Reviving Investment In Africa: Constraints And Policies
UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER
Reviving Investment In Africa: Constraints And Policies
30 March 1995
ECONOMIC AND SOCIAL COUNCIL
ECONOMIC COMMISSION FOR AFRICA ECONOMIC COMMISSION FOR AFRICA
Sixteenth meeting of the Technical Thirtieth session of the Commission/
Preparatory Committee of the twenty-first meeting of the Conference
Whole of Ministers
Addis Ababa, Ethiopia Addis Ababa, Ethiopia
24-28 April 1995 1-4 May 1995
REVIVING INVESTMENT IN AFRICA:
CONSTRAINTS AND POLICIES
Since 1980, extensive efforts have been directed at generating economic recovery in Africa. However,
little attention has been given to the need to promote investment, although investment is essential in
any country in order to: (a) increase employment; (b) reduce poverty; and (c) enhance economic
growth. Furthermore, in order to feed and provide its growing population with productive jobs,
African countries must raise the levels of domestic savings and investment. Unfortunately, policy
makers do not tend to give much practical attention to such a link between investment and socio-
economic progress. Policies currently being implemented or considered, no matter how genuine, cannot
revive the continent's ailing economies unless they accord investment the attention it deserves.
Although there are several explanations for the continent's poor economic performance since 1980, the
low levels of domestic investment is a major causal factor. Gross fixed capital formation has
declined in Africa, from a total of $76.3 billion in 1980 to $58.9 billion in 1989.
A major cause of the poor state of investment is the very low level of foreign direct investment
(FDI), which is the main form of foreign private capital inflows to Africa. These inflows averaged
only $2 billion annually between 1981-1985 and $3 billion between 1986-1990, accounting for only 3 and
2 per cent, respectively, in the total inflow to developing countries. The average annual growth rate
for the second half of the decade is only half that of the first (table 1).
African countries have failed to substitute the declining trend of FDI with increasing local
investment because of a number of factors, such as the low level of domestic savings as shown in table
2. The African savings ratio in the 1980s was about 63 per cent that of the Asian average. For the
empirical evidence on most of these, see Abebe Adera, The Financial Sector and Economic
Development: Reflections on Africa, Finafrica - Cassa di Risparmio delle Provincie Lombarde
(CARIPLO), Milan, 1994; and the Global Coalition for Africa, African Social and Economic
Trends, December 1993, pp. 25-26. Aggregate savings are low because of low per capita incomes,
low exports/GDP ratios, high and variable inflation rates, low interest rates, poor financial
intermediation, relatively high aid flows, which are negatively correlated with domestic savings in
some countries, and high birth rates which increase the proportion of the population under 15.
There is also a strong influence of negative net transfers on national savings. ECA,
"Revitalization of investment for Africa's development: Prospects in the 1990s and beyond",
background paper for the Ad hoc Expert Group Meeting, 29 November - 1 December 1993. Net transfers
were not only negative throughout the 1980s, but their share in gross domestic savings rose from 14
per cent in 1980 to 25 per cent in 1990.
The purpose of this paper is to:
(a) Review the investment climate in Africa, identify and analyze the various constraints and
obstacles to the expansion of domestic and foreign investments in Africa; and
(b) Further analyze current policies and practices and reflect on possible avenues for improvement in
the light of determinants of domestic and foreign direct investment flows.
Table 1. Inflows of foreign direct investment to developing
economies, by region,
1981-1985, 1986-1990, 1991 and 1992
(in billions of dollars and percentage)
Table 2. The pattern of gross domestic savings in Africa,
(percentage of GDP at constant market prices)
II. CONSTRAINTS ON INVESTMENTS
Africa's bid for enhanced domestic and foreign investment flows cannot yield positive results if
adequate solutions are not found to the inhibiting factors. These factors are reviewed in the
following sections of this paper.
A. Inadequate macroeconomic frameworks and irrelevant approaches to structural adjustment
In the majority of African countries, the macroeconomic policy framework is that of the current
International Monetary Fund (IMF)/World Bank induced structural adjustment programmes (SAPs).
It is a fact that current SAPs, designed to address Africa's economic problems, have not succeeded in
reversing the declining trends in investment, even in relatively stable countries with a long history
of adjustment. Part of the answer is provided by the World Bank in its most recent study on SAPs in
"Investment generally responds slowly to adjustment in Africa and elsewhere. This slow response
is understandable. Investments cut capital spending as part of their fiscal stabilization - while the
private sector adopts a wait-and-see attitude during the early phases of adjustment due to the
irreversibility of investment decisions and the reversibility of key policy changes (frequent in
previous episodes). The problem is particularly serious where there is no consensus about the
importance of private-sector-led growth". World Bank, Adjustment in Africa: Reform, Results
and the Road Ahead (Washington, D.C.: The World Bank, 1994), p. 124.
Additionally, the absorption-reducing effects of both fiscal and monetary policies in SAPs not only
reduce public capital spending (as shown in the sample of countries in table 3), but indirectly and
directly reduce private investment through interest rate rises and the complementarity between public
and private investment. Current SAPs, by their heavy emphasis on massive devaluations, tend also to
induce a deflationary spiral, which bears a negative relationship to private investment. In fact,
experience confirms that such devaluations can themselves be the cause of macroeconomic uncertainty.
