AFRICA: New Bourses Threaten To Lure Away Hard Cash Investment

By Lahai J. Samboma Reprint | | Print |

LONDON, Aug 8 1996 (IPS) - Africa’s stock as a destination for foreign investment has risen modestly in recent years, but some analysts think enterprises in need of fixed cash capital are being bypassed in the race for a fast buck on Africa’s emerging equity markets.

The vogue among foreign investors to invest in new and lively African stock markets has meant a loss of direct funds for labour- intensive and growth-enhancing industries such as agriculture and manufacturing, say observers.

“Rising activity on African stock exchanges is, of course, a positive development,” says Carolyn Jenkins, a fellow at Oxford University’s Centre for the Study of African Economies. “However, direct investment in the agricultural and manufacturing industries could be more beneficial in the long-run.”

A number of bourses have opened in Africa since 1993 with a matching increase in the number of Africa-specific investment funds. At least 12 Africa funds with a combined worth of one billion dollars have been founded in the last two years. They include the 250 million dollar Morgan Stanley Africa Investment Fund — by far the largest — GT Management’s 75 million dollar All-Africa Fund and Flemings’ Southern Africa Fund.

With returns from more developed emerging markets in the East and Latin America beginning to level out and fund managers increasingly looking for opportunities to diversify their portfolios, the omens augur well for investment in Africa.

But omens are all they are at the moment — according to World Bank figures released earlier this year Africa’s share of a record 231 billion dollars of foreign investment in developing countries in 1995 was less than one percent, at two billion dollars. Some analysts say the figure is closer to one billion dollars.

Such low start points make the initial figures for Africa sound good — within the past year investors’ outlays in Africa grew 40 percent, according to the London-based Fund Research.

But the amounts are still small in global terms, making it even more important that the effect of the more superficially attractive equity bourses is counterbalanced.

Even if the money going to the bourses is new money, money that would not have been directly invested as fixed capital, Jenkins warns that most of the new activity on African stock markets may eventually prove be a case of paper changing hands, of high-stakes financial players speculating for a fast, easy buck.

By its very nature equity investment is mainly short-termist, with firms more concerned about quick returns for the shareholders than with fostering sustainable development, he argues. Investors in equities are also more prone to sell up and move elsewhere when the going gets tough.

Hence some analysts’ preference for venture capital that goes directly into fixed capital formation in industries such as food processing, mining, brewing, textiles and other manufacturing industry with the potential to not only create jobs, but also serve a domestic market which has become overly dependent on imports.

“Direct investment in agriculture and manufacturing is where the action should be,” says Jenkins. “Jobs will be created, living standards raised and vibrant domestic markets created, which again would attract more foreign direct investment.”

Many fund managers readily agree with Jenkins’s point, but think that it is too early to expect venture capitalists to flock to the region. “Investors are a very cautious breed,” says the Southern Africa Fund’s Rob Fisher. “They are looking for the new political environment in Africa to settle.

“Investment in fixed capital, in creating employment opportunities, is what Africa needs most, but people are not going to start committing funds at the drop of a hat. There are political risks to consider. But you will see things picking up in a few years. People are very confident long-term.”

Ironically, some analysts believe that the major factors inhibiting increased investment in the region are the so-called ‘stabilisation’ programmes required of it by the International Monetary Fund (IMF), the World Bank and the West as a whole.

These Structural Adjustment Programmes (SAPs), they say, have led to across-the-board cuts in public spending on health, education and jobs-creation — the combined, cumulative effect of which has been the drastic reduction of domestic demand and the decimation of markets. This lack of a viable domestic market has stifled foreign direct investment.

“They say (structural adjustment) is a miracle cure, but it is not,” says Gill Tudor, Africa analyst at the Economist Intelligence Unit. “It is largely untested and it is unproven. Insisting on these same criteria will aggravate the debt problem and will not help Africa.”

“SAPs have been in place for close on 20 years and during that time successfully led to a depression of domestic demand — so investors don’t feel like investing in Africa,” says Paul Spray, policy director of the British NGO Christian Aid. “The IMF and World Bank said investment would pick up, but it hasn’t. For investment to increase, SAPs must be dumped.”

“These stabilisation programmes have had a damaging effect on investment,” adds Paul Cook, an economist at the Institute for Development Policy and Management, Manchester University. “They have cut down demand and failed to revive domestic and private investment.”

While they do not deny that ‘stabilisation policies’ have had a negative impact on domestic demand in African countries, Bank officials say the policies are needed for the ‘fiscal discipline’ to underpin economic stability.

SAPs have led to increasing investment in “successfully- adjusting countries” like Ghana, Mauritius and Uganda, according to Geoff Lamb, the Bank’s representative in London. Others who stick to the ‘painful medicine’, he adds, could reap similar benefits.

Bank critics never tire to point out that two decades of ‘painful medicine’ should have shown better results by now.

“I don’t say we’ve been very successful,” Lamb says, “but there are places where the policies are working. As for the restriction of demand, if there was more demand then there would be more investment on imports. This will not help at all.”