Will the 2020s be the decade of Africa’s economic transformation?

16 Jan 2020

Ethiopia’s remarkable record of economic growth and home-grown development path has inspired the whole continent of Africa.

In reviewing the decade, a recent Financial Times article, Ethiopia seizes crown as the fastest-growing country in the 2010s acknowledges this fact. The country’s focus on productive investment, industrialisation, and education continues to generate jobs and economic growth. Here I look at the growing impact of foreign investment across Africa and consider the opportunities and challenges that lie ahead for the continent.

Africa’s bright spot

As the last decade drew to a close, Ethiopia, with its population of 112 million, is one of many countries to top the list for economic growth. The country’s gross domestic product has jumped by 146.7% since 2009, and its per-capita purchasing power parity has risen by 149%. According to the World Development Indicators, Ethiopia’s economic growth has averaged 10.5% since 2004, twice the African average, while life expectancy in the country rose from 44 to 66 years between 1990 and 2016, also twice the average for the continent.

Unlike other countries, Ethiopia’s development path has been home-driven, without the advantages of endowment in natural resources such as oil and minerals. It has therefore focussed on developing productive capacity and attracting productive investment by building physical infrastructure and developing human capital, especially in vocational education and transforming the university system.

Towards investment in the manufacturing sector

In 2010, Ethiopia shifted its attention towards attracting foreign direct investment (FDI) into the productive sector, particularly manufacturing, promoting targeted sectors and firms, and working closely with investors. Four-fifths of FDI inflow into Ethiopia in the last few years has been destined for manufacturing, indicating that the government’s strategy of shifting investment into productive sectors is bearing fruit.

Manufacturing FDI also needs to be channelled towards expanding the export sector to tackle the balance-of-payments constraint. A major challenge for policy-makers is how to sustain double-digit growth while at the same time:

  • generating enough decent jobs;
  • expanding the export sector;
  • resolving the balance-of-payments constraint;
  • building a solid manufacturing base; and
  • transforming the agriculture sector.

Ethiopia has built world-class industrial parks to attract investment, facilitate skill and know-how transfer, and promote linkages and environmental sustainability. This enabled it to increase FDI four-fold between 2012 and 2017. The country’s share of East Africa’s FDI inflows rose from 10% to about 50% and inflows into the rest of the continent from 1% to 10%.

For many foreign investors, the main reason for investing in landlocked Ethiopia has been the government’s commitment to support investors and engage in dialogue.

Attracting targeted and productive FDI is essential for creating jobs, broadening the skills base of the local industrial workforce, motivating domestic firms, and sharing management know-how.

Three ways to attract productive FDI

Africa’s economic performance since 2000 has significantly improved following the sluggish growth of the 1980s and 1990s, a period associated with Washington Consensus prescriptions for economic liberalisation. Although not comparable with that of Asia, Africa’s average annual GDP growth rate for the last 20 years has been 4.6%, but growth has been uneven across African countries (see my forthcoming book on African Economic Development: Evidence, Theory, and Policy with Cramer and Sender).

Ethiopia’s rapid and inspirational growth symbolises the continent’s bright future. At a time of slow global economic growth, African policy-makers should single-mindedly focus on building the continent’s production capacity and attracting productive FDI in three ways.

1. Create the necessary conditions for productive investment

While improving the business climate is essential, it is not enough. Productive investment requires educated personnel, energy infrastructure, and investment in efficient connectivity.

2. Avoid focussing solely on generic foreign investors

Evidence shows that the growth outcomes of FDI for host countries are mixed, with some of it simply ‘phantom’ rather than real capital and bricks-and-mortar investment. African governments should identify their priority sectors and the most promising sources for better quality FDI, and should also target selected firms. An institution fit for purpose should be developed to act as a single investment window, provide better coordination mechanisms, and build the diverse expertise required to attract, facilitate, and retain targeted FDI. Without these essential reforms, there can be no improvement in investment promotion outcomes.

3. Build pockets of excellence and create an industrial ecosystem

There is a need to build and expand industrial parks. Unfortunately, even policymakers often misunderstand the role of industrial parks and that they require a strategic approach linked to creating a wider productive ecosystem. Ethiopia’s approach to building an industrial ecosystem has been driven by learning from others and finding unique solutions to the various challenges and binding constraints.

The mission and challenges ahead

Many countries have encouraged their firms to invest in Africa, but have failed to have a major impact.

The conventional paradigm in advanced economies (such as European countries) must change from the dominant ‘donor‒recipient’ to ‘new growth generation’ that positively feeds Africa’s economic transformation.

The focus must shift to expanding trade, productive investment, financing infrastructure, and collaboration to build human capital.

For instance, in the last few years, the UK’s Official Development Assistance has increasingly focussed on supporting Ethiopia’s industrialisation path. The UK government is also organising the UK‒Africa Investment Summit to give more impetus to the flow of productive investment. However, it is important to note that these efforts are not enough and can only succeed where a government committed to rapid economic growth and economic transformation is playing a key developmental role (see the forthcoming book The Oxford Handbook of Industrial Policy). More needs to be done if the growth initiative and dynamics of many African countries are to be infused.

What Africa needs is not predatory states, but governments that have a strong commitment to economic progress, are capable of setting out policies that benefit Africans, and that support initiatives from the private sector and other social groups. Governments that champion economic development provide stronger support to the private sector, generate new investment opportunities, and improve the livelihoods of their people. It is a pity that the most fashionable prescription of our time has focussed on preaching for a dysfunctional or inactive government, rather than a proactive government that champions economic transformation.

Another critical issue is that Africa should continue to engage with its traditional partners (the ‘west’ and the ‘north’), but it also needs new partners from the east and the south. The economic ties between Africa and China are a good example of how African countries can generate win-win benefits, especially when it comes to attracting productive investment, trade, financing infrastructure, and human capital. This should induce other countries to develop ties with Africa’s interest at their heart, not governed by ‘pre-conditionality,’ but based on values of mutual respect and non-interference in others’ internal affairs.

This will help to build a more prosperous Africa and turn the coming ten years into the decade of Africa’s economic transformation.

Source: Overseas Development Institute (ODI)

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Authors

Arkebe Oqubay
Distinguished Fellow

Arkebe Oqubay is a Senior Minister and Special Adviser to the Prime Minister of Ethiopia. He has been at the centre of policymaking in Ethiopia for over 25 years and is a former mayor of its capital, Addis Ababa.

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Ethiopia’s remarkable record of economic growth and home-grown development path has inspired the whole continent of Africa. In this insight for the Overseas Development Institute, Arkebe Oqubay looks at the growing impact of foreign investment across Africa and considers the opportunities and challenges that lie ahead for the continent.
16 Jan 2020
Will the 2020s be the decade of Africa’s economic transformation?