Thus, it is not surprising that evaluations by some World Bank researchers found that not only did
non-adjusting countries outperform adjusting countries in exports, domestic savings and inflation, but
also in investment. I.A. Elbadawi, "Have World Bank-supported adjustment programmes improved
economic performance in sub-Saharan Africa?", Policy Research Working Papers No. 1001,
the World Bank, 1992; and Elbadawi, I.A., et al., "Why structural adjustment has not
succeeded in sub-Saharan Africa", Policy Research Working Papers No. 1000, the World
It is relatively easy to realize that Africa needs much higher levels of investment to revive its
economies. Such investment is essential in all sectors, such as education, health and agriculture.
In particular, the continent needs very large doses of capital in its export goods sector in order to
compete in the new world era created by the end of the cold war and the emergence of regional trading
blocs. Such investment is also essential in alleviating Africa's huge debt burden, the magnitude of
which is shown above. However, the difficulty that African policy makers now face is how to attract
domestic and foreign investment at the present time, after overcoming the hostility in the 1960s and
1970s towards private capital. In fact, this predicament tends to be the main explanation behind the
inadequate attention of policy makers to investment promotion in Africa.
Table 3. Gross public investment in selected countries
(% of GDP)
B. Inadequate infrastructural and human capital
Investors, both domestic and foreign, are naturally hesitant about investing in countries where basic
requirements, such as roads, health services and utilities are inadequate. Because of the lack of
adequate infrastructure, as stated above, it is common for investors to provide their own back-up
generators, medical care and access roads, even in industrial estates provided by governments. These
increase the costs of doing business and reduce the rate of return on investment; thus turning away
both types of investors.
In African countries many forms of business ventures are prevented by the lack of skilled personnel.
This calls for greater investment in human capital. Human capital investment on health and education,
including institutional and on-the-job training, as well as adult literacy programmes, could overcome
obstacles to productivity and higher earnings by the labour force and ill health, lack of illiteracy,
lack of skills and adaptation to technology, poor incentives and immobility could be reduced.
Furthermore, the capacity to absorb physical capital may depend on investments in human capital. W.
Schultz, "Investment in human capital,", American Economic Review, March 1961; M.
Blaug," The rate of return on investment in education to national economic growth",
Journal of Political Economy, October 1964; E.F.Denison, Trends in American Growth 1929-
82 (Washington, D.C.: the Brookings Institutions, 1985).
In the case of developing countries, the World Bank in 1980 found that, in fact, the economic rates
of return on investment in education were higher than in developed countries. In the same survey, it
was found that human capital also yielded higher rates of return than non-human capital. World Bank,
Education Sector Policy Paper, 1980.
C. Deteriorating economic and social conditions
Africa's economic crisis is further exacerbated by natural and man-made calamities, including
cyclical droughts and internal conflicts. These are, indeed, major inhibiting factors running counter
to the continent's efforts to attract foreign direct investment.
D. Lack of political stability
Another related and equally unfavourable force is political instability. Africa today is not only
facing an economic crisis characterized by famine, malnutrition, high rates of unemployment, refugees,
and severe poverty, but is also burdened by serious political problems, including one-person rule,
violation of human rights, inter-ethnic and interregional conflict, and the lack of tolerance for
minority groups. All these problems have projected an image that Africa is a region riddled by crises
and not conducive to investment. As a result of the political crisis that engulfed Africa in the
1980s and the 1990s, many investors have developed a perception that investing in Africa is
Besides political instability, the likelihood of expropriation contributes to the lack of investor
confidence. Predictability of conditions and lack of arbitrariness may be the most important
assurance that can be offered to investors, who seem able to adapt to practically any conditions as
long as the rules are clearly established in advance and followed subsequently.
E. Low rates of return on investment
The rate of return on investment in Africa has declined significantly over the years and more
precipitously during the past decade. According to the World Bank, rates of return in sub-Saharan
Africa have dropped from around 30.7 per cent in 1961-1973 to around 2.5 per cent in 1980-1987. On
the other hand, during that period the rate of return in South Asia, for instance, grew from 21.3 to
22.4 per cent. World Bank, Sub-Saharan Africa: From Crisis to Sustainable Development
(Washington, D.C., World Bank, 1988).
F. Chronic shortage of foreign exchange
The chronic and persistent shortage of foreign exchange and restrictions on foreign currency
transfers is also considered as a serious constraint facing investors in Africa. The problem of
foreign exchange shortages means that spare parts cannot be imported which, in turn, means that
existing plants have to operate well below capacity. In addition, infrastructural facilities cannot
be properly maintained, nor can the imports of the necessary consumer goods be made. Investment is
not encouraged when such conditions prevail, and instead, disinvestment takes place.
G. Domestic and external debt burden
The situation has been further aggravated by the increase in external debt, which has grown from $93
billion in 1980 to about $240 billion in 1987 and $281 billion in 1991. In 1993, total African debt
(excluding South Africa) reached $285.4 billion. This comprised $118.9 billion for North Africa and
$166.5 billion for sub-Saharan Africa. These figures represent changes of 3 per cent in the total
regional debt, a decline of 0.5 per cent in that of North Africa and a 6 per cent increase in that of
sub-Saharan Africa since 1990. In absolute terms these amounts are small. The total debt in 1993
represented only 16 per cent of total developing country debt. World Bank, World Debt
Tables, various issues.
