Jambo Africa Online’s Senior Editorial Correspondent, FRANCOIS FOUCHE, puts together a collage of news titbits on economic developments impacting on Africa…
Investment flows to Africa significantly cut by pandemic, says UN report
The pandemic had a significant impact on foreign direct investment (FDI) in Africa as flows to the continent declined by 16% in 2020, to $40 billion, from $47 billion in 2019.
Cascading economic and health challenges due to the pandemic combined with low prices of energy commodities weighed heavily on foreign investment to the continent, according to UNCTAD’s World Investment Report 2021.
The report shows that commodity dependent economies were affected more severely than non-resource-based economies.
The challenging environment affected all aspects of foreign investment.
- Greenfield project announcements, a measure of investor sentiment and future FDI trends, dropped by 62% to $29 billion, from $77 billion in 2019.
- Cross-border mergers and acquisitions (M&As), fell by 45% to $3.2 billion, from $5.8 billion in 2019.
- International project finance announcements, especially relevant for large infrastructure projects, plummeted by 74% to $32 billion.
North Africa
- FDI inflows to North Africa contracted by 25% to $10 billion, down from $14 billion in 2019, with major declines in most countries.
- Egypt remained the largest recipient in Africa, albeit with a significant reduction (-35%) to $5.9 billion in 2020.
Sub-Saharan and Southern Africa
- FDI inflows to sub-Saharan Africa decreased by 12% to $30 billion, with investment growing in only a few countries.
- FDI to Southern Africa decreased by 16% to $4.3 billion even as repatriation of capital by multinational enterprises (MNEs) in Angola slowed down.
- Mozambique and South Africa accounted for most inflows in Southern Africa.
West Africa - Despite the slight increase in inflows to Nigeria from $2.3 billion in 2019 to $2.4 billion, FDI to West Africa decreased by 18% to $9.8 billion in 2020.
- Senegal was also among the few economies on the continent that received higher inflows in 2020, with a 39% increase to $1.5 billion, due to investments in energy.
Central Africa - Central Africa was the only region in Africa that registered an increase in FDI in 2020, with inflows of $9.2 billion, compared with $8.9 billion in 2019.
- Increasing inflows in the Republic of Congo (by 19% to $4.0 billion) helped prevent a decline.
East Africa - FDI to East Africa dropped to $6.5 billion, a 16% decline from 2019.
- Ethiopia, despite registering a 6% reduction in inflows to $2.4 billion, accounted for more than one third of foreign investment to East Africa.
- Investment in SDGs also fell except in renewable energy
- Foreign investment in Africa directed towards sectors related to the Sustainable Development Goals (SDGs) fell considerably in nearly all sectors in 2020.
- Renewable energy was an outlier, with international project finance deals increasing by 28% to $11 billion, from $9.1 billion in 2019.
Outflows also declined - FDI outflows from Africa fell by two thirds in 2020 to $1.6 billion, from $4.9 billion in 2019.
- The highest outflows were from Togo ($931 million).
- Investment from Togo country was largely directed to other African countries.
- Outflows from Ghana ($542 million) and Morocco ($492 million) were also significant, although they dropped by 8% and 45% respectively compared with 2019.
Looking ahead - Although UNCTAD forecasts FDI in Africa to grow in 2021, a tepid economic recovery and slow vaccine roll-out programme threaten the scale of the investment recovery.
- FDI to the continent is projected to grow by only 5% in 2021, lower than both the global and developing country projected growth rates.
Some mitigating factors even as headwinds persist
- An expected rise in demand for commodities, especially in the energy sector as the global economy picks up steam in H2 2021, will result in higher resource-seeking investment.
- The reconfiguration of global value chains (GVCs) and the increasing importance of regional value chains (RVCs) will open new opportunities for African countries.
- The implementation of some key projects announced in 2021 and earlier, including those that were delayed due to the pandemic, may support FDI.
- The impending finalisation of the African Continental Free Trade Area (AfCFTA) agreement’s Sustainable Investment Protocol could give impetus to intra-continental investment.
Africa: Top 5 recipients of FDI flows, 2019 and 2020 (Billions of dollars)
Source: UNCTAD, World Investment Report 2021.
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Global Value Chains – Exports of Intermediate Goods Sustain Gains after Rebound from Pandemic
World exports of intermediate goods (IG), such as parts and components, rose by 20% year-on-year in Q1 2021 according to a new WTO quarterly report released earlier this month to help track the health of global supply chains.
The increase sustains the upward trend in IG exports following the sharp decline in Q2 2021 when the global spread of the pandemic was in its early stages.
