6:44 AM May 6, 1997

INVESTMENT BOOM LEAVES ONLY SMALL MARK ON AFRICA

Geneva 6 May (Chakravarthi Raghavan) -- The "investment boom" (foreign direct investment) of the mid-1990s and the on-going increase in inflows to the developing countries, have left only a small mark on Africa, with flows reaching only $5 billion in 1994 and 1995, according to UNCTAD's World Investment Directory on Africa published Tuesday.

FDI flows to Africa averaged an annual $1.7 billion in 1981-1985, rising to an annual average of almost $3 billion during 1986 and 1990, remaining at that level during early 1990s.

And what little goes to Africa as a continent, is also confined to a few countries there.

The Africa volume provides data for 53 African economies -- both inward and outward flows, stocks and other basic financial data of the TNCs in the particular countries, and of its importance to host and home countries, and the regulatory frameworks.

Both a preface to the volume, by UNCTAD Secretary-General Rubens Ricupero, and the technical introduction to the data in the volume to which he has drawn attention, enter some caveats in interpreting the data or comparing them. The chief among these are different yardsticks used in national databases in collecting FDI information, even the differing definitions of the IMF and the OECD in the definition of FDI (as different from other foreign capital flows).

Some academic scholars have question whether, in today's "global capital markets" and their explosive growth of different financial derivatives, even the IMF/OECD distinctions between FDI and other flows have any real meaning or difference -- for purposes of host-country policy analysis and formulation.

The UNCTAD report says that the combined amount of inflows to the African least developed countries have increased steadily during the 1980s and early 1990s, but have remained very small, and their share of total inflows to Africa have slightly diminished."

Two of these countries - Angola and Liberia - account for most of the inflows received by African LDCs. Liberia attracts large FDI inflows by providing flag-of-convenience facilities, while Angola's inward flows is mostly in petroleum. Some African LDCs occasionally receive FDI, which though small in absolute size, are very large when related to the size of the host country economy, e.g Equatorial Guinea."

Most of the African countries, particularly so under the IMF/World Bank structural adjustment reform programmes, have radically changed their policies and regimes on FDI, with some of them having open regimes that are not even present in the major industrialized nations.

Nevertheless, Africa has had weak FDI flows -- and a total absence of equity flows -- unlike Asia and Latin America where FDI was the largest component of net resource flows.

Within Africa, investment flows are concentrated, and hence largely determined, by the continent's nine oil-exporting countries -- which alone accounted for over four-fifths of flows to Africa during the first half of the 1980s. While these declined later, says the UNCTAD report, they remained at the high-level of two-thirds at the beginning of the 1990s.

And within this group of oil-exporters, inflows are concentrated on Egypt and Nigeria -- together absorbing over 50% of total flows to Africa between 1981-1995.

But the relative importance of Egypt and Nigeria for FDI flows into Africa have changed -- that of Egypt from a 41% share in the 1980s to 18% in early 1990s, while that of Nigeria improved. But not all FDI to Nigeria was in the petroleum industry, with the secondary sector accounting for about a quarter of FDI stock.

The small size of investment flows in Africa make them volatile and subject to year-to-year fluctuations, in response to changes in flows to individual countries, the report adds.

In terms of home countries, investors from developed countries have shown uneven interest in Africa. Due to geographical proximity and post-colonial ties, Western European investors have always been more active in the region compared to the US and Japanese investors -- and particularly so in relation to the oil-exporting North African countries that supply half of the EU's oil and gas.

France and Britain are the principal investors in Africa -- accounting in 1993 for more than 80% of the Western European stock. They are also the largest source of FDI for Africa, accounting for 88% of average annual flows during 1991-1993. France is dominant in the francophone countries, and Britain in the anglo-phone region.

The US has become less important as a source of FDI for Africa during 1980s and early 1990s -- accounting in the early 1990s for only 15% compared to about a third of developed country outflows during the second half of the 1970s.

Even in absolute terms, US TNCs invested less in Africa during first half of the 1980s, but since then investments have recovered and grown gradually, says UNCTAD. The negative flows in the first half of the 1980s is attributed to divestments by the US TNCs from Africa's petroleum industry.