However, the magnitude of what is now generally recognized as the "African debt crisis"
becomes more clear from the ratios that express the debt in relation to certain key economic
variables. Therefore, in 1993, the debt/GDP ratio equalled 73.3 per cent for North Africa and 123.1
per cent for sub-Saharan Africa. This means that, in the case of sub-Saharan Africa, for instance,
the debt owed far exceeded the total value of goods and services of the entire region. In such a
situation, the entire economy of Africa can be correctly regarded as less than adequate collateral for
current and future debt. Secondly, for North Africa, the debt-service ratio equalled 37.6 per cent
and for sub-Saharan Africa it equalled 13.2 per cent in 1993. The relatively low ratio for sub-
Saharan Africa is due to the numerous debt rescheduling and the accumulation of arrears that have
taken place in recent years.
Yet, such aggregate figures mask even more worrying cases at the country level. For example, the
debt/GDP ratios for Côte d'Ivoire, the United Republic of Tanzania, Guinea-Bissau and Mozambique
equalled 206, 285, 323 and 386 per cent, respectively. The debt-service ratios for Burundi,
Côte d'Ivoire and Uganda equalled 41, 43, and 56 per cent of their export earnings,
respectively. When the servicing of external debt takes so much of a country's export earnings,
foreign investment will be discouraged simply because investors become uncertain that the country will
be able to authorize the remittance of profits and provide foreign exchange for the necessary imports.
Investors are very risk-averse in such an environment. Uncertainty negatively affects investors'
expectations and, hence, their calculations of expected returns, which are heavily influenced by risk
perceptions. Domestic investors can also be discouraged from investment when the debt is too large
because a debt overhang distorts the incentive to invest since the benefit of good performance goes to
creditors rather than the debtor. Furthermore, investors expect high taxation in the face of a debt
overhang in order to enable the government to service its debt. Karamo N.M. Sonko, Debt,
Development and Equity in Africa (Lanham, MD. University Press of America, 1994); J. Sachs,
"The debt overhang of developing countries", in Guillermo Calvo et al.,(eds.),
Debt, Stabilization and Development: Essays in Honour of Carlos Diaz-Alejandro [Helsinki:
World Institute for Development Economic Research (WIDER) 1984]; and P. Krugman, "Financing vs.
forgiving a debt overhang", Journal of Development Economics, vol. 29, 1988, pp. 253-
Domestic debts are equally inhibiting factors: they affect domestic savings, corporate efficiency
and domestic investments and may even lead to disinvestment.
H. Cumbersome investment legislation and procedures
Other inhibiting factors are related to the slow response of host governments, complicated
requirements, inefficiency, corruption, bureaucratic processes and government decision making.
I. Insufficient/inefficient incentive packages
Most African countries have, indeed, enacted generous investment codes, yet in many other African
countries the investment incentive packages have not yielded the expected results because of the
deterrent effect of excessively high corporate taxes, high interest rates not in line with the
requirements of productive investments, inadequate depreciation allowance systems contributing to high
capital costs, uncompetitive wage rates and rigid labour codes.
J. Inefficient financial sectors
The financial sector is crucial to the development of any economy. The institutional set-up of the
financial market is important in the transmission of monetary and credit policy effects on investment.
While there are both foreign and locally owned commercial banks in many African countries, merchant
banks are few and they have concentrated mainly on trade finance and less so on the mobilization of
medium to long-term investment finance. Commercial banks are located mainly in urban centres with
very few and not so well-dispersed branches in rural areas which constrains their financial
intermediation. Also, the lending operations of development banks, which were established to finance
capital projects, have been plagued by poor lending policies or government interference resulting in
heavy investments in large projects with low economic rates of return. As a result of these factors,
the financial sector remains undeveloped, inefficient and inaccessible to most savers and credit-
seekers. These factors account for its failure to adequately mobilize domestic savings and to attract
foreign capital for domestic investment. S.E. Omoruyi, "The financial sector in Africa. Overview
and reforms in economic adjustment programmes", Economic and Financial Review of the Central
Bank of Nigeria, vol. 29, No. 2, June 1991.
In a sample of 12 African countries in the late 1980s, the M2/GDP ratios range from only 0.114 per
cent in Rwanda to 0.225 per cent in Benin. Abebe Adera, The Financial Sector and Economic
Development: Reflections on Africa, Finafrica - CARIPLO, Milano, 1994.
The development of capital markets has recently gained momentum in a few countries, in addition to
six principal stock exchanges in Côte d'Ivoire, Egypt, Kenya, Morocco, Nigeria and Zimbabwe.
But the existing capital markets are suffering from grossly inadequate capitalization. The factors
inhibiting foreign and local investment in the local capital markets include low fiscal incentives,
lack of market information, insufficient investment protection, lack of participation by financial
institutions as underwriters and brokers, and the restrictions on profit and dividend repatriation by
So far, the informal sector has not been given adequate attention in terms of its potential in non-
bank financial intermediation, particularly in the rural areas in Africa. Money lenders, community
savings organizations, and non-institutional forms of saving and credit arrangements would appear to
have enormous capacity to tap the savings potential of some 80 per cent of Africans who live in the
rural sector. However, the lack of an organized framework to link these informal financial
intermediaries with formal financial institutions is depriving African economies of an important
source of savings for domestic investment.
