Tailored Policies for Effective FDI in Africa

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African countries require significant levels of capital investment to help them stay on track regarding the attainment of MDGs, said a study titled: Impact of FDI on Poverty Reduction in Africa: Are there Regional Differences?, presented at the AEC by Gaston Gohou, principal economist at the AfDB, and Issouf Soumare, associate  professor at Laval University in Québec, Canada.

“At present, most African countries are off track on meeting their goals,” the paper said, adding that the private sector was the principal driver of growth, supplying the FDI required for capital investment.

Gohou and Soumare point out that the continuous flow of FDI into African countries could stimulate their economies and reduce poverty. The point is supported by figures. The study indicates that net inflows of FDI per capita and as a ratio of GDP had been increasing over the past couple of years. At the same time, there have been improvements in real per capita GDP and UNDP’s Human Development Index. The HDI has been “universally accepted as a consensual measure of human development.”

They however question the apparent link between FDI increase and welfare improvement or poverty reduction. They argue that through their studies they have found that more GDP leads to more FDI in some countries, while in others, more FDI leads to more GDP. There are also those countries where both FDI and GDP affect each other at the same time, they point out.

At the aggregate Africa level, however, the study asserts that there is a strong positive relationship between FDI and welfare.

“Foreign direct investment can contribute to the development of countries and reduce poverty in Africa,” they say, advising, however, that “policies to attract these foreign investments should be tailored on a regional basis and account for economic convergence within regions and differences between regions in order to be effective.” They argue that in some regions, the channelling of FDI into investments that benefit the poor was missing.

Written by Ayenew Haileselassie