African growth slows as global crisis hits FDI

8th August 2009

Simon Harding

‘The crisis could not have come at a worse time’, says Joseph Gijon, chief Africa economist at the OECD, highlighting the effects of the current global downturn on some of the world’s poorest countries. ‘Before the meltdown’, he continues, ‘many African countries had made significant progress in attracting foreign investment and private capital, and this could derail those efforts’.

It had been thought that Africa would emerge from the financial crisis relatively unscathed as its banks were not involved in the sub-prime mortgage market, which caused financial turmoil in OECD countries, but it has recently become clear that the continent will be badly hit. The IMF estimates that foreign direct investment (FDI) in sub-Saharan Africa this year will be 18% lower than in 2008 at around $24 billion. Growth rates in the region will plummet from the 2004-8 average of 6% to an average of 3% this year. All this comes after African countries had made significant progress in switching incoming cash flows from emergency humanitarian aid to productive and potentially growth-inducing investment.

The downturn has prompted investors to scale down their African projects. In 2007, Dubai World announced a $230 billion investment programme in tourism in Rwanda, including a golf course, a luxury hotel, and an eco-lodge and game park. Two years on, and in the grip of a global recession, Dubai World plans to go ahead with just two of its original eights projects in Rwanda. ‘The scaling back of foreign investments like Dubai World certainly impacts the things that the government of Rwanda wants to do in terms of raising the standards of living for all Rwandans’, said Clare Akamanzi, an executive with the Rwanda Development Board, ‘it was a major deal for us because tourism is a big part of our economy, and investments in that sector are what we need’.

Dwindling foreign investment has many obvious disadvantages for sub-Saharan Africa: reduced infrastructural investment, smaller tax-takes, under-utilised resources and fewer positive spill-over effects to encourage small businesses. However, foreign investment is not always an effective solution to poverty. FDI tends to concentrate in ‘extractive industries’ like coal, oil and gas. Most money is spent in extracting and shipping resources overseas, with the local population seeing little benefit. Indeed, Nigeria and Angola enjoy high levels of foreign direct investment in ‘extractive industries’, which benefit a small urban elite, whilst the majority remains mired in poverty.

As the global economy recovers, investment flows to Africa will improve, boosted by increasing Chinese involvement in the region, following the establishment of the China-Africa Development Fund by the Chinese government in 2006, which plans to plough $5 billion into African projects. The developmental effects of foreign investment will depend on how African governments, local partners and foreign investors build opportunities for small local businesses into their plans and how they are managed. It remains to be seen whether Dubai World’s Rwandan hotels will employ local staff in high level positions, buy products and services from local businesses and make an effort to purchase food grown on Rwanda’s lush green fields.


Also see: ‘Just when Africa’s luck was changing’, Ron Nixon in Kigali, Rwanda, New York Times, 1/8/09.