Economic shake-up needs joint effort

Continent's growing wealth is changing the way its development is financed

The Ninth African Development Forum, held in Marrakech, Morocco, in mid-October, was notable because it openly acknowledged the need to improve the African environment for investment and trade. The UN Economic Commission for Africa estimated that the continent loses at least $50 billion each year in illicit financial outflows and leakages, though some estimates are much higher. This is nearly equivalent to the official development assistance that Africa receives annually from all of its global partners.

Although the media give more attention to illegal and criminal activities involving money laundered across borders, most illicit flows are linked to fraudulent trade pricing. An estimated $60 billion in trade pricing has been channeled illegally out of just five African countries: Uganda, Ghana, Mozambique, Kenya and Tanzania. The tax loss to total government revenue is potentially 12.7 percent in Uganda, 11 percent in Ghana, 10.4 percent in Mozambique, 8.3 percent in Kenya and 7.4 percent in Tanzania. It is critical that Africa stem the loss of this tax revenue if it hopes to meet its development goals.

Africa's growing wealth and strong GDP growth in recent years are changing the formula for financing economic development. It is no longer a question of relying so heavily on external capital inflows. The financial experts meeting in Marrakech concluded that Africa can potentially generate $200 billion annually if the continent increases the tax-to-GDP ratio and makes appropriate reforms. It needs to promote the free movement of capital, encourage private equity investment, remittances and domestic resource mobilization.

It is also important to take account of the changing nature of external capital flows to Africa. The official development assistance has been static or declining, while foreign direct investment is increasing but tends to be volatile from year to year and is concentrated in African countries with the best investment environments. For example, ODA to Africa from the United States has been static recently at about $8 billion annually, nearly all of it in the form of grants.

China's ODA, most of it as concessionary loans, to Africa recently is estimated at about $2 billion annually, while the European Union is the largest source of ODA to Africa. ODA will continue to be an important source of financing in poorer countries that are less attractive to foreign investment.

External financial flows are more promising when it comes to foreign direct investment, an area where China is playing a proportionately more important role. China's last white paper on investment said cumulative FDI in Africa at the end of 2012 totaled $22 billion. In my view, this official figure significantly understates China's actual FDI in Africa. It only includes FDI that has been reported to the government. It excludes investment through Hong Kong and tax havens such as the British Virgin Islands and the Cayman Islands.

It would not surprise me if the true number is nearly twice the official figure. In recent years, China has likely provided more FDI to Africa than any other single country. In 2013, for example, Chinese companies were the largest source of FDI in Ethiopia. China's FDI to Africa is about 4 percent of its global investment. Some 58 percent of its FDI stock in Africa is concentrated in six countries: South Africa, Zambia, Nigeria, Algeria, Angola and Sudan.

On a cumulative basis, the US has more FDI in Africa, an estimated $61 billion at the end of 2012, than does China. The larger number is due to the fact that the US began large investments, especially in the oil sector, earlier than China. In recent years, however, US FDI has stagnated and the total for Africa constitutes only about 1 percent of its global investment. The US-Africa Summit in Washington in August last year resulted in the announcement of new FDI totaling $14 billion over the next several years. This may herald a significant return to Africa by US companies interested in investing.

In his opening speech to the African Development Forum, King Mohammed VI of Morocco had several important messages for both African leaders and Africa's external partners. He called for an overhaul of African economies with a shift toward technology-intensive, high-value-added activities. This is an area where ODA and FDI from China, the US, and Africa's other partners can make a positive contribution.

He urged the international community to show greater imagination in devising innovative financing instruments that can support the economic transformation of Africa as well as sustainable development. The new BRICS' development bank, which will be headquartered in Shanghai, may be able to play a role here, just as the US has. The Millennium Challenge Corporation, a US government foreign aid agency, has changed the way the nation provides financing.

Finally, King Mohammed said the world should encourage good governance, strong institutions, institutional reliability and capacity building, regional and intergenerational cohesion, and human resource development. These are goals that China, the US, and all of Africa's partners should be able to support.

The author, the former US ambassador to Burkina Faso and Ethiopia, is an adjunct professor of international affairs at the George Washington University's Elliott School of International Affairs.

(China Daily Africa Weekly  10/31/2014 page9)