North Africa: What impact does FDI have on the people?

29/04/2015
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The African Development Bank has published a new report on North Africa entitled "Does Foreign Direct Investment Improve Welfare in North African Countries?" Supported by analysis and quantitative data, the report confirms the close links between foreign direct investment (FDI) and the quality of life for people in the six countries of the region (Mauritania, Morocco, Algeria, Tunisia, Libya and Egypt). On the other hand, the picture differs from country to country.

Insufficiently diversified FDI have different impacts, depending on the country

The paper points out that FDI generally has an impact on economic growth in North Africa – growth that generates revenues for governments and populations in the region – however, it points out that these investments are concentrated in too few industries: extractive petroleum, services and tourism, and construction. Few of these investments are directed towards non-extractive primary industries which are pro-poor and highly labour-intensive, or towards the manufacturing sector, with high potential for spillover effects in the economy.

This lack of diversification of FDI in the economies of the region partly explains the differences from one country to another as to the links between FDI and the welfare of the people.

Optimizing the impact of FDI

The paper makes three recommendations to strengthen the impact of FDI on the welfare of North African populations. The first, intended to reduce the differences in impact from one country to another, is that policies to attract FDI should be carefully thought through to direct the investment towards the most productive sectors of the economy, in particular the manufacturing sector. The second, to reduce inequality within any particular country, is that sufficient incentives should be offered to encourage foreign investment in highly labour-intensive sectors, benefiting the poorest, such as agriculture, fishing, education, health care and infrastructure development. The third recommendation aims to better distribute wealth within the region, to reduce poverty and to improve human development. To do this, it encourages North African governments to pursue the efforts undertaken to strengthen the quality of their institutions and governance.