# 16 Boosting investment for transformative growth and competitiveness in African economies: A review of trends, policies, development challenges and prospects

Franklyn Lisk

Africa has enjoyed high and continuous growth in the past decade; the average annual growth rate of real output increased from 2.6 percent in the period 1990-2000 to 5.3 per cent during the decade 2000-2010. Yet, closer examination of the continent’s recent growth performance reveals some worrying trends: poverty rate overall has declined but the number of poor has increased significantly; growth has been largely jobless and inequality remains high; growth has been heavily resource-based (oil and gas and mining) and driven mainly by consumption and services.

Perhaps most worrying is the fact that there has not been any significant change in investment rates over the past two decades. UNCTAD in a 2014 report on economic development in Africa estimated that to achieve sustained growth and poverty reduction, Africa needs an average growth rate of about 7 per cent and above in the medium to long-term, and that this will require investment rates of 25 per cent of GDP and above. Over the period 1990-1999, Africa’s investment rate was 18 per cent and moved by only one percentage point to 19 per cent in 2000-2011 (compared to 26 per cent for developing countries as a group). The UNCTAD report also revealed that public investment rates in Africa have declined relative to 1980s and are currently below optimal levels.

 The paper will focus on investment as a fundamental requirement for economic transformation and long-term sustainable development in Africa. It will contend that investment is a major driver of long-run growth; it is required to create and sustain vital physical infrastructure; to build productive capacities; to transform the structure of economies; to generate employment and income; and to reduce poverty. The key question then that is addressed in the paper is: how can African countries catalyse investment for transformative growth and enhancing international economic competitiveness. Augmenting the contribution of investment to transformative growth and international competitiveness in Africa, the paper will allude, requires first and foremost boosting investment rates overall. For most African countries, this calls for a complementary process of broadening the sources of growth both on the demand and supply side of the economy, and simultaneously improving the productivity of existing and new investments. In this regard, it is important to ensure that investment goes to strategic and priority sectors that are crucial for economic transformation and competitiveness: public investment, particularly in infrastructure, is used to catalyse private investment (foreign and domestic); policy-makers  adopt a more coherent approach to promoting investment as the main driving force for economic transformation and competitiveness.

The paper will identify and elaborate on the main factors that affect investment in Africa:

  • Access to credit and the cost of finance;
  • Low domestic savings
  • Risk and uncertainty
  • Degree of socio-economic inequality in society
  • Inappropriate  policy prescription and weak institutional environment

In the light of these binding constraints on economic transformation and competitiveness, it is recommended that at both national and regional level immediate action should be taken to:

  • Boost the level and rate of investment: more balanced and coherent macroeconomic policy; reduce risk and uncertainty; improve access to affordable credit and reduce the high costs of factor inputs
  • Ensure that investment finance goes to strategic sectors: give priority to infrastructure and production sectors (e.g. agribusiness and manufacturing)  that are crucial for sustained growth and economic transformation; adopt a sensible industrial policy; provide credit guarantees for worthwhile and promising private sector ventures;
  • Improve the productivity or quality of investment: more targeted public investment (e.g. energy, transport); getting more value out of existing infrastructure; better project selection and delivery; focusing on value addition in private sector investment; better access to technology

As regards action at the international level, particular attention should be paid to:

  • Strengthening linkages between local and foreign enterprises: promote joint ventures; develop workforce skills; make FDI promotion policy statement consistent/coherent  with the promotion of domestic entrepreneurship;
  • Stemming capital flight in order to boost investment: international cooperation in preventing tax evasion and illicit transfer of capital across borders;
  • Stimulating investment through aid and trade: using aid as a guarantee mechanism to reduce risk faced by investors and lenders to boost investment; policy reforms that reduce the transaction costs  linked to production, trade and investment

In conclusion, in order to achieve transformative growth and increase international competitiveness African countries would need to increase private investments massively and increase the efficiency of public capital expenditures. New and innovative modes of financing are required to boost investments in both the public and private sectors and broaden the financing options for development projects; new procedures for investment planning and financing should be defined and adopted for reinforcing the link between public and private investments and promoting a more private sector  and productivity driven  growth with high impact on employment; clearly defined and appropriate legal  and institutional frameworks for public and private financing  need to be put in place to help attract investments. In order to increase the impact of investment on growth to support sustainable development in Africa, more should be done at national and regional level, supported by an investment conducive and facilitating international environment, to improve productivity and competitiveness.

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