A PAPER PRESENTED

BY MOHAMMAD AHMAD WALI, NIGERIA'S AMBASSADOR TO ARGENTINA

AT A SEMINAR ORGANIZED BY THE COMMITTEE OF AFRICAN AFFAIRS,

ARAB COUNTRIES AND THE MIDDLE EAST ON AFRICA:VIABILITY AND CHALLENGES,

AT THE ARGENTINE COUNCIL ON INTERNATIONAL RELATIONS,

BUENOS AIRES, ARGENTINA ON 26TH OCTOBER 2000.

 

Democratization and Investment Climate in Sub-Saharan Africa

Sub Saharan Africa comprises 48 countries south of the Sahara, with a population of 642.3 million, with annual growth of 2.4 in 1999, a surface area of 24.3 million sq km and a GNP of $US333 billion.

Democratization

There were two encouraging political and democratic developments in Sub-Saharan Africa in 1999 worth mentioning: Democratic elections in Nigeria and South Africa. For Nigeria, the election brought in President Obasanjo to power after 15 years of military dictatorship. As for South Africa, the election brought in President Mbeki, through a smooth transfer of power from President Mandela. With these developments in Africa's two great nations, democracy in Africa seems to be very promising.

Democracy or democratization is being widely embraced by most of the countries in SSA. Our intention here is not to attempt any polemics of definition, but highlight necessary components of democracy that are discernable in any democratic political system:

Rule of law
Human rights
Competitive election
Separation of powers
Freedom of the press
Liberalized economy
Provision of some social services, namely education, health, water.

All the highlighted characteristics of democratic regimes are discernable in African democracies. There are, by and large, shortcomings and differences here and there in the degree of entrenchment of democratic values, as the oldest democracies in SSA have existed only for forty years or so - Cameroon, Senegal, Kenya, Zambia to mention a few.
Democracy in SSA generally started in the 1960s following the granting of independence to many countries. National political positions were contested for by various political parties, after intense campaign in most countries. However, it should be pointed out that while some countries operated multi-party system, others adopted one party system.

Anyway, the new political systems were either Argentinad on federalism, as in Nigeria or unitary system as in Ghana. The form of government was either parliamentary or presidential. Nonetheless, before the consolidation of democracy, military coups and counter coups and emergence of dictatorship began in most of the countries, starting with Togo in 1963 and by 1985, more than half of SSA was under one kind of dictatorship or another. Military coups became fashionable as they were supported by one ideological block or the other; anti imperialist forces, as they were called, toppling compradors and petty bourgeois governments, as they were labelled, and vice versa. Today, with the cessation of the cold war, coupled with the tremendous success of liberal economies, and concerted efforts of the donor communities to promote good governance in Africa, more than two third of SSA is under the influence of democracy. In a word, dictatorship is giving way to democracy, and new generation of leaders are emerging to face the new reality of the contemporary world.

The end of the Cold War coincided with the emergence of the concept of good governance in the early 1990s, initiated by the World Bank, IMF and donor communities to support democratization in developing countries.

Good governance in Africa is about all the component of democracy earlier highlighted and includes the following:

Administrative capacity building
Women empowerment
Civil society empowerment
Decentralization

Good governance should have been introduced first in the 1980s before the World Bank and IMF structural adjustment programmes were introduced. SAP, which sought to improve the economic situation of the SSA did not take into account the political environment, and that was a serious blunder. In Africa, as it is common knowledge, the economic and the political are intertwined. Thus, tackling economic problems has to start with political programmes. Good governance, therefore, takes into account the importance of strong and effective state in the democratization of the polity, thereby improving the economic condition of the people.

Emphasizing the importance of good governance, the ICC Secretary-General Maria Livanos Cattaui says: "The inescapable conclusion is that good governance, a transparent and predictable regulatory framework, the rule of law and a stable society all contribute to a hospitable investment climate".

