Contents
Introduction
Part I: Investment and Private Capital Flows in Africa: Trends and Performance
Part II: Explaining Africa's Poor Investment Performance: A review of Investment Constraints and Determinants
Part III: Measures to Improve the Investment Environment

A. National Level Actions;
B. Actions at the Sub-Regional Level;
C. International Cooperation to Facilitate Investment in Africa;

Box 1: Investment Promotion Agency: Structure and Functions;
Statistical Tables; Selected References.

Introduction

The recent significant upturn in GDP growth recorded by the majority of Sub-Saharan African countries, to an annual average of around 4%, has been widely noted and recognized as a welcome development. There should, however, be no complacency about the need to further accelerate growth in African countries, as the turnaround is still too fragile, and is also well below the growth rate of 7% or more required to achieve tangible reduction in poverty. Such higher and more accelerated GDP growth rates can only be realized if there is commensurate growth in investment rates. In effect, Sub-Saharan Africas investment performance has to be raised from its current rates of 16-18% of GDP to an annual investment rate of 25% or better, for the region to be on the path to adequate and sustained growth and poverty reduction.

To achieve such radical shifts in investment rates, African countries will have first to re-examine why investment rates have declined and remained at low levels, following which they need to come up with the policy and institutional measures required to revitalize investment. This paper explores these and other issues related to the revival of investment in Africa. Part I of the paper reviews, in summary form, trends in private capital flows as well as actual investment performance in Africa in the recent past, while Part II examines the principal constraints to investment in African countries. Based on this, proposals are made in Part III for measures to be taken at the national, sub-regional and international levels in order to create and sustain a more hospitable environment for investment.

I. Investments and Private Capital Flows in Africa: Trends and Performance

A. Investment Trends

During the period 1965 to 1980, Africa was doing fairly well with respect to average gross domestic investment as a proportion of the regions gross domestic product. From 1965 to 1973, SSAs investment rate averaged a respectable 20%, and rose to an average of 23.7% between 1974 and 1980. Unfortunately, investment rates in African countries began a continuous long-term decline after 1980, this being one aspect of the generalized economic crisis that engulfed the region during this period. Although many SSA countries have since been undertaking economic reform programs, most of them still have not had much success in rekindling significant recovery in investment rates.

In comparison to the average performance of China, India and Indonesia taken as a group (the group of comparator countries), Africas investment trends over the past three decades have been significantly lagging behind (see Table 1). Up to 1980, the gap in investment rates between Africa and the comparator countries, although noticeable and gradually widening, was still moderate. Thereafter, while Africas investment rate declined, the rates in the comparator countries continued to grow. By 1996, the investment rate in the comparator countries had climbed to 32.1%, while SSA investments had declined to approximately half that rate.

A breakdown of total investment into its public and private components indicates that private investment has lately overtaken and surpassed public investment in the developing world, including Africa. Thus, public investment rates in the developing world as a whole decreased from an average of 10% in the late 1970s to a low of 6% of GDP by the mid-1990s. In those SSA countries for which statistics are available, public investment rates were declining during the 1990s, from an average of 7% of GDP in 1990 to 5% in 1995. On the other hand, private investment rates increased by about 30%, from 10% to just over 13%, during the same period. As a result, in the 1990s private investment has come to account for over 65% of total investment. Although private investment growth has been fairly widespread, it is still fragile. Nevertheless, this trend may reflect an improvement in business confidence as the macroeconomic environment becomes more stable.

Since domestic investment is financed largely by domestic savings, the broad trends of SSAs aggregate investment performance are closely matched by the regions trends of aggregate domestic savings. Aggregate average savings rates in SSA (as a percentage of GDP) initially rose and reached 23.3% in 1974-80. However, this trend was reversed and savings declined to 18.5% during 1981-87, and further to 16.7% in 1988-96. By contrast, the comparator countries had steadily increased their savings rates to 32.1% by 1996 (see Table 2). Thus, SSAs savings rate which was as much as 90% of the average rate for the comparator countries in the late 1960s and early 1970s, had, by the mid-1990s, dropped to only 50%. It should be noted that Africa suffered considerable capital flight -- estimated at some 70% to 90% of SSAs GDP -- during this period. This was a reflection of the lack of confidence in the prevailing political and economic environment, as well as a significant explanation for the poor savings performance. Also, it is known that a significant portion of savings were invested in non-productive assets. In short, even as Africas investment rates were declining, the savings needed to finance those investments were also declining. As a result, external resource flows were required to finance this domestic savings-investment gap. However, Africa was not the only region to require external resources to finance investments. All developing regions have been recipients of external financial resource, although the bulk of such external capital has been going only to about a dozen countries.

Fed by the rising trend of globalization of the international economic and financial systems, the growth of foreign private investment has been spectacular, particularly since the late 1980s. Developing countries, as a group, have benefited from this phenomenon. In fact, in recent years, foreign private investment flows have overtaken official development assistance as a source of external financing for economic expansion in the developing world. The proportion of total external development financing accounted for by private sources increased almost two-fold, from 44% in 1990 to over 85% in 1996.

