Is the Aid vs. Foreign Direct Investment Debate Helpful for Africa?

07.13.16
Rosalie Colfs
World News /13 Jul 2016
07.13.16

Is the Aid vs. Foreign Direct Investment Debate Helpful for Africa?

Africa has made tremendous socio-economic progress in the past two decades. On average life expectancy and literacy levels are higher than at any other time. Today we witness and enjoy levels of opulence and civil liberties that would have been inconceivable three decades ago.

But alongside affluence there is unyielding deprivation. Many basic needs are unmet for millions of Africans. Tonight, many children will not see their fifth birthday. About 100 babies will be born dead in Kenya today. In the 21st century, one in three children in this country are born without the assistance of a qualified healthcare professional. Nearly 70 percent of women between 18 and 35, living in rural areas are unemployed. Moreover, Kenya is ranked sixth among the top 10 countries in Sub-Saharan Africa with a large population living in extreme poverty.

Delivering these unmet needs is at the heart of Africa’s development challenge. As an enterprise the ultimate goal of development is to raise incomes and advance prosperity by providing access to a wide range of goods and services to the poor. The UN MDGs and its successor, the SDGs, are about a framework for prioritizing global development to eliminate poverty, hunger, disease and, advance equitable and sustainable prosperity.

Four sources of capital flows drive Africa’s development: domestic revenues; remittances, Official Development Assistance (ODA); and, Foreign Direct Investment (FDI). In 2012, 17 countries received more FDI than ODA, suggesting that sub-Saharan countries are less dependent on aid.

In 2014 ODI inflow to Africa was $28 billion. In the same year, FDI inflow was $54 billion, nearly twice ODA.

It is instructive to note that about 55 percent of ODA is country programmable assistance. Hence a recipient country can have considerable influence on how aid is spent. Although global flows of ODA increased by 66 percent between 2000 (when the MDGs were agreed to) and 2014, one leading development economist and proponent of SDGs Jeffery Sachs argues that ODA flows – at the current average of 0.29 percent – from OECD countries are miniscule. The United Nations ODA target for OECD countries is 0.7 percent of gross national income.

In 2012, Africa’s FDI was dominated by inflows into the service and primary sectors (natural resources, especially minerals and oil and gas), accounting for 48 and 31 percent respectively. Manufacturing only accounted for 21 percent of FDI stock.

The checkered history of ODA and its decline relative to FDI over the last two decades has motivated a debate on what form of capital flow suits Africa best.

William Easterly and Africa’s own Dambisa Moyo have put forth a scorching denunciation of what in their view is the catastrophic failure of ODA. Dambisa Moyo has argued that all aid is bad and encourages corruption, fuels civil wars and leads to bad and unaccountable governance. Dr. Moyo has argued, instead, for promotion of trade, investment and capital markets to promote economic growth.

Conversely, Jeffery Sachs and Bill Gates have argued that aid works and when properly designed can deliver vital investments in health, agriculture and education. Similarly, Paul Collier has argued that smart aid can help build the necessary human capital and strengthen institutions of governance critical to making non-aid financial flows more effective.

FDI flows into Africa are currently concentrated in the service and primary sectors. What we have seen in this period of FDI dominance, even with limited data, is jobless growth and the rise of inequality. In the absence of effective governance and strong institutions receipts from extractive resources, just like huge ODA inflows, are associated with weak development outcomes and lack of accountability.

The argument for or against ODI or FDI has degenerated into a nonsensical ideological and academic blood sport among academics and donors, which has reinforced neo pan-Africanist politicians who characterize receiving aid as surrender to charitable outside interests. Does Africa really need this debate?

In my view, the ODA vs. FDI debate is unhelpful. The issue for Africa is how different sources of capital, including domestic savings, can be leveraged to fund advancement in human wellbeing, through inclusive and sustainable economic transformation.

What we need in Africa are approaches that enable differential diagnosis of development challenges and opportunities and deployment of responsive and pragmatic funding and investment models. In the end, Africa’s growth must be measured by outcomes such as employment creation, human capital development, strong public institutions, good governance, engaged civil society and improved quality of life.

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