Democratization has been given an unprecedented impetus by African leaders since their 1999 (12-14 July) meeting of OAU in Algiers. The leaders resolved, at the summit, to promote strong and democratic institutions that will safeguard good governance throughout the continent. The leaders decided that member states, whose governments came to power through unconstitutional manners after the 1997 Harare Summit, should restore constitutional legality before their next summit which was to hold in Lome, Togo, 2000.

The declaration was far reaching, as it was the first time in OAU's history where leaders categorically pledged to support and defend democracy and by doing so condemned, in unmistakable terms, any unconstitutional means of taking over power by any group. It is in this connection that President Obasanjo and President Mbeki condemned the December 1999 military coup in Cote d'Ivoire and urged the military government to return the country to a democratic rule as soon as possible. On its part, the OAU set up, in July, a 10-nation OAU Cote d'Ivoire Monitoring Group. The group met in Cote d'Ivoire and Togo to resolve the political crises lingering in Cote d 'Ivoire.

Although presidential election took place on Sunday 22nd October 2000 in the country, without the OAU and UN monitoring teams because of the situation on the ground, the election turned out to be a failure, General Guei declared himself winner so also the opposition candidate, Laurent Gbabo. Although the General had been chased out of the country, still international community is asking for a fresh election to enable those excluded from participating to take part. Besides, the electoral commission put the turnout at just 34.44 per cent.

This notwithstanding, recently, at the last UN historic millennium summit, the entire world leaders declared: "We will support the consolidation of democracy in Africa". This is a significant declaration for consolidation of democracy is harder than establishing democracy. United States, the strongest power, has been practising democracy for 225 years but the first 90 years was full of problems. Thus, building democratic infrastructure becomes imperative for SSA.

Building democratic infrastructure

Building democratic infrastructure entails the following: Subordination of the polity to the rule of law Strengthening the judiciary Facilitating economic growth Encouraging debate and dialogue in the resolution of disputes Provision of some social services Strengthening of party politics, electoral institutions and political education Ensuring peace, security and containing conflict Transparency and accountability of public institution Empowering the civil society Professionalizing the military.

Necessary Conditions for Sustaining Democracy

Provision of some basic social services

Provision of some basic social services, notably education, health, water and infrastructure, namely transport, communication network and the environment are fundamental for sustenance of democracy. These functions undoubtedly enlarge the economic space for efficient and effective enterprises and growth. Governments throughout Africa are making concerted efforts to cope with problems of poverty. Democracy cannot be sustained in an environment characterized by hunger and diseases.

Reducing the debt burden

Total African foreign debt has risen 24-fold since 1970 to a staggering $320 billion in 1996, but decreased to $314 billion in 1997 and to $309 billion by 1999. Approximately one quarter of total export proceeds was devoted to servicing external debt. The indebtedness of some low-income countries could increase due largely to declining terms of trade and the possible loss of market shares in primary commodities. More importantly, debt-servicing deprives countries of badly needed savings for domestic investment to improve the physical and human infrastructure. Debt cancellation or reduction should thus be a cornerstone of the international community's efforts to improve Africa's growth prospects in general and its attractiveness for FDI in particular. Additionally, the debt overhang seriously impairs Africa's ability to carry out reform.

Democracy in SSA cannot be sustained and consolidated without addressing seriously the debt burden. Africa needs to start afresh, following the end of the cold war which had done more damage to the region economically and politically than any other region. During the cold war, it had been difficult for African successive governments to pursue focused and complementary development policies: A circle of ssocialistic policies replacing capitalistic programmes and vice versa. Even successful business entrepreneurs were termed mostly as exploiters and agents of imperialism. It is not surprising that quite a number of successful business people had their investment abroad instead of in SSA.

It should be pointed out that there is nothing wrong about borrowing, but the problem is that, the basic principles of borrowing, which require that loan be used productively to generate a net income over and above that required for debt repayment or amortization were flouted. As Professor Ayittey observes, Africa's debt crisis originates from three basic missteps. First, many of the loans were simply "consumed" and therefore, did not generate the returns needed to repay the loan. Such loans were used either to finance a budget deficit on the current account, to finance imports of consumer goods. In this case, the loan is simply consumed and there will be nothing to show for it; no foreign exchange saved or earned, or to purchase arms and ammunition. No income generated to repay the loan. Second, in many other cases, the loans were indeed "invested" in projects but they turned out to be hopelessly unproductive. Third, some of the foreign loans that were contracted were of a "questionable nature."