Foreign direct investment (FDI) has emerged as the leading component of all private foreign investment financing sources, substantially exceeding official development assistance. In 1996, FDI accounted for 39% of the US $284.6 billion worth of external flows to developing countries, with private debt flows forming 31%, portfolio equity investment 16%, and official development finance 15% of the total.

While net FDI flows to developing countries increased almost eleven fold between 1970 and 1995, from US $8.2 billion to US $87.1 billion, Africa has been receiving a declining share of these flows. Thus, Africas share of FDI flows to the developing world, which averaged 20% in 1965-73, fell dramatically to less than 3% by 1993-95. In gross amounts, FDI inflows to SSA did grow, but this growth was by a modest one-and-half times during the 25 years from 1970 to 1995. During the same period, FDI flows to all developing countries grew by more than ten times, with such regions as East Asia recording much higher growth.

In sum, SSAs aggregate investment performance has been generally poorer than that of other developing nations. The region has not yet recovered fully from the investment collapse it suffered starting in the early 1980s. Moreover, since investment rates in other developing regions have continued to grow steadily since the 1960s, the gap in investment rates between SSA and the others has widened by a factor of 2 over the past thirty years. The equally disappointing trend of SSAs domestic savings rate matches that of the investment rate, but at a lower level. As a result, SSA now finances no more than half of its domestic investment with domestic savings, compared to 80% or more in other regions. Making matters worse, SSAs share of net FDI flows to developing countries has fallen sharply in the last two decades. The combined impact of these negative trends is that Africas investment rates are far below the level required for promoting more rapid economic recovery and sustained growth. There is a need to close the widening savings-investment gap, so that SSA can emerge from the vicious cycle of low savings-low investment-low growth in order to move onto the virtuous cycle of high growth-high savings-and high investment which many of the faster growing countries have achieved. Comprehensive and effective measures are required both to mobilize domestic investible resources and to attract increased private foreign capital inflows.

B. Investment Rate Performance

Behind the aggregate picture of broad investment trends and foreign private capital inflows to Africa, there are substantial sub-regional and country-level differences that are worth examining for their policy significance.

A comparison of investment patterns in the CFA franc zone with those in non-CFA countries reveals interesting differences. In the second half of the 1970s, the CFA group performed better than the others, with average investment rates rising from 16.8% in the period 1965-1973 to 26.1% during 1974-1980. Corresponding investment rates for the non-CFA countries were 20.9% and 23.6%, respectively. However, while both groups of countries suffered sharp declines in their investment rates after 1980, the CFA zone appears to have experienced a slightly larger investment decline than the non-CFA group. More specifically, the CFA groups average investment rate fell from over 26.1% in 1974-80 to less than 22% during 1981-87, and then declined further to 16.5% in 1988-96. By contrast, the average investment rate of the non-CFA group declined from 23.6% to 19.6%, and then to 17.7%, during the respective periods.

As would be expected, more detailed country-level investment data show variability in performance, with a few countries achieving and sustaining impressive investment rates. During the commodity boom years of 1974-80, twenty six countries achieved investment rates of 20% or more. Of these, eighteen countries, including Botswana, Congo, Côte dIvoire, Gabon, Mauritania, Mauritius, South Africa, Swaziland and Zambia had investment rates averaging 26% or more. Among the eight countries with investment rates of between 20% and 25% were Cameroon, Kenya, and Nigeria.

Over the more recent period of 1988-96, Botswana, Congo, Mauritius, Mozambique, and Tanzania were among countries that recorded investment rates of at least 30%. At the other extreme, fifteen countries including Angola, Côte dIvoire, Ethiopia, Madagascar, Senegal, Sudan, Uganda and Zambia had investment rates that averaged less than 15%.

This brief overview of country-level data on investment rates broadly confirms that SSAs investment rates are generally low and have not fully recovered from the decline in investment that started in the early 1980s. It also shows that a small number of SSA countries have managed to sustain fairly high investment rates both before and after the general decline of the 1980s. It is important to note, however, that the relatively high investment performance of some of these countries rests rather precariously on large external concessional resource transfers. Only in a few cases (notably Botswana, Gabon, and Mauritius), were high rates of investment mainly financed from increased mobilization of domestic resources, both public and private.

C. Private Capital Inflows

There appears to be a clear sub-regional and performance-based pattern to foreign private capital inflows to SSA. CFA countries suffered relatively larger and more sustained declines in private capital inflows than did their non-CFA counterparts immediately after 1980. Even during the 1990s, overall foreign private capital flows to the CFA countries have broadly remained modest, although following the 1994 CFA Franc devaluation there appears to be renewed investor interest in various sectors including the energy and mining sectors of some of these countries. By contrast, non-CFA countries as a group have experienced relatively better growth in foreign private capital inflows during the second half of the 1980s, and continuing into the 1990s. However, this may mostly reflect the significant FDI flows to mining and oil activities in a few countries such as Angola, Ghana and Nigeria. Also, SSA countries which have achieved positive per capita growth since the late 1980s, have attracted higher levels of private capital inflows than the less successful performers.

