Experience has suggested that institutional reforms should be undertaken in order to
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facilitate the liberalization process. Many countries need to reform their banking and insurance laws and regulations, contractual laws, and their law enforcement mechanisms.
3.2 Foreign Direct Investment
83. Foreign direct investment (FDI), in addition to providing finance is expected to help promote growth in developing economies by facilitating the transfer of technology, increasing labor force skills, promoting competition, and increasing exports. These
"spillover effects" could translate into greater productivity growth in the economy as a whole [World Bank 1999a].
84. The flows of net private capital into least developed African countries since the mid 1980s has assumed the following characteristics (UNDP 1999): 1) some increases in net foreign direct investment; 2) virtual absence of net portfolio investment flows; and 3) sharp drop in net bank and trade-related lending (e.g. for Angola it dropped from 1,042 million dollars in 1985 to -374 million dollars in 1997 and for Ethiopia from 59 to 23 million dollars over the same period). This implies, among other things, that Africa is bound to heavily rely on official development assistance, which itself, too, is on the decline [UNDP 1999; World Bank 1999a].
85. A recent World Bank report noted that net long-term financial flows to developing countries, including both private and official flows, fell from 338 billion dollars in 1997 to 275 billion dollars in 1998 (World Bank 1999a).
86. The decline in long-term financial flows to developing countries was concentrated in flows from international capital markets, which fell from 136 billion dollars in 1997 to 72 billion dollars in 1998. Similarly, commercial bank loans, bonds and portfolio equity were all affected [World Bank 1999a].
87. FDI flows into Africa has remained quite small as can be seen from Table 3.
During the period 1991-95 annual flows into the region averaged 3.8 billion dollars as compared to 2.8 billion dollars during 1986-90. Africa has been marginalized in terms of
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flows of FDI as the region's share in all developing economies dropped from 10.8 percent during 1986-90 to 5.4 percent during 1991-95. Such weak flows can be partly explained by the existence of a large number of least developed countries in Africa (32 out of 48 countries) which are characterized by small domestic markets, poorly developed infrastructure, a risky business environment, limitations of highly skilled labor, institutional constraints, high level of external indebtedness, etc.
88. Moreover FDI in the region is unevenly distributed as the top five host countries (Nigeria, Egypt, Angola, South Africa, and Tunisia) account for as much as 80 percent of the total flow into Africa. Flows are strongly dominated by oil-exporting countries most of which are found in North Africa. During 1991-95, North Africa received an annual average of 665.2 million dollars (17.5%) out of a total flow of 3,801 million dollars for all of Africa,
89. For some countries in Africa, divestment exceeded flows. That is countries like Sudan, Gabon, Cote d'lvoire, Botswana registered negative flows during 1991-95. For example, Botswana registered an annual average of -55 million dollars over the same period.
Table 3: FDI Flows in Africa. Annual Average
Period
1981-85 1986-90 1991-95
Africa's share in all countries %
2.9 1.8 1.7
Africa's share in developing countries (%)
8.6 10.8
5.4
Flows in billion dollars
1.7 2.8 3.8 Note: The largest recipients of FDI during 1991-95 are ranked as follows (annual
average in billion dollars):
1. Nigeria-1,250.6 4. South Africa = 401.0
2. Egypt = 692.2 5. Tunisia = 273.4
3. Angola = 516.2 6. Ghana =235.8
Source: UNCTAD (1996) World Investment Directory 1996. Vol.5 Africa.
90. Similarly, a strong concentration pattern is observed in the distribution of FDI inward stocks in Africa. In 1995, the five largest recipients of FDI (South Africa, Egypt, Morocco, Angola, and Tunisia) accounted for almost 70 percent of the total African
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stock. South Africa, with 27 percent of the total, has the largest stock, i.e. 10,166 million dollars in 1995 as against 37,804 million dollars for the whole of Africa. On the other hand, North African countries (notably Egypt, Morocco and Tunisia), that had negligible stocks in the 1970s had reached sizeable levels by the mid-1990s (UNCTAD 1996).4
91. The importance of FDI, as measured by shares of FDI in (GDP) and shares of FDI in gross capital formation, has varied from country to country. Countries with small size of the domestic economies, (e.g. Liberia, Equatorial Guinea, and Swaziland) have registered quite large shares of FDI in the GDP. In some countries, the relative size of FDI is apparently high because domestic investment is depressed while FDI continues to flow into key sectors. Angola is a case in point. War in that country did not deter FDI in petroleum, but domestic investment fell considerably. As a result, FDI flows accounted for almost 70 percent of Angola's gross capital formation in the early 1990s. In other countries (e.g. Algeria, Nigeria and Tunisia), large amounts of FDI in absolute terms are not very significant compared with the size of their economies. In some countries (e.g.
Namibia and Ethiopia) recent large investments have not flowed for a long enough period to produce sizeable stocks [UNCTAD 1996].
92. Africa's FDI originates mostly from Europe will the United States and Japan have played a lesser role in providing the region with FDI. That is, investors from developed countries have displayed uneven interest in Africa. Investors from West Europe have maintained close ties with certain African countries (e.g. with oil exporting North African countries) because of proximity and post-colonial ties. In 1993, France and Britain alone accounted for more than 80 percent of the West European stock in Africa. The United States has become less important as a source of FDI for Africa during the 1980s.
93. However, US investment has made some recovery in the early 1990s. And this recovery was very unevenly distributed in the region and was almost entirely the result of increased investment activity by US affiliates in only five countries, namely, Algeria, Angola, Egypt, Nigeria and South Africa. As to Japan, negative investment flows or 4 In 1995, Ethiopia's inward stock was only 158 million dollars or 5% of the country's GDP in 1994.
Ethiopia's rank regarding stock was 34th among African countries.
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dinvestment is the order of the day as far as Africa is concerned. The following table provides the geographic distribution of the sources of FDI for Africa.
Table 4: Geographic Sources of FDI for Africa: 1975-1980 and 1991-1993 Region and country*
Source: UNCTAD (1996) World Investment Directory, vol.v Africa, 1996, New York and
Geneva, UN.
94. The sectoral composition of FDI in Africa has been biased against agriculture, the dominant sector in most economies. FDI is attracted to manufacturing and the service sector as can be seen from the following table. The mining sector (along with quarrying received a mere 4.1% of the total FDI flows to Africa, perhaps contrary to expectations.
Table 5: Africa: FDI flows bv Sector: 1990-1995
Sector
Source: UNCTAD (1998) World Investment Directory vol. 5, Africa.