Trade statistics on intermediate goods reflect the international exchanges of parts, components, accessories used to produce final products and serve as an indicator of the activity in supply chains.
Exports of intermediate goods by region
Source: Trade Data Monitor (98 reporting economies, including estimates for Africa).
All % below refer to Q1 2021.
Asia recorded the highest growth in exports of intermediate goods in due to a 41% increase in Chinese exports of industrial intermediate goods, mainly parts for information communication technology equipment and photovoltaic cells.
The most resilient supply chains were for ores, precious stones and rare earths, with exports increasing by 43%, and for food and beverages (up 22%).
In contrast, exports of transport parts and accessories posted the weakest recovery at 6% following steep declines in 2020 as the pandemic affected both demand for and production of automotives.
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To access the full information note on trade in intermediate goods, which kickstarts a new WTO series of short reports monitoring recent trends and providing insights on trade in IGs, is available here.
A separate information note is further provided on world trade in 2020 of platinum group metals (PGMs), a commodity used in electronic components, catalytic converters to treat automobile exhaust emissions, and other industries.
PGMs accounted for around 2% of ores, precious stones and rare earths exported in 2020 and are strategic inputs for many industries.
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Taiwan’s early emphasis on exports vindicates the power of economic ideas
In a recent New York Times piece, Paul Krugman discussed two drivers of the “hyperglobalisation” era that began in the mid-1980s and lasted until the global financial crisis of 2008.
These drivers are:
– improved transportation technology (shipping containers and airfreight) and
– lower trade barriers (tariff reductions) in developing countries.
These factors combined to reduce trade costs and dramatically increase global integration.
Krugman calls particular attention to the “trade policy revolution” in developing countries. At the time, the managing director of the International Monetary Fund (IMF), Michel Camdessus, called it the “silent revolution.” The opening of markets and reduction in trade barriers in China, India, Mexico, and many other countries during the 1980s and 1990s fundamentally reshaped the world economy. As Krugman put it, “We wouldn’t be importing all those goods from low-wage countries if those countries were still, like India and Mexico in the 1970s, inward-looking economies living behind high tariff walls.”
What accounts for this trade policy revolution?
Many factors could have played a role, such as lobbying by exporting interests in each country or strong-arm tactics by the IMF and World Bank.
But Krugman claims that ideas about policy brought about the change.
Is that right?
Yes!
After World War II, import substitution—an approach to economic development that emphasized protecting domestic industry with barriers against imports—was popular among economists and policymakers around the world. By the 1970s, as a result of theoretical developments (optimal policy ranking, effective rates of protection) and the successful experience of export-oriented countries (such as Taiwan and South Korea), support for this view diminished considerably. This sea change in economic ideas about trade policy—led by economists such as Bela Balassa, Jagdish Bhagwati, and Anne Krueger—eventually proved influential among policymakers in the 1980s.
Taiwan provides a concrete example of Krugman’s claim that economic ideas matter for policy. As explained in a new PIIE working paper, How Economic Ideas Led to Taiwan’s Shift to Export Promotion in the 1950s, economist S. C. Tsiang (then working at the IMF but acting in an unofficial capacity) convinced K. Y. Yin (a leading policymaker) to support a devaluation of Taiwan’s overvalued currency, the end of foreign exchange rationing, and a dismantling of import controls. After heated debate within the Taiwanese government, Yin emerged victorious and was promoted to oversee far-reaching changes in the country’s trade regime from 1958 to1963. Taiwan did not change its policy because of export interests, which were politically weak, or because international financial institutions insisted upon a different policy stance. Nor was Taiwan in an economic crisis that required major policy adjustments. Instead, Tsiang’s then-novel idea that a realistic exchange rate and an open market in foreign exchange would promote exports and reduce distortions proved to be compelling to government officials—particularly in an environment where foreign exchange was scarce.
As a result, Taiwan became the first developing country after World War II to shift away from import substitution and focus on incentives for exports. Its economic success in doing so was widely noted at the time, and the country soon became a model for others.
The experience of Taiwan is not unique. Lasting policy reform does not happen deus ex machina; it is rarely initiated by pressure from domestic interest groups and cannot be imposed from the outside. Instead, policy advisers must provide convincing arguments to political leaders that a different set of policies can improve a country’s economic performance—and, perhaps more importantly to the politicians, increase their popular support.
The deeper question is knowing which ideas are best suited for the specific challenges that confront a particular economy and understanding how those ideas win acceptance by politicians in power.
This article from Douglas A. Irwin (PIIE) first appeared here.