K. Inefficient domestic resource mobilization
In Africa, like anywhere else, foreign investment should play a significant role in economic growth.
However, domestic resource mobilization must form the core of growth in order to attain self-reliant
and sustainable development. Among other measures, domestic resources can be mobilized through
realistic interest rates on domestic savings, integration of informal economic activities into the
formal sector, more efficient banking systems, easier access to domestic credit for investors,
appropriate investment incentives, special training and financial assistance to small-scale
entrepreneurs, etc. Karamo N.M. Sonko, "The management and promotion of small-scale enterprises:
Field evidence from Ethiopia", paper presented at the Senior Policy Workshops on SMEs, Addis
Ababa, Ethiopia, 14-17 November 1994.
The main source of domestic revenue in African countries is taxes, particularly indirect taxes on
international trade. On average, tax revenues equal around 20 per cent of the GDP of sub-Saharan
African countries, while indirect taxes on exports and imports account for 45 per cent share in
government revenue. Taxation is a widely prescribed measure to raise public revenues and governments
use their taxable capacity to generate high tax ratios. During the late 1970s, the average tax ratio
for sub-Saharan Africa was 18 per cent but, by 1985, tax revenues as a percentage of GDP rose to 23
per cent. Despite this trend, the loss of export receipts, resulted in a substantial loss of
The overdependence of African countries on a narrow tax-base which is tilted heavily towards indirect
taxes on international trade has been problematic in the 1980s because of depressed commodity markets
and tax reforms. Revenue collection has been unstable, fluctuating widely with movements in export
receipts which have declined or stagnated, causing import demand to shrink in many countries in the
region. Even though it is easier for governments to raise additional revenues through higher taxes on
foreign trade, this is becoming increasingly difficult due to a reduction of import duties and export
taxes. In any case, the collection of trade taxes has always been undermined by smuggling and tariff
evasion, as well as corrupt tax administrations.
The generally low income levels in the region and the narrow corporate base, make personal income and
corporate taxes, unviable alternatives for enlarging domestic savings. In fact, as part of investment
incentives, many countries, for example, Kenya and the United Republic of Tanzania, in 1992 reduced
corporate taxes to competitive levels in order to lure domestic and foreign investors.
L. Narrow national markets
Domestic markets are narrow and often fragmented. This is further exacerbated by the insufficient
liberalization of intra-regional trade, thus limiting trading opportunities for potential investors.
M. "Image issue"
Last, but not least, is the negative perception of Africa. Beyond economic policies and issues, the
major obstacle Africa has to overcome in attracting foreign investment is that of negative attitudes
towards the continent. More than any other continent, Africa has long suffered from adverse media and
academic exposure. The stereotypical image of the continent is that of corrupt dictatorships, hunger
and starvation, ethnic wars, coup d'états and now AIDS. The result is a sense of apathy and
pessimism, even within the continent itself. A part of such attitudes is deliberately prejudicial,
sometimes justified by events and the behaviour of some governments in Africa, as stated earlier, but
a part is simply due to the lack of adequate information about the continent.
N. Improving the investment climate in Africa
Judging by the extent of Africa's economic, social and political crises, this would be a monumental
task. Yet it is not impossible. Considering Africa's rich natural resource base, abundant human
resources and the country-specific advantages of many African nations, they could compete in global
capital markets. The policies and means of attracting both foreign and domestic investment are
addressed in the following paragraphs.
(a) Setting relevant macroeconomic policy frameworks and providing the public sector with a
The initial step is to restructure expenditure in favour of spending on infrastructure and services,
as well as human capital and institutional capacity. Karamo N.M. Sonko, "Investment: A key to
Africa's recovery", Brussels: Club de Bruxelles, mimeo, June 1994.
African countries can reduce risk through macroeconomic stability. This means that inflation has to
be controlled, exchange rates stabilized and interest rates set at realistic levels. Government
action is required to introduce fundamental changes in the macroeconomic environment, stimulate
private investment through the removal of distortions in the incentive structure and to encourage a
more efficient allocation of resources and factor inputs in line with resource endowment and national
The promotion of the investment climate in Africa requires a clear perception of the proper role of
the public and private sectors in economic development. At this stage of Africa's development, the
two sectors should be developed simultaneously, not one at an unnecessary cost to the other. The
current emphasis on private sector development in Africa should be pursued. In the process, however,
the public sector should not be deprived of its role in creating an enabling environment for the
private sector nor from undertaking necessary investments in the economy. Doing so will make the
objective of private sector development unattainable. See Karamo N.M.Sonko, "A tale of two
enterprises: Swaziland's lessons for privatization", World Development, vol. 22, no.
7, 1994, pp. 1083-1096; and Karamo N.M. Sonko, "The promotion and manage-ment of small-scale
enterprises: Field evidence from Ethiopia", paper presented at the Senior Policy Workshop on
Small-scale Enterprises, Addis Ababa, Ethiopia, 14-17 November 1994.