Due to the sharp fall in petroleum prices at that time, says UNCTAD, petroleum affiliates began to pay dividends to their parent firms in excess of their earnings and, as a result, US affiliates in Africa registered large negative re-invested earnings and negative FDI outflows.

For several of the large recipients of FDI in Africa (Egypt, Morocco, South Africa), the services sector accounts for the largest share of inward FDI, followed by manufacturing. Within services, the finance and insurance service sectors have attracted FDI. The primary sector is still the largest recipient of FDI, particularly from France, the Netherlands, the UK and the USA.

Besides the developed countries, FDI in Africa has three main sources -intra-regional, from neighbouring Arab countries and from South-East Asian countries.

South Africa is the main source of intra-regional FDI in neighbouring countries. And since end of Apartheid, South Africa firms have begun investing actively in rest of Africa - in retailing, banking, brewing, satellite television and tourism.

There is also intra-regional investment among North African countries, most notably in Mahgreb - between Algeria, Libya, Morocco, Mauritania and Tunisia.

Most of the FDI from neighbouring Arab countries, the Gulf countries, is concentrated in the finance sector with North Africans as the largest recipients.

The main destination for South-east Asian investment flows is South Africa - with FDI from Malaysia accounting for almost half of the total outflows to South Africa in 1995. But much of this was due to a single large investment in petroleum. Asian investors have also shown interest in South Africa's neighbours (Botswana) where they can produce at low cost and export to South Africa.

The voluminous data in the 528-page volume (including the preface and introduction) does not provide, or claim any analysis or conclusions.

Nevertheless, it says in the introduction says: "One of the reasons why investment flows to the African continent have been so weak is that, among the developing country regions, Africa has the largest concentration of least developed countries (31 out of 48). Most of these countries suffer from a cumulation of factors that discourage investment inflows, ranging from small domestic markets to unskilled labour force to poorly developed physical infrastructure and high levels of external indebtedness."

This raises questions about FDI determinants, FDI as a supplement to domestic savings, and whether reliance on FDI (through liberalization policies) raises also domestic savings levels or reduces them through new consumption patterns, the relationship of FDI to growth, and whether it is causal, and whether there is a "threshold" level of growth and development that brings in FDI, and if so what the level is and how to enable countries to get over that threshold.

Without policies and rules to address this question, the advocacy of FDI and FDI frameworks to promote it and the substitutability of trade and FDI (that underlies much of the EU/Canada/Japan drive for FDI rules in the World Trade Organization) has become essentially a neo-mercantalist role to increase the earnings and capital accumulation of TNCs based in these countries, and not one for promoting Development, as often claimed.

One of the few studies, that of Swedish economist Magnus Blomstrm, viewed FDI as an engine of growth, and sought to show (from FDI flows of 1980-1985 and growth in that and subsequent period) a causal relationship between FDI and growth.

Efforts by others to replicate these across a wide range of developing countries have been unable to establish a causative relationships, and suggests that any conclusions that could be drawn remains confined to a small number of middle-income developing countries, with some particularities, that cannot be replicated elsewhere -- the oil-exporters or the Hong Kongs and Singapores.

The IMF accounting system takes profits and earnings of the foreign investors as outflows on the revenue account, and as new FDI when these are actually not taken out but reinvested within the country.

Whatever, the merits of this accounting this leaves a difficult picture about FDI and analysis of this or policies based on rising FDI.

The OECD and the IMF define FDI differently - the former in terms of control over the local affiliate, and the latter on basis of 'permanence' - but neither are useful in today's 'markets', where derivatives can spin off any investment (short-, medium or long-term) into anything else.

As Prof. Jan Kregel has pointed out in his article in the UNCTAD Review, at any point when a foreign investor decides to take out the profits, or not reinvest his profits even when leaving the original "brick and mortar etc" investment in, the host country faces problems as a result of over-reliance on FDI.

The UNCTAD report's introduction brings out that from a position of limiting foreign investor participation in the 1960s and 1970s, there has been an extensive review of sectoral policies and regulatory frameworks, most if not all African countries have, after extensive review of sectoral policies and regulatory frameworks, have now swung to FDI-policy liberalisation.