Foreign Direct Investment Flows

Compared to other forms of private capital inflows, FDI brings substantial benefits to host countries. The most obvious of these is the inflow of equity-finance which helps increase production and growth without the creation of additional debt. Other significant benefits include increased employment, access to modern management techniques and technology, skills upgrading, and external market links and marketing expertise. FDI also brings such spill-over benefits as the stimulation of competition, efficiency and higher quality standards, as well as catalyzing the establishment and expansion of domestic enterprises which supply goods and services to the foreign investors.

Inflows of foreign direct investment to the SSA region during the 1970-96 period were broadly concentrated in a few countries, although FDI flows were increasingly spreading more widely toward the end of this period. In the overall competition for FDI in the developing world, SSA has been losing out since the 1970s. For instance, during the 1970s, two SSA countries, Nigeria and South Africa, ranked among the top 12 developing country recipients of FDI. During the 1980s, only Nigeria made the list, while in the 1990s, no SSA country was among the top twelve.

In earlier years, Botswana, Cameroon, Côte dIvoire, Gabon, Nigeria, and South Africa were among the countries receiving significant amounts of FDI. In the 1990s, countries getting relatively large flows of FDI include Angola, Ghana, Nigeria, South Africa, Tanzania and Uganda. Again, it needs to be noted that a large proportion of the FDI increases in a number of these countries has been directed to their oil and mining sectors. Among the countries that have achieved notable turn-around, in terms of FDI inflows, are Uganda, whose FDI flows increased from an annual average of only US $1 million during 1990-92 to US $93 million in 1993-95, Tanzania (from US $4 million to US $76 million), and Ghana (from US $21 million to US $210 million).

While even these increased flows of FDI were modest in comparison to flows going to countries in other regions, it is however not insignificant as a proportion of the GDP of the African countries themselves. In the case of Angola, for example, recent annual FDI flows constitute more than 5% of its GDP, while for Ghana and Tanzania, FDI flows amount to over 3% of their GDP. Countries that had, during the 1990s average yearly FDI inflows equivalent to 1% to 3% of their GDP include Cameroon, Nigeria, and Uganda.

Portfolio Equity and Private Loan Flows

Compared to FDI, portfolio equity flows to SSA countries other than South Africa, are of recent origin and are still at relatively low levels. However, portfolio investment flows to SSA countries outside South Africa did grow from $17 million in 1993 to $641 million in 1994, before falling back to $297 million in 1995. Corresponding portfolio investment flows to South Africa have been experiencing significant up and down swings: from $144 million in 1992 to $4.6 billion in 1995 (the largest such flow to any developing country that year) and then declining by more than 40% the following year; the decline appears to have been mainly triggered by unfavorable movements in the exchange rate of the South African Rand. As in other regions, the short and limited experience of SSA countries with portfolio equity flows demonstrates the inherent volatility of such flows and hence the inherent risks in relying on them as an important component of long-term financing.

Private loans continue to exhibit a declining trend for all SSA country groupings, presumably because credit worthiness ratings for most SSA countries have remained generally low. The relatively low or negative levels of commercial bank lending to the SSA region in the 1990s are in sharp contrast with the trend during the period of 1977-82 when private loans constituted the dominant component of foreign private capital inflows to Africa.

The SSA region continues to receive most of its foreign capital inflows from its traditional development and trading partners in Western Europe and North America. Broadly reflecting historical patterns as well as more current trade linkages, two countries (France and the United Kingdom) accounted for over 60% of OECD investment in SSA countries during the first half of the 1990s. The United States provided about 15% of the total foreign investment flows, while Japans share was just over 5%. Investors already established and operating in the region rather than new ones account for most of the new FDI taking place in Africa.

There are, however, two relatively new developments. One is that developing countries in Asia were, in recent years, important sources of private capital inflows to the SSA region, and the second is that recorded intra-African investment flows were also growing. Asian FDI flows to Africa rose sharply, from $18 million in 1990 to a peak of about $200 million in 1994, with the Republic of Korea, China, and Malaysia as the main sources. This trend is unlikely to continue, at least not at recent levels, in view of the financial crisis now prevailing in most of these Asian countries. Intra-African flows originate largely from South Africa, although Nigerian firms have recently been active in generating intra-African FDI flows. In all, African private investors are estimated to have generated an outward FDI stock of $2.6 billion by 1996, with South Africa and Nigeria accounting for about two-thirds.

The sectoral focus of foreign private investment in the SSA region is much more oriented towards the primary sector than in any other region of the developing world. This means, in effect, that the oil and mining sectors have been predominant - and hence that SSA countries endowed with oil and mineral resources have, by and large, dominated the regions FDI flows. But, even within the principal oil and mineral exporting SSA countries, FDI flows are increasingly financing both the secondary and tertiary sectors. In Nigeria, for example, which combines its oil endowment with a large domestic market, the oil and gas sector accounted for only 33% of the countrys FDI stock in 1992, while manufacturing and services took 48% and 19% respectively. In South Africa also, between May 1994 and May 1996, the most important recipients of FDI flows included food and beverages, motor and automobile components, electronics and information technologies, services and property.

