Why our continent needs to rethink her overenthusiastic attitude towards foreign direct investment
Last month, Rwanda hosted the African Union’s summit on the Continent Free Trade Area (CFTA). The discussions were as inspiring as they were frustrating. Leaders from government and the private sector talked big about the benefits of integration. Some even suggested an African crypto-currency. There is a mistaken belief that the existence of a common interest is sufficient to promote a collective effort to achieve it. This is rarely true.
African nations are young; they lack entrenched interests and profound national culture to drive consistent policy. So they sacrifice broader national interests over petty squabbles. For instance,I attended a discussion where South Africa’s president, Cyril Ramaphosa, was a panelist. The summit was being held in Rwanda. Ramaphosa spoke eloquently on African integration. Yet South Africa imposed a visa ban on Rwandans because of a disagreement between Kigali and Pretoria during the Jacob Zuma administration. Why punish ordinary Rwandans over a quarrel with their government?
The challenge to integration in Africa is the tendency to seek big dreams when our governments have failed to fix small things. For example, it is very hard for Africans to travel, leave alone to work, within Africa due to poor air connectivity; difficult visa and working permit requirements. Ugandans need a visa to travel to the Democratic Republic of Congo and South Sudan next door. So the gap between rhetoric and action in Africa is huge.
One of the reasons many people admire President Paul Kagame is he matches his words with government policies. Rwanda is the only country in Africa that allows all Africans to get a visa on arrival. How can Africa integrate when small things like ease of travel to visit or work by Africans within Africa are very difficult for our governments to implement? Does it need a summit of heads of state to remove visa requirements for Africans traveling within Africa? Without such a summit, most African countries allow Europeans and North Americans to apply for visas at the port of entry.
There were many discussions of how to make Africa hospitable to Foreign Direct Investment (FDI), by which they meant attracting American, European, Indian, Chinese and Middle Eastern capital. There was zero (and I mean zero) discussion of how to harness domestic capital as a driver of transformation. FDI has become the obsession of every African country and leader. It is easier for even a conman pausing as a foreign investor from China, America, Europe, the Middle East or India to meet a president of an African country than a big genuine local investor.
The CFTA is meant to promote continent trade. But we must remember that international trade is a value chain: some countries produce cotton; others weave cloths while others market high fashion. Some countries mine iron ore; others produce steel while others sell automobiles. How much a country earns from trade depends on its position in this value chain. The poorest countries export raw cotton and iron ore; middle-income countries weave cloths and produce steel. The richest countries market high fashion like Dolce and Gabbana, Valentino, Hugo Boss and Louis Vuitton and Toyota, Ford and Audi.
If you export raw cotton, you earn 1.9% of the international price of the final product – a Louis Vuitton shirt. If you weave cloths, you earn about 15% of the final value. For labeling the same cloths Louis Vuitton, the designer takes about 60 to 65% of the final value – the rest going as a margin for transportation, retail, storage etc. The same applies to those who export iron ore. To be producer and exporter of unprocessed goods, as Africa has done for the last 100 years, is to render oneself perpetually poor. This has harmful implications for the welfare of our people and the politics of our nations. Poor countries are characterised by “bad politics”.
Therefore, the process of moving from a poor to a rich country is a process of upgrading from being exporters of low value unprocessed goods to high value manufactured products. Yet there was little discussion of manufacturing as a driver of ourtransformation. Indeed, if you look across Africa, the continent is actually deindustrialising i.e. the ratio of manufacturing to the Gross Domestic Product (GDP) is declining in many countries or has been stagnant for decades or is growing marginally – except for Ethiopia. Even South Africa, Africa’s industrial giant, is deindustrialising.
Now why is FDI a poor vehicle for Africa’s transformation? As a rule, multinational corporations do not shift the most valuable aspects of their business to their subsidiaries. Apple is not going to shift the design and marketing of the iPhone to her subsidiary in Nairobi. Forget it. It will remain in California. However, it can outsource assembling, which it has done to China. Design and marketing of the iPhone constitutes 60 to 65% of the total value, assembling only 15%, the rest going into retail, transport, insurance etc.
Therefore, while America is eating the big pie, China eats the smaller portion. DRC, which exports Coltan, the mineral from which mobile phones are made, only eats the crumbs of about 4%. This is the reason DRC is wretched poor. It is also the reason China is aggressively penetrating the global smart phone market with her own brands. The trick is that one has to position themselves in a global niche with the highest value addition on her products.
I am not arguing against FDI. It should be welcome into non-priority sectors of our economies. But in those sectors we consider critical to our transformation and future prosperity, it should only come through joint ventures with local firms where the terms of engagement make it possible to transfer technology and progress to producing the greatest value locally. Otherwise FDI often displaces local firms or stifles their development that if facilitated to grow would become the future Samsungs and Toyotas of Africa. It is such local firms that would transform our continent.
Just imagine if South Korea had invited Nokia and Ericson to build assembly plants for mobile phones and thereby displaced or stifled Samsung?Today Samsung produces about 27% of South Korea’s GDP and 40% of her exports. How many African Samsungs have we displaced or whose emergence stifled with our blind embrace of FDI? FDI gives us highly attractive short-term benefits (jobs, taxes, skills, technology) at the price of displacing/stifling local firms that are key to our transformation and future prosperity. I hope someone in Africa takes this lesson seriously.