(b) Defining and implementing proper incentive packages
Investment incentive systems are the main policy instruments that can directly influence the volume
and allocation of investment. In view of the competitive global investment environment, African
Governments should undertake a complete overhaul of their investment incentive packages, taking into
account the experiences of other developing regions. Some of the issues that need to be addressed are
the impact of tax concessions, minimum wage and employment legislation, interest rate policies,
training allowances, depreciation allowances, policies on the repatriation of profits and foreign
Tax concessions, interest rate policies and accelerated depreciation allowances should be formulated
in a manner to lower the cost of capital. The tax incentives should be assessed both in absolute
terms and in relation to tax rates and concessions that potential investors are likely to obtain
elsewhere. Some empirical studies have shown that minimum wage levels in Africa are higher than in
other developing regions. It is imperative for wage rates to be established within the overall
context of an investment incentive system, taking into account the prevailing conditions in other
developing regions. F. L. Osunsade, "Impacts of adjustment programs: Concern for the human
condition", in V. Nanda et al., World Debt and the Human Condition: Structural
Adjustment and the Right to Development (Westport, CT.: Greenwood, 1993).
Relatedly, the effects of labour laws on employers is an area that needs careful attention.
Investors do not like to be denied their right to "hire and fire" workers, and any attempts
to do so may force them towards the use of more capital-intensive technologies.
Incentive packages should include a training component for nationals through investment allowances.
This will effect the transfer of skills and adaptability of technologies. Appropriate measures should
be devised to increase the access of investors to foreign exchange for the importation of essential
inputs and, for the repatriation of profits. Time is essential in investment decision making and the
operation of business. Bureaucratic time-consuming procedures should be avoided in the consideration
of investment applications and the administration of investment concessions. "One-stop"
investment centres could help to do this. An important factor in improving the investment climate in
Africa is to develop legislation that is credible, permanent and consistent with the national
investment code. Laws should be transparent, non-discretionary and applied fairly to all investors.
Investors should feel a sense of legal security at all times.
(c) Tackling the domestic and external debt obstacles to enhanced investment flows
The first step to be taken by African Governments in this direction is to ensure proper management of
their current debts by establishing up accurate debt databases and acquiring management and
negotiation capacities in this domain. It is equally important to ensure that new debts are directed
to resource-generating projects contributing to enhancing payment capacities of African countries.
Africa's creditors should accept that Africa's viability can only be built with positive transfer
flows. This requires measures for the alleviation and/or cancellation of sizable volumes of the
continent's external debts and resorting to swap operations (debt-equity swaps and various types of
debt-development swaps) linking external and internal debts with investments and growth through,
inter alia, the privatization process.
African Governments should give priority to settling internal debts, especially those owed to
productive enterprises; this would help maintain productive activities, safeguard employment and
(d) Optimizing rates of return on investments
This could be achieved through efficient incentive packages and the simplification of documents and
(a) Reasonably attractive corporate taxes which may be obtained with the expansion of the tax base to
new areas coupled with a more efficient and effective tax collection;
(b) Discriminatory (bontified) interest rates to allow profitable investments;
(c) Depreciation allowance systems contributing to cuts in yearly capital costs (low provisions);
(d) Flexible labour codes and dynamic wage/salary systems allowing, through a variable element,
incentives for enhanced productivity.
Simplifying documents and procedures through a single window system and enhancing the liberalization
of business operations could also contribute to higher rates of return as they would help cut
investment costs and operations.
(e) Increasing public investment towards human development and infrastructural development
The budget allocation process should take into account the priority accords of these two key pre-
requisites to enhanced investment flows. Due regard should be accorded to the social rate of return
in these domains which should be seen as participating in productive activities (and not as
unproductive investments). Resources should be allocated to provide for adequate health services and
efficient professionally oriented educational systems to build adequate human capital bases.
Industrial estates with good infrastructural networks (roads, electricity, telephones) should be
promoted by governments to cut basic investment costs.
(f) Building reliability through political stability, predictable sets of rules and regulations
and continuity in the supply of foreign currency for input imports and transfers
Reliability is a very important element for investors. Policies should therefore be adopted towards
effectively ensuring this through:
(a) Political stability: this requires the democratization of public life and popular participation,
so as to ensure peaceful transitions;
(b) Predictable sets of laws, rules and regulations, adopted in good faith, and clearly stipulated in
agreements with investors;
(c) Foreign currency allocation systems should be put in place with due regard to the priority that
ought to be accorded to the requirement of productive activities. Discriminatory measures should be
adopted through the acceptance of negative lists and in favour of input imports and contractual
transfers. These discriminatory measures are necessary in an environment of scarce foreign currency
(g) Enhancing financial intermediation
The banking and non-banking financial systems should be shaped to play their role in promoting
productive investments and providing efficient services to investors and corporate activities. The
speculative bias of current credit and monetary policies should be looked into and remedied. Banks
should be urged to consider funding productive investments. Investment banks should also be
The development of a capital market is another important avenue for enhanced financial
intermediation. African Governments should promote the establishment of such instruments and envisage
their regionalization in the medium and long term.