Mauritius is probably the most successful SSA country in attracting substantial FDI flows to manufacturing. It has done so based largely on special access to foreign markets through the MFA and Lome preferences, and by using the generous incentives of its export-processing zone arrangement. Similar preferential access advantages have motivated FDI flows to Lesotho and Botswana for manufacturing activities targeted at the EU, the US and South African markets, and FDI financing of textiles in Togo and Zimbabwe based on Lome Convention and GSP market-access preferences.

FDI flows to finance the service sector in SSA have focused largely on tourism, particularly hotels. Several large-scale agricultural projects have also received FDI inflows. Prominent examples include bananas in Cameroon, tea estates in Tanzania, palm oil in Ghana, and large-scale farming operations in Zambia. There is growing interest, by foreign investors, in telecommunications and power, both by way of participation in entities being privatized and also in investments in new capacities.

Overall, available evidence indicates that the returns to foreign investment in Africa have been growing to respectable levels. For example the average rate of return to investment for both UK and US companies have risen to over 15%, and this compares favorably to returns to FDI in other regions. Some African stock exchanges have similarly recorded higher returns than exchanges elsewhere. Such facts have however not been sufficiently disseminated.

II. Explaining Africa's Poor Investment Performance: A Review of Investment Constraints and Determinants

From the foregoing analysis, it is quite clear that most African countries had very low investment rates throughout the 1980s and well into the 1990s. It is equally clear that adequate economic growth and significant poverty reduction cannot be achieved without raising investment rates substantially from the current SSA average of 16-18% to the Asian and Latin America rates of 25-30%. The goal of realizing such a major upward shift in investment rates may appear daunting for many African countries, but it can be achieved. Such an effort should begin with an analysis of why African investment rates have been lagging, by focusing especially on the key determinants of investment, which are generally the same for both domestic and foreign investors. In general, investment decisions are based on a process of weighing of the risks of committing capital early as against delaying such an "irreversible" decision in the hope of reducing uncertainty. It appears that in the case of many African countries, decisions to invest are constrained by various real and/or perceived risks, which arise within the general framework of these determinants.

Size of Market and Economic Growth

Obviously, a country with a large domestic market and an economy experiencing steady growth would, in principle, be attractive to both foreign and domestic investors, as profitability and good returns on investment are likely. Conversely, a small economy experiencing negative or inadequate growth is normally not attractive to investors. As the majority of African countries have small markets, and also as a significant number of countries have had poor growth records since the 1980s, their disappointing investment rates should not be surprising.

Macroeconomic Policies

A sound macroeconomic policy framework, characterized by low and sustainable fiscal deficits, moderate inflation, and exchange rates that are broadly competitive, is one of the essential elements of a favorable investment environment. Sound policies and reforms aimed at achieving macroeconomic stability, and liberalized pricing and trade systems need to be sustained for a sufficiently long period to gain and retain the confidence of investors. Inconsistency, reversals and lack of determination in adherence to reforms and sound policies, have a dampening effect on investment.

The exchange rate regime is a critical and sensitive issue for investors. On the one hand, investors, particularly those producing export products, disfavor a misaligned and overvalued exchange rate regime. On the other hand, if the exchange rate is volatile, or if it is continuously depreciated with a view of maintaining competitiveness, this may add to risk and uncertainty for the foreign investor as it affects the (foreign currency) value of his capital investment as well as his future profits and remittances. Investors would thus prefer a policy framework that ensures a broadly stable and reasonably well-aligned exchange rate regime.

Overall, the stability and credibility of macroeconomic policies have considerable implications for investment decisions. One of the few African countries to achieve such stability early on was Mauritius which has been appropriately rewarded with a robust and continuing investment response.

Political and Social Stability

Political instability, civil unrest, and internal and inter-state conflicts are major inhibitors of investment. (The exceptions are some investments in mining and oil and gas, which are in enclave locations, and can in many cases be shielded from conflict and civil unrest.) In politically unstable environments, property rights, and the security of investments will be at great risk, and normal business operations will be hampered by irregularity and interruptions in transport and communication. The internal conflicts of one country may also have adverse spill-over effects in neighboring countries, as instability in one country cannot be isolated from the sub-region. For example, the cost and disruption to neighboring "stable" countries can be considerable where existing communications and transport routes require them to transit other countries plagued by internal conflict and instability. Cases in point are the negative effect of the Mozambican civil war on the economies of Zimbabwe and Malawi. While major civil wars in Africa have substantially wound down, the continuation of a few internal conflicts, as well as the recent overthrow of some democratically elected governments, perpetuates an image of instability in Africa. Unless and until effective counter measures are taken, by both African countries and their development partners, to change this negative image of Africa, a good deal of potential foreign direct investment flows to Africa will be postponed. Political stability is also a function of citizen confidence in their own governments. Such confidence may not always be present, especially when there are memories of arbitrary, predatory and repressive governmental actions in the recent past. Foreign investors tend to look to their domestic counterparts for guidance in this area.

Debt, Terms of Trade and Other Shocks

As exporters of predominantly primary products, African countries are more exposed to terms of trade shocks than most other countries. Their exposure to adverse terms of trade during most of the 1980s and early 1990s had a negative impact on their economic performance. Such unfavorable terms of trade contribute, among other things, to balance of payments difficulties which in turn discourage investment by reinforcing the image of an unstable economic environment.