Containing scourge of conflict and civil wars

Conflicts and civil wars are capable of derailing democratization in SSA. The subjects of conflicts in SSA have been eloquently discussed by Argentine Africanists, namely Virginia, Yapur, Marcelo Javier de los Reyes, Mayor Carlos Perez Aquino in their recent analysis of the conflict situation in Africa. It suffices to point out that while addressing the OAU meeting in Algiers in 1999, the Executive Secretary of the ECA, Mr. Amoako highlighted that by 1999, about 20 percent of Sub Saharan African population was afflicted by civil war, apart from the interstate conflict. Although a number of regional conflicts appear to be moving towards resolution, with peace deals in Guinea-Bissau, Liberia, Sierra Leone and Eritrea, while fighting has abated in Angola and the Democratic Republic of Congo, the situation of conflict in Africa can only be contained with entrenchment of democracy in the region. As Amoako observed, "Civil conflict is less probable in a full democracy. The more democratic the society, the more it has outlets for frustration and ways to seek solutions. The more governments respond to the issues people have, the lower the risks of civil war."

Yet, a pertinent question asked by many scholars and observers on African affairs, `is why is it that Africa's greatest conflicts are in its richest spots: the Niger Delta, the Red Sea area of the Horn of Africa, the Great Lakes area, the diamond fields of Sierra Leone and Liberia-and who indeed can say what justifiably provokes these almost curious conflagrations? Ancient hatreds may exist, as some intellectuals and writers insist, but these translate into forms that are fed by contemporary realities-mostly within the spheres of today's politics and economics. There is thus, more than a patina of truth in the view by New York Times Ian Fisher that "In broad outline, the conflicts (in Africa) are quite like those in the Balkans. Ancient divisions, even animosities, exist, but it takes a political elite to seize on them and transform them into something far more violent".

Cooperation and integration

Various regional efforts have been made towards integration of the continent. Regional economic groupings, namely ECOWAS, SADRC, COMMESA and UMA have initiated moves towards closer cooperation among member states and hence facilitating the desire for establishing African economic community, as contained in the Abuja Treaty, and eventual continental union, as adopted in Lome, by the OAU Assembly of Heads of State, and ratified so far by 29 states.

In his determination to strengthen integration, President Obasanjo created the first Ministry of Cooperation and Integration in Africa to follow up on all initiatives made towards a successful integration of the continent. The integration of the continent will, apart from other things, help tremendously in containing conflict in Africa. Recently ECOWAS-EU met in Abuja to explore areas for enhancing their cooperation.

Capacity building for the civil service

In their third conference in Rabat in 1998, organized by CAFRAD and UN, the African ministers of civil service and heads of civil service resolved to produce a charter for civil service in Africa. The charter, will among other things, set ethical standards for public service as well as promote professionalism. These are paramount for containing corruption on the one hand, and improving the capacity of the civil service on the other, to enable it to play a new role of facilitating the process of public private partnership in economic development.

Investment Climate

Countries in SSA, from South Africa to Senegal, from Ethiopia to Namibia, from Nigeria to Kenya have made considerable efforts over the past decade to improve their investment climate, as highlighted by UNCTAD:

I) Many have made impressive progress towards political and economic stability;
II) They have scaled down bureaucratic obstacles and interventions in their economies and embarked on privatization programmes.
III) They have liberalized their investment regulations and have offered incentives to foreign investors.
IV) They have also improved their regulatory frameworks for FDI, making them far more open, permitting profit repatriation and providing tax and other incentives to attract investment. By 1997, 26 of the 32 least developed countries in SSA had a liberal or relatively liberal regime for the repatriation of dividends and capital (UNCTAD, 1997b).
V) Improvement in telecommunications and transport infrastructure (World Economic Forum, 1998, p. 20).
VI) They have taken steps to restore and maintain macroeconomic stability through the devaluation of overvalued national currencies and the reduction of inflation rates and budget deficits (UNCTAD, 1998a, p. 124).
VII) More importantly, the economic performance of the region had substantially improved from the mid-1990s.

