How is it that West Africa only accounts for 5% of foreign direct investment (FDI) into the African continent? The World Bank wondered this in July this year.
This is a region that includes the continent’s largest economy, Nigeria, with gross domestic product (GDP) of $406 billion in 2016, about 29% of sub-Saharan African output of $1.4 trillion. By comparison, South Africa, the continent’s most advanced economy has a size of $294 billion. Furthermore, the largest and most dynamic francophone African country, Ivory Coast, with a $36 billion economy, is also West African. So why the scant foreign investor interest?
Jack Ma, one of Asia’s richest men, led a group of people with similarly deep pockets to East Africa in July. His first stop was Kenya, an economy barely one-fifth of Nigeria’s size. Ma also visited Rwanda, a tiny landlocked neighbor to Kenya.
If corruption, terrorism and the occasional rebellion in Nigeria and Ivory Coast is disturbing, why is Ghana overlooked? With an economy almost as large as Kenya, Ghana has a better democratic record and has proved to be one of the most stable African countries. And just as Nigeria struggles to deal with the Boko Haram terrorist group in its northeast, so does Kenya with Al-Shabaab. Additionally, political violence is more of a problem in Kenya than it is in Nigeria.
So why did Ma and his 38 billionaire friends find relatively smaller African countries more attractive to the larger coastal countries in the West with such cosmopolitan cities like Lagos and Abidjan? The reasons are not farfetched.
The World Bank asserts cumbersome administrative procedures and corruption at the ports hinder the speedy clearance of goods, for example. These apply to most African countries, though. It attributes access to finance as well. This is not significant though, as foreign investors bring their own capital. But if a country’s exchange rate policy is controlled and not transparent, this can be stymied.
East African countries have been more reliable in this regard, allowing their currencies to trade without much interference and not hindering the free flow of capital in and out of their jurisdictions, even during periods of crisis. Historically, this has not been the case in West Africa, especially Nigeria, which until recently not only rationed hard currency but blocked the repatriation of capital, causing great losses to foreign investors. Also, myriad bottlenecks around doing business in most West African countries are worse than they are in East Africa. Little wonder the World Bank ranks Rwanda and Kenya 56th and 92nd out of 190 countries respectively in its latest ease of doing business index. Ghana and Nigeria are ranked 108th and 169th respectively.
Even though corruption underpins the relatively more difficult business conditions in West African countries, it is not likely the reason they are less attractive investment destinations. Kenya is perceived by some to be more corrupt than Nigeria, for instance. In fact, Transparency International ranks Kenya as more corrupt than Nigeria in its corruption perception index.
The reason could be that East African countries are more economically integrated. In contrast, West African countries, under the Economic Community of West African States (ECOWAS), have been more successful at political integration than economic cohesion.
A more innovative streak is also a factor, especially with information technology; albeit West African countries, like Ghana, Senegal and Nigeria, are increasingly demonstrating technological progress as well. Facebook’s chief executive, Mark Zuckerberg, visited Nigeria in August 2016, for instance.
So what can West African governments do to attract more FDI? They must make doing business easier. The World Bank is helping via a European Union funded four-year ‘Improved Business and Investment Climate in West Africa Project’. It is hoped the ECOWAS Investment Climate Scorecard will bring quicker progress with integration.
With patronage-based politics continuing to be crucial to the stability of most West African countries, however, there is not much political will towards economic integration. Move too quickly and they might have bigger problems than just being difficult to do business in. – Written by Rafiq Raji