(h) Enlarging markets: the need to promote regionalism in Africa for enhanced investment flows
The regional approach is also important in order to draw investors' attention to opportunities not
only within but across nations. Since the total GDP of Africa is only equal to that of Austria
alone, the small size of national economies is a disincentive to investors. Abdelkader Allaoua and
Michael Atkin, "Foreign direct investment in Africa: Trends, constraints and challenges",
Ad hoc Expert Group Meeting on the Revitalization of Investment in Africa: The 1990s and Beyond,
Addis Ababa, Ethiopia, 29 November - 1 December 1993.
The existence of regional markets makes it possible for small African countries to become hosts to
transnational corporations (TNCs). Therefore, Africa's current efforts at regional integration can be
another way of attracting investors. Regional integration should be accorded all the enthusiasm that
it deserves. In this regard, the intent of the Abuja Treaty establishing the African Economic
Community by the year 2028 should be pursued by all African Governments.
The effectiveness of present regional organizations has been limited by a host of factors, including
political and financial support of member countries. These organizations should be restructured at
the levels of both policy and production, and supported by the necessary financing, administrative and
organizational backstopping. The recent initiative of the African Development Bank (ADB) to establish
an African export/import bank deserves serious commitment by all concerned partners. Such a bank
could contribute immensely in boosting intra-African trade.
(i) Improving the world's perception of Africa: abolishing the continent's negative image
Where the lack of information is the cause of such stereotyping and the consequent shying away from
Africa by potential investors, a general information campaign could make a great difference. The aim
of such a campaign should be to emphasize the positive aspects of African countries and economies.
The world should be aware that there are countries which continue to enjoy relative political and
economic stability. Some of these were at one time among the fastest growing economies in the world.
It should be known that there are African democracies, imperfect as they may be, like anywhere
elsewhere. The strengths of African culture and the unrivalled hospitality of Africans should be
brought forward. The world should be informed that like Asia and the rest of the world, Africa has
its good parts too, and sometimes even better than elsewhere. The African diplomatic community,
African-owned papers abroad, African correspondents of the foreign media, international development
agencies and foreign friends of Africa, could all help in such an urgent venture.
The benefits of such a campaign could be immense. First, it could convince potential investors to
pay more attention to Africa. Second, it could influence the behaviour of African governments in
creating conditions attractive to investors. The record of the modern mass media and the experience
of South-East Asia show that these objectives can be attained.
However, some coordination will be necessary in doing this. Currently, some countries are devoting
huge resources directly or indirectly, without any significant impact. For cost-effectiveness and
greater impact, regional institutions and organizations, such as ECA, ADB, the Organization of African
Unity/African Economic Community and the various subregional groupings should launch collective
campaigns on behalf of their member countries.
Africa's efforts to offer a more attractive investment climate should, indeed, be supported by the
international community at large and at the technical/promotional level by the relevant regional and
(j) The role of the international community
It is in the long-term interest of the international, particularly donor, community to encourage the
flow of foreign investment into Africa. This is the only viable way of shifting Africa's dependence
from aid to trade and putting an end to the pressures for aid on the donor community. It is also the
best way of making Africa an effective partner in global trade and income growth, as the current poor
trade performance of Africa has, in effect, depressed both African and global income through minimal
export earnings and stunted import demand.
Africa's development partners could help improve the investment climate in the continent in three
(a) Channelling increased concessional flows (aid and soft loans) into infrastructural development
projects, research, education and health to help create the required enabling environment for
increased private investments in Africa;
(b) Helping Africa out of its debt shackles through meaningful debt reduction and debt-development
swaps (including debt-equity swaps), with a view to restoring financial viability and confidence in
(c) Supporting external investments by providing reliable guarantees through their national guarantee
systems and Multilateral Investment Guarantee Agency (MIGA).
Organizations within the United Nations system and other international organizations should step up
their assistance to Africa in four directions:
(a) Advisory services to members and their national institutions in the formulation of macroeconomic
policies, investment incentive packages and project identification;
(b) Building and development of sustainable institutional and human capacities to back Africa's
efforts to attract domestic and foreign investments. In this regard, every effort should be deployed
to strengthen training and research capacities within centres such as the African Regional Centre for
Technology (ARCT), the African Regional Centre for Design and Manufacturing (ARCEDEM), the Food
Technology Institute (FTI), etc., and national investment promotion centres;
(c) Staging of relevant promotional events to create opportunities for contacts between African
promoters (public and private) and African and foreign investors and to put forward Africa's potential
and comparative advantages;
(d) Support of efforts to build up and expand African capital markets.
ECA's recent and ongoing activities in this domain should be seen within this framework. The
Commission has planned, carried out and/or supported the following activities:
(a) The African capital market forum
In view of the importance of capital markets in promoting investment in Africa, ECA has been involved
in a number of meetings since 1992 to discuss modalities of developing capital markets in the
continent. The first of these took place in Abuja, Nigeria, from 11-13 November 1992, followed by
another one in Nairobi, Kenya, from 18-20 August 1993.