Almost all aspects of the regional economy are open to foreign direct investment. In particular, agriculture, mining, petroleum, automobile, communication, transport, information technology, textile, construction, water resources management are very attractive.

Conditions for favourable investment climate

Apart from the above highlighted improvement in the investment climate in SSA, other factors which are very influencial in attracting forgne direct investment are as follows: Growth, Size of the local markets, Low cost of doing business, Low risk to investors, and High returns on investment

Growth

The World Bank, in its 1999 report on development in Sub Saharan Africa says: Sub-Saharan Africa will be the most important development challenge of the 21st century. … five years of steady growth in Africa have fostered economic revival in several countries, after decades of stagnation. In 1998, economic growth was less strong - at around 3.6%, compared to 4.6% in 1997 and 4.9% in 1996.
But 13 countries (out of a total of 48) had a GDP growth rate of 5% or more and at least 29 countries had positive GDP growth, i.e. national income grew faster than population.

The recovery had been driven partly by the significant progress towards greater macroeconomic stability, and by improved resource allocation due largely to the implementation of macroeconomic policy in most countries of the region. Although real output growth barely kept pace with the population increase in 1998, the positive trend in per capita income since the mid-1990s was sustained. Most African countries have experienced positive per capita growth of 1-2 per cent a year and more than half have recorded per capita income growth above 2.5 per cent.

The Bank expects Sub-Saharan GDP to grow by 3.2% this year and for expansion to accelerate to an average 3.75% in 2001-02. This will be driven by agricultural recovery and firmer commodity prices, with exports forecast to increase 7% in volume in 2000 and by 5.8% annually over the subsequent two years.

This projection for growth in SSA is attainable, considering that three conditions which were found by Collier at al (1997a) as necessary for economic growth in Sub Saharan Africa are achievable: a minimal degree of social stability, a minimal degree of macroeconomic stability, and a minimal degree of allocative efficiency. Presently about 60 percent of Sub-Saharan Africa have met either two or all the three conditions for growth and, considering other factors, conducive for foreign investment.

Size of the local markets

With a population of over 600 million, couple with economic growth, the region provides immense opportunity for investment. Apart from the need of the local markets, the region has access to developed countries' markets for non-traditional, labour-intensive goods. The Lome convention, the recent initiative by the United States as reflected in the African Growth and opportunity Act recently passed by the US Congress, is intended to confer duty-free status on textile and apparel products exported from designated Sub-Saharan African countries, including Botswana, Cameroon, Côte d'Ivoire, Ghana, Malawi, Mozambique, Nigeria, South Africa, United Republic of Tanzania and Zambia.

This act, is undoubtedly the most revolutionary in America's trade relation with Sub-Saharan African countries and provides seemingly unlimited potentials for companies operating in Sub-Saharan African countries to export goods to the US, thereby enhancing economic growth of such countries. liberalized access to developed countries' markets can lead to additional FDI (Sachs and Sievers, 1998, p. 41)

Low cost of doing business

Africa's main advantages are in operating costs, driven by low labour costs brought about by the comparatively low standard of living in most African countries. In addition, several export-processing zones have been established, including the Calabar processing zone, Ghana gateway project and South African export zone.

Low risk to investors

The majority of African countries have signed multilateral agreements dealing with the protection of FDI, such as the Convention establishing the Multilateral Investment Guarantee Agency (MIGA) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

The multilateral investment Guarantee Agency (MIGA) has been actively involved in investment promotion in Africa. It encourages and facilitates the flow of foreign direct investment to its developing member countries for economic development, through the provision of investment guarantees. In 1999, MIGA provided 63 contracts of guarantee covering projects in 19 African countries which facilitated foreign direct investment in excess of US$3.9 billion. MIGA's electronic network, IPAnet, has extended the reach of African countries into the global marketplace, facilitating the flow of information to potential investors worldwide. A specialized window within IPAnet, PrivatizationLink, was launched to promote privatization in Africa and profile the investment opportunities arising from them.

