AFRICA: Foreign Investment ‘No Substitute For Aid And Good Policy’

By Lahai J. Samboma Reprint | | Print |

LONDON, Mar 22 1996 (IPS) - More foreign direct investment is not a cure-all for Africa’s socio-economic ills and can not substitute for well-targeted international aid and sound macro-economic policies, argues a leading economist.

According to Carolyn Jenkins, a fellow at Oxford University’s Centre for the Study of African Economies, too much emphasis is being attached to foreign investment when there should be equal, if not more, concern about the decreasing flow of aid and other concessionary credits to the region.

“Investment from abroad can’t be a substitute for aid and sound macro-economic policies,” she says. “Although there are signs that the investment climate in Africa is improving, foreign investment is still very small and can not in the short or medium term cover the gap left by falling aid.”

Recent figures released by the World Bank reveal that despite a record 231 billion dollars of foreign investment in developing countries as a whole in 1995, Africa’s share of that was less than one percent at about two billion dollars– and even that meagre proportion has been disputed by some analysts who believe the true figure to be less than one billion.

Jenkins concedes that while the current level of investment in the region may seem minuscule, it nonetheless represents a positive development from the 1980s when capital flight and negative investment was the norm in Africa.

Though she says improving investment prospects in the region may in part be attributed to ‘reforms’ imposed by the World Bank and International Monetary Fund (IMF), Jenkins is no fan of so-called Structural Adjustment Programmes (SAPs), which she says heap the burden of ‘adjustment’ on the poor in the form of reduced health and education spending and job losses.

Investment will only pick up, she maintains, when sensible macro- economic policies are implemented. These do not necessarily mean extreme free-market policies, she says.

“I am in favour of reform, but one that is both sensible and gradual,” she says. “It’s no good privatising everything in sight, for example. But at the same time, I don’t see why governments should be involved in hotels or brewing beer.

“Some utilities could be commercialised, instead of privatised, and health and education safeguarded. The primary focus on investment is misplaced. First, you have to get the macro- economics correct. Aid should then be used to cover shortfalls until the policies have had time to deliver the conditions which will attract investment.”

This position is broadly accepted by the World Bank, which has called on Western governments to increase aid to African countries which are unable to replace lost or non-existent development funds with private direct investment.

Official development assistance to Sub-Saharan Africa from the West was cut by 12 per cent in 1993/94, most of it due to falls in bilateral and multilateral concessional flows. Many analysts expect further cuts in Western aid budgets.

There are indications that U.S. bilateral assistance to the region will be cut by 30 percent this year. British aid to Africa is set to fall by five percent in real terms in 1997/97.

But analysts say the reality of falling aid to Africa must not force African governments into unquestioning acceptance of whatever aid is offered. They argue that the region should reject aid that is ineffective, counterproductive or ‘tied’ to donor services.

The London-based Overseas Development Institute (ODI) estimates that, for instance, over 60 percent of European Union (EU) aid to Africa is ‘tied’, meaning recipients are prevented from seeking more cost-effective services from countries other than the donors themselves, even when donor nation services are higher.

One French aid package required 45 percent of the funds to be spent on contacts with French companies. A Japanese contribution to part-cover the costs of one aid project allegedly set a percentage on the total cost of the scheme, so the recipients actually returned more than twice the funds Japan gave to Japanese firms.

In 1987 the European Union admitted that 56 percent of its aid to developing countries was tied. Had the recipients been allowed to spend the funds elsewhere, say the ODI, it would have added close to two billion dollars in savings to the value of that aid.

“It is clear that investment is not going to make up for declining aid in a place like Africa, at least not in the short term,” says Ivan Nutbrown, a campaigner with the World Development Movement. “Aid is necessary, but governments must be very guarded and refuse any aid that is tied.”

“Of course, tied aid must be refused,” says Jenkins, “because they are tied to more extensive imports from donors and also because at the end of the day the countries that receive it have to repay it at great cost.”

South Africa, for example, has several times declined World Bank and bilateral aid because of the conditions attached to them, but South Africa, unlike other African states, can afford to do so.

Analysts argue that the best course for African countries is to only accept aid geared towards debt relief and no other, since the debt problem also inhibits investment, both domestic and foreign.

Yet some maintain that foreign direct investment can and will replace aid in the region, and that only more radical economic reform along the lines advocated by the IMF and World Bank can create the conditions necessary for increased investor interest.

“It is difficult medicine, but it can work and it is working,” says Anthony Garnett, an analyst with the all-Africa Simba investment fund. “The rising investment in the area is due to SAPs. I say that all aid should be stopped, more reform undertaken — and then investment will pick up.”

Jenkins disagrees. She says it would take five years for improvements to bear fruit and most of the early funds will go to short-tern schemes and sectors where capital can by quickly shipped out in a crisis. “Even with more radical policies, investment will not just pick up like that.”