A five-member steering committee, including ECA, was elected at the second meeting in order to make
recommendations on the establishment of an Africa capital markets forum for the promotion of formal
capital markets in Africa. ECA is the secretariat of the committee. This committee has now completed
its work and the forum will be launched officially at the forthcoming ECA investment promotion
(b) The investment promotion conference/forum
It is in the light of its recognition of the vital role investment can play in the economic recovery
of Africa and the inadequate attention so far accorded to coordinated efforts at boosting investment
in the continent that ECA is planning to hold an investment promotion conference on "Reviving
private investment in Africa: Challenges and opportunities". The meeting will be organized by
ECA, with the support of ADB, UNDP, the World Bank Group, the African Business Round Table, the
European Commission (EU), the United Nations Industrial Development Organization (UNIDO), UNCTAD, the
Islamic Development Bank (IDB), the Centre for the Development of Industry (CDI), the Global Coalition
for Africa (GCA) and other agencies.
The objectives of the conference are to:
(a) Bring together African government officials at the highest levels, African private
entrepreneurial men and women, United Nations agencies, foreign governments and private investors, and
scholars and students of international business;
(b) Provide a better understanding of the needs and means of public/private partnership in African
(c) Increase the awareness of potential foreign investors of the opportunities of investment in
(d) Provide an opportunity for joint ventures among Africans and between Africans and their foreign
(e) Increase awareness of African policy makers of the factors discouraging domestic and foreign
investors in Africa and the role of governments in changing the situation;
(f) Enhance the bargaining skills of African policy makers for attracting investment;
(g) Increase Africa's awareness of the investment potentials of non-traditional partners in general
and Asia in particular; and
(h) Provide a better understanding of how integration can be a means of improving the investment
Participation at the conference will be drawn from the following:
(a) A number of African Heads of State;
(b) Private business corporations, firms and individuals from Africa and abroad;
(c) African Governments, represented by a Minister of Finance and/or Trade from each country;
(d) Women's business associations. These should be given particular attention;
(e) Scholars from universities and institutions of higher learning from the United States of America,
Europe, Asia, African business schools and research centres;
(f) ADB, African Business Round Table, OAU, EU, Commonwealth Secretariat, 90 diplomatic missions in
Addis Ababa, UNDP, World Bank, UNIDO, United States Agency for International Development (USAID),
African Economic Research Consortium (AERC), UNCTAD, IDB, CDI, African-American Institute (AAI),
Canadian International Development Agency (CIDA), Japan International Cooperation Agency (JICA) and
other international development organizations;
(g) Stock markets, cooperatives, trade agencies and non-governmental organizations (NGOs); and
(h) Major international newspapers and magazines, such as The Financial Times, The Economist, The
Observer, West Africa, New African, Jeune Afrique, Jeune Afrique Economie, Afrique Industrie,
It is expected that the conference will:
(a) Create a platform for immediate or future impact on African policy makers to create a more
attractive investment climate;
(b) Develop contacts between African economic operators and potential foreign partners;
(c) Result in various publications on domestic and foreign investment in Africa, as well as special
features in prominent journals and magazines; and
(d) The formulation and adoption of an action plan for domestic and foreign investment in Africa.
(c) Building collective capacities to support Africa's efforts to promote public and private
investment The list of studies and the directory of institutions concerned are available for
distribution on request.
The following actions have been carried out by ECA:
(a) Assistance to African countries to establish centres of excellence: 30 ECA-sponsored Institutions
were established to cater for collective capacities in support of investment;
(b) Assistance for the enlargement of national markets into subregional markets through the
establishment and strengthening of regional groupings all over the continent;
(c) Pre-feasibility studies for the development of infrastructures and their interlinking were
prepared under the UNDP fourth regional cycle programming covering road networks, electricity grids,
(d) Preparation of industrial master plans and studies on potentialities for industrial investments.
The importance of private and public investment in Africa's growth and development cannot be
Africa has therefore to brace itself and resolutely enter stiff international competition to attract
much needed private capital flows from within the continent and from foreign sources.
Africa's potential for investments is immense yet constraints on the investment climate are numerous
although not insurmountable. Africa can cope with the constraints by adopting the right policies,
formulating and implementing the right incentive packages. Establishing political stability and
adopting the right approaches to economic reforms are important prerequisites to an increased
investment flow. There is also an urgent need to develop infrastructural and human capacities and to
further the economic integration process so as to offer greater trading opportunities to investors.
Not less important are the promotion of a dynamic financial sectors and the adoption of monetary and
credit policies conducive to investments in the productive sectors.
Africa's efforts should be supported by its development partners and international organizations.
The former should consider granting substantive alleviations and the cancellation of the continent's
debt burden and creating reliable guarantees for potential investors.
Capacity and infrastructural development programmes of African countries should also be supported by
increased concessional flows in the context of positive transfers. The relevant international
organizations should step up their programmes of assistance to Africa for the promotion of domestic
and foreign investment. They should advise on macroeconomic policy formulation, regional economic
integration and capacity building to promote an enabling environment for enhanced investment flows.
Efficient communication strategies are of the utmost importance in developing a positive perception
of African countries and focusing attention on economic potential and opportunities for the
redeployment in the world economy (de-localization and new markets).
** Table 4. Changes in main national legislation in relation to foreign direct investment in
Regulation of June 1991 of the General Authority for Investment (GAFI) of the
Ministry of Economy and Foreign Trade.