High returns on investment

The profitability of investments is, of course, of prime interest to foreign investors. . From the viewpoint of some foreign companies, investment in Africa seems to be highly profitable, more profitable indeed than in most other regions, as highlighted by UNCTAD:

· In the case of United States FDI, it is noteworthy that between 1983 and 1997 there was only one year (1986) in which the rate of return in Africa was below 10 per cent;
· Since 1990, the rate of return in Africa has averaged 29 per cent; since 1991, it has been higher than in any other region, including developed countries as a group, in many years by a factor of two or more;
· Net income from British direct investment in sub-Saharan Africa (not including Nigeria) was reported to have increased by 60 per cent between 1989 and 1995 (Bennell, 1997a, p. 132);
· In 1995, Japanese affiliates in Africa were more profitable (after taxes) than in the early 1990s, and were even more profitable than Japanese affiliates in any other region except for Latin America and the Caribbean and West Asia.

Foreign Direct Investment (FDI)

Foreign direct investment net flow to SSA was $3.5 billion in 1995, $4.3 billion in 1996, $5.2 billion in 1997, $4.8 billion in 1998 and $7 billion in 1999. The United Nations Conference on Trade and Development (UNCTAD) and the International Chamber of Commerce (ICC) conducted a survey at the end of 1999 and January 2000, involving a total of 296 companies, which are among the world largest, and whose total foreign assets of US$ 2.1 trillion in 1997, or 17% of total foreign assets worldwide, on foreign direct investment (FDI) in Africa, and the results show that one third of transnational corporations (TNCs) that responded to the poll say they want to increase investment in the next three to five years. More than half of the companies expect their investments to remain at present levels.

More than 43% of the respondents expect that Africa's overall prospects for attracting FDI will increase in the next three to five years compared with the past three years. Slightly more (46%) do not expect prospects to change.

Industries in which a significant number of companies saw investment potential in SSA were petroleum, gas and related products (37%) and mining and quarrying (37%), as well as agriculture (30 %), pharmaceutical and chemical products (22%) and foods and beverages, which were cited by more than a fifth of the respondents.

South Africa and Nigeria, not surprisingly, easily topped the list of the most attractive countries for FDI in SSA This ranking is very much in line with the list of the most important recipient countries for FDI in Africa, since South Africa and Nigeria account for much of the FDI inflows into SSA. The survey results suggest that this order will not change dramatically in the near future. Anyway, it may be pointed out that in 1997, Nigeria topped the list of the largest FDI recipients in the continent with estimated inflows of $1.5 billion.

Other countries most frequently cited that are expected to make the most progress in creating a business-friendly environment by 2000?2003, include, Côte d'Ivoire, Ghana, Mozambique, Uganda, the United Republic of Tanzania and Ethiopia in that order.

The results point to a severe image problem from which many African countries suffer: more than half of the respondents (56%) stated that the actual business environment is better than the continent's image would suggest in at least a small number of African countries, while a quarter observed the same situation for "many" African countries. These results call for more efforts on the part of the international community to change the image of Africa and to provide a more differentiated picture of the continent, helping African nations to become more attractive for FDI.
On the whole, the message emerging from the survey is clear, as Mr. Kofi Annan, Secretary-General of the United Nations observes: "The results of the UNCTAD/ICC business survey on the prospects for FDI in Africa are, indeed, encouraging. They show that it is indeed worthwhile for companies to have a closer look at investment opportunities in Africa".

In 1999, FDI had reached a global record flow of US$827 billion. This is a 25 per cent rise over the 1998 figure of US$660 billion, itself representing a 41 per cent increase over the preceding year. The driving force behind these recent increases is cross-border mergers and acquisitions (M&As) (UNCTAD1999 Report).

