Ranking the race to attract investment
Bereket Gebru
Through the relatively new multi-polar international system, private ownership and capital have hit new heights in their history. States are in some cases convinced and otherwise forced into privatizing their state owned enterprises with policies that promote opening up one’s borders for foreign investment taken as the cornerstone of growth and development.
The result of such moves is that there has been a huge surge in Foreign Direct Investment (FDI) throughout the world since the 1990s. A 2012 study cites UNCTAD as saying that the growth in FDI accelerated in the 1990s, rising to $331 billion in 1995 and $1.3 trillion in 2000. UNCTAD’s World Investment Report 2017 states that in 2016, global flows of foreign direct investment fell by about 2 per cent, to $1.75 trillion.
The 2012 study cited above states that with the rise in international FDI, developing countries experienced a dramatic increase in FDI with the annual figure soaring from $24 billion in 1990 to $178 billion in 2000. Despite the general rise of FDI coming into the developing world including Africa, explains the study, the African share of the total FDI flowing to developing countries decreased steadily. The study states that Africa’s share in total FDI flows dropped significantly from 36% in 1970 – 74 to 10% in 1980 – 84 and to 3% in 1995 – 99. A 2007 UNCTAD report indicates that Africa’s share of global FDI inflows decreased from 3.3% in 2003 to 2.7% in 2006.
The UNCTAD World Investment Report 2017 shows that the trend continued by stating that FDI flows to Africa continued to decline in 2016, though by a moderate 3 percent to $59 billion. Continued robust foreign investment into Egypt boosted inflows to North Africa. In contrast, sluggish commodity prices have diminished economic prospects in Sub-Saharan Africa and tempered investor interest in the sub-region. It goes on to state that investment in developing countries declined even more, by 14 percent, and flows to LDCs and structurally weak economies remain volatile and low. Although UNCTAD predicts a modest recovery of FDI flows in 2017–2018, they are expected to remain well below their 2007 peak.
FDI inflows into Africa are also distributed unevenly between states. Foreign investors gravitate towards stable countries with relatively bigger economies enjoying rapid economic growth and a big domestic market. The African Investment Index launched in 2017 conducts research on the attractiveness of Africans states to FDI and ranks them accordingly.
Africa Investment Index (AII) 2018 has been released recently. The results show that the Northern African states of Morocco, Egypt and Algeria are the most attractive to investors while Botswana from sub-Saharan Africa follows at fourth and our country Ethiopia comes at seventh. The two sub-Saharan countries that stand in between Botswana and Ethiopia are Cote d’Ivoire and South Africa. The remaining three countries that follow Ethiopia in the top ten are Zambia, Kenya and Senegal. On the other hand, the bottom five are: Central African Republic, Liberia, Somalia, Eritrea and Equatorial Guinea.
The AII uses six clusters of factors to gauge the attractiveness of states. These are: growth factors, liquidity factors, risk factors, business environment factors, Demographic and social capital factors. Growth factor includes domestic investment in percentage of GDP, size of the economy and economic growth. These capture the growth opportunity and potential returns from investment. Liquidity factor include real interest rate and excess money supply. Risk factor incorporates exchange rate risk, import cover, external debt and current account ratio. Business environment is measured through ease of doing business and trade openness. Demographic factor deals with population. The social capital factor is measured in terms of the facebook penetration rate which is supposed to account for the level of networks, knowledge and connections in the target country.
The AII 2018 states that Ethiopia exhibits good performance in growth factors, notably domestic investment, and on liquidity factors and demographics. Although these factors standout as the country’s best performance, the rest have also done well. The index also shows that Ethiopia’s attractiveness has increased tremendously over the past four years. Accordingly, its AII rank was fifteenth for 2014 and 15 while it plummeted to twenty-first in 2016.
Considering the past four years represent a harsh period for Ethiopia in which both natural and artificial problems posed themselves as obstacles to the sustained rapid economic growth the country has been experiencing, the faltering ranks are understandable. The country experienced the most severe drought in the last fifty years in 2016 leaving about eighteen million people in need of aid. Despite the severity of the El Nino induced drought, Ethiopia managed to control it before transforming into famine and claiming the lives of people. Although the efforts proved successful in controlling the drought, providing aid and generally rescuing one fifth of the population had its strains on the distribution of resources towards domestic investment and other factors that directly and indirectly affect drawing FDI.
The last four years also saw recurrent political unrests in different parts of the country. What started out as popular demands for good governance and recognition of identity turned violent and were soon transformed into wide ranging political unrests. With the protests covering the biggest regions in the country, the strain they put on growth and development was undeniable. The attack on a few properties owned by foreigners could also have gone a long way to discourage others from investing in Ethiopia.
With all these negatives weighing against Ethiopia’s otherwise rapid rise to success, its double digit ranking over the past three years is understandable. Its much improved current ranking of seventh is thus a clear indicator that the country has put the worse behind it and is set on a march to the top.
Ethiopia’s efforts and the reputation it has built over the past fifteen years as a country on the fast track to development also seem to have come in handy in containing the adverse impacts of these natural and artificial constraints. After all, UNCTAD’s World Investment Report 2017 states that Ethiopia attracted more FDI inflows than ever before in 2016 – amidst the drought and protests that engulfed the country.