Expanded areas for foreign investments to include air and sea transport and
consultancy services for electricity, water and waste-water projects. Also
lists activities where foreign investors are barred and manufacturing
activities subject to local-content requirements.
The Investment Code, of 25 January 1991.
Establishes the Uganda Investment Authority whose functions are to promote and
supervise investments. Foreign investors cannot operate a business without an
investment licence. Transfer of foreign exchange requires approval also.
Incen-tives include exemption from import duties and sales tax on machinery and
construction items not available in Uganda, plus three-year tax "holidays" from
corporate and dividend taxes.
Investment Act of 1991.
Establishes an "Investment Centre" as a "one stop" facility for the promotion,
coordination, regulation and monitoring of investments. Enumerates incentives
granted to licensed investors in specific industries; guarantees include
protection of property from expropriation, except upon payment of com-pensation
equivalent to the market value of the property; transfer of profits, interests,
royalties and dispute settlement by arbitration.
Law No. 1/30 on the Creation of a Free Zone in Burundi, of 31 August
Creates a free-zone regime for export-oriented enterprises covering the entire
territory of Burundi and open to local investment and FDI; prescribes
procedures for obtaining free enterprise status; foreign investors may create
such companies or purchase their shares; establishes fiscal advantages,
including a 10-year tax "holiday", exemption from taxes on dividends and from
customs duties; allows free transfer of income and repatriation of capital;
permits approved free enterprises to hold accounts in foreign currency without
foreign exchange controls and to export without a licence; labour legislation
Investment code of March 1992
Lifts most previous criteria to benefit from legal advantages it creates.
Nationality of firms no longer a determinant to take part in privileged customs
duty rates. Creates new tax breaks to promote investment in general and
special tax incentives to firms operating in certain areas. Mandates the
national invest-ment commission to improve investment climate.
(a) Amendments to the Executive Regulations issues under Investment Law No.
230, issued by General Authority for Investment and Free Zones, of April 1992
(b) Decree issued by General Authority for Investment and Free Zones, of April
(c) Banking Law No. 37/1992, of 1 June 1992.
(a) Includes permission for foreign bank subsidiaries to operate in local
currency; branch banks still limited to foreign currency transactions.
(b) Further streamlines investment procedures applying to FDI; also, permits
TNCs to form joint stock holding companies; allows repatriation of capital
gains without prior approval of Investment Authority; opens new activities to
FDI, including sea and air transport, as well as water and wastewater
consult-ing services; reduces requirement of distribution of profits to
(c) Creates eight new investment zones open to both domestic companies and
TNCs, two of which are free zones where com-panies are completely tax-exempt;
in other zones, projects are exempt from taxes for 10 years from the
commencement date of their activities.
Proclamation No. 15/1992 to provide for the encouragement, expansion and
coordination of investment, of 25 May 1992.
Aims at encouragement of FDI by opening some areas to private investment, while
reserving some spheres to the Government and other spheres to Ethiopian
investors; requires minimum FDI of $500,000 with 25 per cent in cash deposits
and registration of imported capital by foreign investors; establishes
investment incentives in qualified areas, including partial exemption on custom
duties and tax "holidays" for new investments and expansion of established
ones; precludes nationalization except upon payment of adequate compensation;
allows establishment of foreign currency accounts by investors earning foreign
currency; allows remittances of dividends and payments and repatriation of
capital in approved currency at prevailing rates; guarantees access to land use
and water; establishes procedures for approval of investment applications and
registration; requires registration of imported capital and approval of
Amendment of the Invest-ment Code of 1985, effec-tive September 1992.
Removes previous restrictions to FDI, including requirement of Ghanaian
participation in enterprises unless these were not foreign-exchange earners;
reduction of minimum FDI equity participation for joint ventures and for
wholly-owned foreign enterprises; reduces number of sectors closed to FDI from
24 to 2. Offers favoured treatment to investors in agriculture,
manu-facturing, tourism and construction.
Investment Promotion Act, Act No. 28 of 1991, assented to by the President of
24 January 1992, effective 16 March 1992.
Establishes the Malawi Investment Promotion Agency, to encourage and facilitate
both local investment and FDI, giving priority to certain sectors; permits FDI,
with no ownership restrictions; replaces industrial licences with simple
registration; plans assistance to develop industrial sites; states commitment
to availability of foreign exchange, local financing and land; pro-vides for
tax and import duty incentives for export-oriented investment; states assurance
of investment protection and access to international arbitration.
Offshore Financial Centres Law, Law No. 58-90, Dahir No. 1-91-131, of 26
Authorizes creation of offshore financial centre in Tangier, where non-resident
banks are permitted to offer services to non-residents and to offer loans in
convertible currency, without being subject to Moroccan banking laws; requires
authorization by the Finance Minister; offers incentives for banks including
exemptions from certain fees and charges for 15-year period, as well as
corporation tax rate of only 10 per cent; even more liberal rules apply to
offshore bank-holding companies.
Law 92-81, of 3 August 1992.
Authorizes creation of free zones within which companies, including TNCs, which
export 100 per cent of their pro-duction benefit from a wide range of
incentives, including tax relief, services, infrastructure and access to
** Source: World Investment Report 1992 and 1993, Annex Table 11 and Annex
Table 4 respectively.
Note: This list is indicative and not exhaustive.