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.
****
amwenda@independent.co.ug
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