The discouraging effect of the African debt overhang on fresh investment is not difficult to understand. Even if an African country, with significant external debt, were able to service its debt, the payment obligation would either add to its fiscal deficit, or require increased taxes to meet obligations. Also, government may have to restrict or ration foreign exchange for other purposes, including remittances, because of the additional foreign exchange requirement for debt service. Clearly, all of these would be seen as significant risk by investors, particularly foreign investors. The current situation may appear different, in that debt service obligations are not strictly being met by a number of countries. However, investors are likely to be concerned not only with current debt service but also with the total debt stock. Therefore, under current circumstances, where, despite the commendable HIPC initiative, the debt overhang problem of most African countries remains largely unresolved, debt will continue to be a significant impediment to investment in Africa.

Many African countries have also been vulnerable to other shocks, mostly of an internal nature such as drought, flood and health epidemics. As such shocks will usually result in depressed production and exports and, in most cases, in the need for increased government expenditures, investors are likely to attach a risk factor to such phenomena.

Physical Infrastructure

The availability, cost, up-keep and efficiency of essential infrastructure, including roads, transport, power, telecommunication, and port facilities are critical for the profitability and competitiveness of both existing and new businesses. With the general trend of reduced government involvement in productive activities, the focus of public investment in many SSA countries has in recent years been in infrastructure, education and other social sector services. However, in a number of SSA countries, because of budgetary constraints, there has been a sharp decline in public investment in general, and in investment in infrastructure in particular. Inadequacies in infrastructure, and the likelihood of such inadequacies persisting, will discourage new investment and may, in time, lead to possible relocation of existing foreign investment. Not only do many African countries lack adequate physical infrastructure but what exists is in dire need of repair and upgrading, and will require further investment to expand capacity and improve efficiency.

Institutional Infrastructure

Public Institutions: The capability, strength and efficiency of public institutions will define and determine the adequacy, impartiality, and transparency of the decisions they make and the services they provide. Lack of transparency and corruption with respect to governmental purchases and contracts, partiality, favoritism and nepotism in administrative and legal processes are well-known constraints to new investment. The predictability of the legal, regulatory and administrative machinery is one of the foundation stones on which investor confidence is built. A related requirement is a competent, independent, impartial, and corruption-free judiciary. Only such a judicial system can ensure the rule of law and the prompt enforcement of contracts and property rights. This is one of the most important institutional issues on which investors must be convinced and re-assured. Similarly, the degree of professionalism, effectiveness and competence of the administrative and regulatory agencies of government is critical for investors, as these will affect the time taken and the expenses incurred in processing permits and, indeed, in determining the outcome of other issues brought before government officials. Hitherto, public institutions in most African countries have generally remained weak and in need of further strengthening. Poor pay and lack of a merit-based system have inevitably led to corruption and inefficiency. There is little doubt that the overall weaknesses of the administrative and regulatory machinery have had a dampening effect on investment in Africa.

Human Capacity: In the area of human capacity, the skills, trainability and productivity of labor are of considerable importance to the investor, as these have a direct bearing on the costs, revenues, and profitability of business operations. The general educational level, labor regulations and the discipline of the work-force all have implications for productivity and competitiveness. The long-term viability of investments, as well as the international competitiveness of business organizations are more decisively influenced by human capacities and skills than the host countrys natural endowments.

Financial Intermediation: The underdevelopment and shallowness of the financial system has also been a significant constraint on investment. The lack of an adequate financial infrastructure has translated into poor savings mobilization and scarcity of loanable funds for investment. In particular, in most African countries today, investors have great difficulty in getting access to formal domestic sources of medium and long-term credit. In a number of countries, the inherent deficiencies of the financial sector have been further compounded by the crowding-out and financial repression emanating from the public sector. All of these have inevitably impeded the growth of investment.

Underdevelopment of the Private Sector: All of the foregoing institutional, policy and infrastructural shortcomings contribute to the high transaction costs associated with investing and doing business in Africa. But the African private sector itself is not immune from being a constraint to the growth of investment. The entrepreneurial, managerial and technical capacity limitations of the domestic private sector have meant that there has been little domestic capacity and scope for identifying investment opportunities, and elaborating and implementing these as tangible projects. Even for the foreign investor, the depth and strength of domestic production and commercial capacities are relevant issues in determining the suitability of a country as an investment destination. Beyond its own intrinsic limitations, the development of the private sector in the typical African country was almost invariably hampered by the ill-advised extension of the public sector into production and commercial activities, as well as by the various regulatory, macroeconomic and institutional impediments already mentioned. Privatization, if pursued more vigorously, and with appropriate opportunities for domestic entrepreneurs, can contribute to the development of the private sector, particularly when the promotion of competition is taken as an one of its objectives. Without a fully developed and vibrant domestic private sector, investment rates will continue to remain at the disappointingly low levels seen in recent years.