One of the main trends, says UNCTAD, is to move away from mandatory requirement that government must have an equity, often majority, stake in the mineral sector. The new laws are on the basis that public interest can be safeguarded by the government in its capacity as regulator - and that well-designed tax arrangements can generate adequate revenues without government being exposed to risks of ownership participation.

While in the 1970s and early 1980s, many African countries had restrictions on capital outflows, including profit remittances, over the years African governments have recognized that their foreign exchange control laws are a strong disincentive to foreign investors, and foreign investors have been guaranteed the right to repatriate capital and profits.

But the key problem for such repatriation of earnings has not been formal legislative restrictions, but the BOP difficulties as a result of which central banks allocated scarce foreign exchange to eligible companies, and foreign exchange "queues" became the most formidable constraint on repatriation of dividends and capital.

Recently introduced foreign exchange retention schemes -- for direct access to either all or a proportion of the value of a firm's exports -- offer a more effective solution to the problem, says the UNCTAD report.

And an even more effective solution has been the introduction of liberalized currency markets as part of SAPs.

An important component of Africa's FDI policies since 1980s has been provision of fiscal incentives to foreign investors - mainly via corporate taxes and import and export duties.

And while most countries continue to offer fiscal incentives, others have begun to re-examine their policies. A number of studies have shown that these fiscal incentives by themselves are not enough to attract FDI - if the general regulatory framework is not conducive to doing business.

If incentives should hence not be used (and the OECD's MAI agreement tries to discourage it, and WTO rules on subsidies etc enable penalties by an importing country), and if investment does not come in for countries under particular thresholds (whether of income, overall development or infrastructure), and if the state is to bow out to provide an overall framework favouring entrepreneurs, what can Africa or others starved of FDI do ?

There are no answers, except an indirect one of doing more to liberalise, an advice that is more directly provided by the IMF and the World Bank.

According to an IPS report from Addis Ababa (where the report was released Monday, ahead of the Economic Commission of Africa (ECA) conference of African ministers, responsible for economic and social development), the report shows a new trend in investment patterns emerging on the African continent, as companies begin to flow out of their own national borders into other African countries.

Transnational corporations (TNCs), especially from South Africa and Nigeria, are the main players in intra-regional Foreign Direct Investment (FDI), according to UNCTAD.

These investment flows have been supplemented by an upsurge in investment from South-East Asian countries, notably Malaysia, and give credence to South-South investment.

"Although they are very small, companies are now investing outside their borders, as a large number of African countries remain by-passed by world investment," says Jagdish Saigal, who heads UNCTAD's division of international trade.

In 1994, some $25 million flowed from companies on the continent into other African countries. According to UNCTAD, this "... demonstrates that even in developing countries, companies no longer look to domestic markets as sources of expansion."

"All African countries, for which data are available, have experienced an increase in outward investment during the last decade, indicating the development of domestic firms in several countries in the region," the UNCTAD report says. Few African countries, however, collect data on outward investment flows, and the existing picture is very partial.

"If you take the Mauritian experience, you find many small TNCs from other developing countries such as India, but you also see that Mauritius is investing in other African countries," says Victor Shangiro of the ECA.

According to Shangiro, while a lot of initiatives to assist regional integration have been propelled by governments, the private sector is beginning to play an active role.

Africa's share of FDI in world terms remains minuscule. Between 1991 and 1995, Africa received 2% of the total global FDI and 5% of total FDI flows into developing countries. The FDI for 1996 was $4.5 billion, with Egypt and Nigeria accounting for more than half of this.

"Africa should be receiving much more foreign investment than it currently does given that the average return of investment in the region is either considerably higher or compares favourably with other regions," says Ken Kwaku of the World Bank.

But due to adverse locations, poor infrastructure, low labour productivity, governance problems, red tape, ineffective promotion and a negative media image, investors continue to shy away.

The arrival of South-East Asian companies on the scene however, may be a positive development for Africa. Last year, the Malaysian company, Petronas, announced a $436 million investment in the South African oil company, Engen. Telekom Malaysia, this year, completed a joint-investment with US-based SBC International for a $1.3 billion stake in South African telecommunications.