Out of the global flow of $827 billion, developed countries attracted an estimated US$609 billion, developing countries received an estimated US$198 billion and countries of Central and Eastern Europe, in transition to the market economy, attracted US$20 billion:
· Developed countries attracted an estimated US$609 billion in FDI inflows in 1999, accounting for nearly three quarters of the world's total. The United States and the United Kingdom continue to lead the world in FDI flows. The United Kingdom became the largest investor in 1999, replacing the United States for the first time since 1988. These two countries also represent, for each other, the principal home country as well as host country. Other developed countries recording high levels of FDI flows were France and Germany (both inflows and outflows), Netherlands (inflows), Spain (outflows) and Sweden (inflows).
· FDI flows to developing countries increased by 15 per cent in 1999, after stagnating in 1998. Of the total flows of an estimated US$198 billion:
A. Latin America received US$97 billion
B. Developing Asia (including West Asia) received US$91 billion, US$40 billion of it to China alone. The Republic of Korea saw a 55 per cent jump to US$8.5 billion, driven once again by M&As.
C. Africa, attracted US$11 billion.
Africa, in spite of its high profitability level is the least region favourable to FDI. Reasons for this phenomenon is largely attributable to the political and economic problems which characterized the 1980s.

Democracy is the key for encouraging FDI. It is not surprising that within 15 months of democratization, Nigeria has attracted $US20 billion of FDI, which is more than the annual total of the region as a whole. Besides, it is expected that within the next one year the investment profile will reach $100 billion.

Globalization

Recently, at the last UN historic millennium summit, the entire world leaders declared: "We will support … and assist Africans in their struggle for lasting peace, poverty eradication and sustainable development, thereby bringing Africa into the mainstream of the world economy."

This, in a word, is to bring Africa to a stage, where it will benefit from globalization, which is the intensification of the integration of the world economy, accentuated by the growth of global financial market; the cessation of the cold war; the growth of corporate activities of multinational companies, information, communication and transportation technology revolutions; internationalisation of environmental problems; increasing intervention of the World Bank, IMF and World Trade Organization (WTO) in national and regional economic and trade crises; and the assertiveness of the UN in resolving world political, social and economic problems. The world economy, with the exception of the North Korea is completely integrated. And, with the new changes taking place in North Korea, the entire world economy will soon be integrated.

Globalization, in spite its current problems to developing countries is unstoppable. However, Africa, which is the least beneficiary of globalization can, with entrenched democratic values and improved investment climate, participate fruitfully in the globalization process.

Conclusion

On the whole, attempt has been made to highlight the following:

A. Democracy or democratisation in SSA is irreversible and is the key variable for enhancing investment climate in the region.

B. Investment climate in SSA is very conducive and it offers enormous investment opportunities and that it is worthwhile to take a different look at Africa -- country by country, industry by industry and opportunity by opportunity. In this regard, agriculture, infrastractural developments and tourism offer the best opportunity. President Clinton says, during his recent visit to Nigeria that the country provides seemingly unlimited opportunitiesy for investment. As a matter of facts, investors from all over Europe, North America, Asia and Latin America have been visiting Nigeria for investment purposes. In September 2000, a Trade Mission from Argentina visited Nigeria under the leadership of the President of Argentine/ Nigeria Chamber of Commerce, Dr Miguel Speranza.

C. A forum of regional economic grouping in SSA, notably ECOWAS, COMESA on the one hand, and Mercosur, on the other, can be initiated to facilitate dialogue with a view to concretizing some commercial concerns.

D. In their recent presentations in these series of seminars organized by the Committee of African Affairs, Arab countries and the Middle East on Africa: Viability and challenges, Ambassadors Garcia Pinto and Eduardo Sadous have drawn attention to the favourable political and investment climate in SSA, and urged Argentines to take up the challenge to participate actively in the African market. I endorse whole-heartedly their observations for this way Argentina will be playing its part not only in promoting South-South cooperation, but also in playing its role in the increasingly interdependent world, where globalization is the moving force.