III. Measures to Improve the Investment Environment

Since investment levels in most African countries have been too low to replace existing capital stock, much less contribute to the creation and accumulation of additional wealth, new strategies are needed to break out of the vicious cycle of low savings-low investment-low growth. It is therefore important to identify the measures that need to be taken to establish the conditions for much higher rates of investment.

The rebuilding of credibility in a countrys policies, institutions, and services which are relevant to the cost of doing business is necessarily a long term undertaking which needs to be started as soon as possible. Nevertheless, there are measures that can be taken on a faster track which will serve both to begin restoring credibility and send signals that the investment climate is becoming hospitable. In effect, concerted actions have to be taken individually by each of the African countries interested in improving their investment environment, by like-minded sub-regional groupings of countries, and by external bilateral and multilateral partners of Africa. Many of the actions, even if taken promptly, may not immediately result in robust and sustained investment response, but should clearly provide encouraging signals that the investment environment is changing for the better.

A. National Level Actions

Many of the constraints identified as hindering investment have their origin in national policy deficiencies and institutional weaknesses; others are related to inadequacies in infrastructure and in the provision of essential services. Each of these areas need to be addressed as a matter of priority. African countries have to recognize that policy reform and institutional strengthening programs need to be pursued over a long period with consistency and due diligence, in order to achieve the twin objectives of sustained growth and restored investor confidence.

Ensuring Political Stability and Participatory Governance

Peace and stability are pre-conditions for normal business operations. Investors generally shun countries and sub-regions considered to be unstable and conflict-prone. Conflict prevention and resolution, therefore, need to be part of any strategy package to enhance investor confidence. Conflict, of course, is a normal part of politics. What is important is that the systems of political choices, governance, resource allocation and decision-making be perceived as relatively fair and equitable by the majority of the population, so that normal disagreements can be settled by non-violent means. Political and governance systems that are monopolized by narrowly-based political, religious, or regional groups to the exclusion of all others, are inherently vulnerable to violent conflict. Political tolerance and dialogue, pluralism and participatory governance are clearly the essential elements of conflict prevention. Such political and governance practices will help underpin stability and peace which will in turn contribute to the prevalence of a favorable environment for investment.

Creating a Credible Policy Environment

Predictability and consistency in the pursuit of sound macroeconomic policies, in the enforcement of laws and property rights, and in the efficient and transparent administration of rules and regulations are critical for building a track record towards credibility. The macroeconomic and trade policies needed for stabilization, for liberalization, and for enhancing the structure of incentives are well-known and need not be repeated in detail. It is sufficient to recall that investors attach a great deal of importance to macroeconomic stability as well as the openness of the economy.

Although a number of African countries have been undertaking economic reforms, focusing mainly on macroeconomic stabilization and trade and exchange rate liberalization, most of them have yet to be rewarded with the investment response they have been expecting. In part the poor response may be due to investors still continuing to doubt the seriousness and irreversibility of these reforms. Also, it may be due to the fact that these "first generation" reforms need to be accompanied by the more challenging structural and institutional reforms. In effect, most reforming countries need to take further measures on both the macroeconomic stabilization and liberalization fronts to demonstrate seriousness to potential investors. For example, some of the more successful African countries found investor interest greatly increased after they totally liberalized their foreign exchange markets and demonstrated a determination to minimize inflation by adopting stricter budgetary regimes. A more liberalized economic environment can also promote export diversification which helps minimize the shocks arising out of adverse terms of trade, and in turn can generate even more investment. Finally, the institutionalization of "agencies of restraint" on a national or sub-regional level, such as independent central banks or sub-regional policy accords supervised by autonomous review boards can perhaps serve to buy investor confidence in the sustainability of reforms. At the national level, the proposals include the granting of full policy autonomy and independence to the Central Bank. Credible measures for ensuring fiscal restraint would be the other component of actions at the national level for establishing policy consistency and irreversibility. In some cases, there have been attempts to address the issue of fiscal restraint through the adoption of the Cash Budget system. However, it is questionable whether the cash budget system will enhance credibility. Also, the prudence of the Cash Budget from the overall long-term marcoeconomic management point of view is difficult to defend. In general, doubts can be raised as to the viability and effectiveness of either approach in restraining policy-makers.

The fiscal regime, particularly the structure of taxes, applicable rates and the efficiency and transparency of tax administration are issues of vital interest to investors. Both direct and indirect taxes need to be set at moderate rates, and their structure and administration must be simplified and efficient. Foreign investors will also be concerned about double taxation which is normally taken care of by relevant bilateral treaties between the host country and the investors home country.

Strengthening the Capability and Integrity of Institutions

Reform and restructuring of public institutions: An important requirement for an improved investment environment is to move decisively to eliminate the bureaucratic red-tape, corruption and inefficiency that frustrate and discourage investors. In this respect, the introduction of new systems and the initiation of organizational changes invariably face resistance, particularly from those who were benefiting from existing structures and practices. When the targets of reform are major sectors and branches of the state, resistance to change is usually well entrenched and the challenges facing policy-makers cannot be overstated. However, in most cases, it is only through wholesale changes in the structure, systems and accountability of public institutions that transitions towards effectiveness, transparency and impartial service to all clients can be achieved. This will take time, but investors will be reassured if they see progress. It can be achieved if policy-makers are fully committed to the goal and implementation of institutional reform and strengthening, and are capable of mobilizing the support of political leaders, key legislators, the upper levels of the judiciary, the civil service, the private sector, and civil society.

