Economic Conference, some 150 participants met on Wednesday, November 11, 2009, at the UN Conference center in Addis-Ababa, where they listened to a presentation on:  “Impact of Foreign Direct investment (FDI) on Poverty Reduction in Africa: Are there regional differences?”

The paper,  which was co-authored by the AfDB’s Results and Quality Assurance Department (ORQR) Principal Economist, Gaston Gohou and Laval University Professor, Issouf Soumaré, attempted to assess the impact of FDI on welfare across Africa.

Given the significant disparities in development, African countries need continuous flows of foreign investment in order to stimulate their economies and thus trigger reductions in poverty levels. Also, the attainment of the MDGs will contribute to improved human development, especially poverty reduction. Unfortunately, at present, most African countries are off-track on meeting their goals and they require significant levels of capital investment to help them get back on track. One main source of this capital investment is Foreign Direct Investment (FDI), since in most African countries; the private sector is seen as being a principal driver of growth.  FDI will therefore play a critical role in the achievement of these goals.

The current financial and economic crises have reanimated the debate on the importance of Foreign Direct Investment (FDI) for economic growth and poverty reduction in developing countries, especially in Africa. Most, if not all researchers, fortunately admit that the current financial crisis may have stronger negative repercussions on economic growth in Africa because of the potential reduction in foreign capital flows. It is believed that in some regions, channelling FDI flows into investments that benefit the poor is missing, although at the aggregate level, FDI contributes to poverty reduction. However, few papers have been devoted to Africa and its regional disparities on attracting FDI. According to the two experts, their paper intends to reconsider the relationship between FDI flows and poverty reduction in Africa.

Their research departs from current literature in the sense that they used the human development index (HDI) as a measure of welfare, instead of the usual GDP per capital. With regard to FDI measurement, they separately used per capita FDI net inflows, FDI net inflows over GDP and FDI net inflows over gross capital formation (GCF). “We find that there is a strong positive relationship between FDI and welfare at the aggregate Africa level”, Mr. Gohou explained, stressing that “this strong positive relationship holds even after controlling for government size, indebtedness, macroeconomic instability, infrastructure development, institutional quality, political risks, openness to trade, education and financial market development.” However, he added, “When taken at the regional level, the impact of FDI on welfare is no longer obvious and differs across regions.”

Concluding their remarks, the experts indicated that although Foreign Direct Investment can contribute to development and poverty reduction in Africa, policies put in place to attract these foreign investments should be tailored on a regional basis. “To be effective, policies should also account for economic convergence within regions and differences between regions,” they suggested, before opening the floor for discussions.