Reform of the legal system, establishment of the sanctity of laws, and the assurance of the integrity and impartiality of judges and law enforcement officials are critical for investors, as they are for all citizens. In the interim, properly constituted and empowered arbitration tribunals could be used to adjudicate commercial disputes. The upgrading of the effectiveness, competence, and integrity of the civil service is equally important, particularly as it affects the implementation of regulations relating to investment permits, trade and foreign exchange transactions, and other private sector operations. Merit-based recruitment and promotion, adequate pay, reinforcement of professional standards, regular training and the introduction and timely updating of modern management systems are among the relevant elements required for a more effective civil service. The setting of good examples by senior civil servants and political leaders will also be crucial for this reform effort.

The simplification, liberalization and elimination of unnecessary regulatory requirements are also important elements in the creation of a conducive environment for investors. The elimination of unnecessary controls, permits and licenses removes opportunities for rent seeking, and saves investors both money and time, thus allowing them to focus on the actual implementation of projects.

Development of Human Resources: Flexibility of the labor market, the availability of skilled and easily trainable work-force through targeted vocational educational and skills upgrading programs, are also critical issues for all investors, and in particular for foreign investors. The depth of the human capital stock together with institutional strength and efficiency, rather than natural endowments, have come to be recognized as the more durable and vital components of a nations competitive advantage. Flexibility in labor regulations and norms, including the rules for hiring and terminating employees, are also important to investors. African countries should therefore continue to give priority to human capital development as well as the reform and strengthening of their institutional frameworks. Increasing womens access to education and training would help in achieving gender equality while significantly expanding the stock of human capital. Attention should also be paid to employment creation particularly for young people.

Deepening and Diversifying the Financial Sector: Investment is dependent on the availability of credit and other financial services. In most African countries, financial intermediation is characterized by shallowness and institutional weakness, with little or no linkage between the formal and informal components. Because of this lack of depth and due to the weak linkage between formal and informal finance, the sector has remained ill-equipped to engage in effective mobilization of savings. In many countries, existing commercial banks and other financial institutions are saddled with non-performing loans, including large arrears owed by state entities. In a number of countries, large budgetary deficits have been financed by commercial banks. While this may have been forced on the banks, they themselves appear to be channeling a good portion of their resources to the purchase of high interest-bearing treasury bills, rather than focusing on their core activity of lending to business. Another characteristic of the financial system is the overall lack of diversity in credit facilities and financial instruments, and the domination of the formal part by commercial banking with the virtual absence of term-financing. These and other related weaknesses of the financial sector have placed a major constraint on investment. Investors, particularly domestic ones, but also many foreign investors, still do not have access to term-credit for partial financing of their projects, nor do they have easy access to short and medium-term working capital loans. Financial sector reform and restructuring is therefore important to the achievement of investment objectives.

Governments should use the banking system in particular and the private sector in general as the main means of revitalizing, strengthening, expanding and diversifying financial services. Such public-private collaboration should first aim at restructuring and reforming existing banks and financial institutions, with a view of upgrading their management and technical skills, ensuring the adequacy of their capital base through recapitalization, and maintaining sound asset-liability ratios. The goal is to have strong financial institutions that can more effectively mobilize savings and efficiently manage credit operations.

While commercial banks may be encouraged to do more term-financing, other institutional arrangements more oriented to long-term financing should be explored, promoted and supported. Examples would include the promotion of appropriate institutional means and mechanisms for expanding the savings mobilization functions of life insurance, pension funds, mutual funds (unit trusts), venture capital schemes, and other similar instruments, and channeling the resources thus mobilized, through appropriate institutions and other arrangements, to meet the equity financing and long-term credit requirements of investors. In this respect, it may be appropriate and timely to re-examine the case for establishing specialized long-term credit institutions, with mixed public-private funding, but with control and management strictly autonomous and free of governmental interference. External concessional assistance and lines of credit, directed at financing private investment, may be channeled through these and other similar institutions.

While encouraging and supporting such strengthening of financial intermediation, governments should refrain from their past practice of "directed credit". On the other hand, they should encourage the growth of capital markets, including adequately regulated stock exchanges as a means of mobilizing both domestic and foreign sources of equity capital. However, the volatility of portfolio capital inflows would call for a lot of caution, particularly, in countries with limited experience and sophistication regarding the intricacies of international capital movements. Overall, the relevant public sector bodies entrusted with financial oversight, particularly Central Banks, should ensure that adequate prudential regulatory arrangements are in place to monitor and supervise the operations of banks and other financial institutions.

Entrepreneurship: Even if financing is available, potential domestic investors may be inhibited from making new investments or expanding existing operations due to their own capacity limitations. Technical, managerial and skill related constraints may be addressed through training, technical support and other forms of assistance. Small and medium enterprises in particular need these and other forms of assistance. Appropriately reformed Chambers of Commerce and Industry can play useful roles in research, market identification, and product promotion. Licensing arrangements, joint ventures and management contracts with foreign partners are among other well-known avenues for acquiring know-how and expertise. Developing domestic capacity in consultancy and professional services would help meet both the needs of the private investor/producer and also facilitate the creation and strengthening of important technical services. A new class of younger, more entrepreneurial, and better informed private business appears to be emerging and needs to be encouraged and motivated. Governments can improve the investment environment if they actively promote supportive and collaborative public-private relations. Such collaborative mechanisms can be used to exchange information, to make adequate consultation prior to the issuance of major business-related policies, and generally to maintain adequate public-private dialogue. In general, ensuring "a level playing field" and treating both domestic and foreign investors on an equal basis, including in the granting of incentives, has proven to be the most appropriate and useful rule to follow.

Privatization: Privatization contributes to the growth of the private sector. The seriousness shown and time taken by governments in implementing their privatization programs would indicate the degree to which they are committed to disengage from productive and commercial operations. A carefully planned privatization program can contribute to the realization of the additional objectives of private sector development and the strengthening of competition. Privatization has in practice been a significant instrument in attracting investment, including foreign direct investment. In many cases, entry through privatization has motivated foreign investors to make additional investments both for upgrading or expanding the privatized enterprise, and also for engaging in totally new investment ventures. Benin, Ghana, Mozambique and Uganda are among countries where privatization has stimulated significant new investment. If divestiture is effected through public sale of shares it can also contribute to the development of capital markets. As stated earlier, if privatization is implemented with adequate transparency and open participation, it will strengthen the private sector, stimulate competition, help to promote new investments, and reinforce the investment environment by signaling the governments intentions.

Minimizing Transaction Costs

While narrower definitions are preferred by some, "transaction costs" are used here to cover transport, communication, transit, port operations and shipping, as well a commercial, marketing, banking, negotiating and contracting activities and other functions related to the supply of inputs, storage and marketing and selling of products. The comparatively large margins between the farm-gate or factory-gate price and the price at the end of the distribution or marketing channel clearly demonstrate the excessive nature of Africas transaction costs. For land-locked countries, there will be additional transit and transshipment-related expenses. The costs, time, and efficiency features of these transactions greatly impact on "the cost of doing business". Needless to repeat that every African country has to take a wide range of measures to bring about significant improvements in these areas. Part of the task is related to reforming and streamlining the regulatory and administrative systems; as indicated earlier an important approach is to eliminate, minimize and simplify the rules and regulations themselves (although in some cases gaps in laws and regulations may have to be corrected by additional provisions). What remains of regulations needs to be administered with due efficiency and transparency in order to enhance the environment for business. Private sector providers of services must also streamline and improve their operations; introducing more competition may be a key means of achieving this.

Investment in new infrastructure and equipment, as well as major improvements in the maintenance and up-keep of existing ones are the obvious ways of reducing transport, communication and related costs. This has been considered mainly the task of the public sector which should give it due priority, recognizing that the efficient provision of such supportive services would go a long way in addressing a major concern of investors. Public sector investment in basic infrastructure, particularly in roads, can also yield such other benefits as the creation of significant new employment opportunities. As poor infrastructural services inhibit private investment, countries have to give high priority to investment in infrastructure. However, due to budgetary constraints, it is becoming clear that governments may not be in a position to finance all such investments. It is vital, therefore, that SSA countries upgrade their infrastructure by accelerating privatization programs and adopting other innovative ways of involving the private sector in the financing and management of essential infrastructure. Recently, in some African countries, there has been interest in promoting the involvement of the private sector in investment in infrastructure. Through privatization, and by engaging in new operations, the private sector already has made significant in-roads in African telecommunications. There is also growing private sector interest in electric power generation and distribution. Some of these new private sector ventures in infrastructure appear to be based on the so-called "build-operate-transfer" (BOT) arrangement. Other variations of such arrangements are BOO (build own and operate) and BOOT. Some major road and rail corridors are considered good candidates for new private investments using BOT arrangements. Some of the countries where such set-ups are either operational or at the project level include Côte dIvoire, Uganda and Zimbabwe. Currently, there are serious BOT-based plans to further develop and upgrade the Maputo Corridor, linking the Johannesburg industrial area with the port of Maputo. The project is to be led by the private sector, but with considerable scope for public-private collaboration. Other major corridors in other sub-regions of Africa can study similar private sector-led possibilities for upgrading their transport - transit sectors. BOT may not be a panacea; but with the known constraints on public finances, private sector investment in infrastructure should be explored as an alternative means of overcoming major transport, communication, and power bottlenecks to business operations and new investments.

Enhancing Competitiveness

Foreign direct investment in particular seeks to locate new capacities and source its products from countries providing tangible locational advantages. Historically, FDI locational decisions were mainly made for market-seeking or resources-seeking purposes. More recently, "efficiency-seeking" considerations have come to be equally if not more relevant determinants for investment decisions. These considerations are not necessarily mutually exclusive. However, foreign investors, particularly multinational corporations, have a more global perspective and want, where possible, to fit their new production into their international production and distribution networks. To be feasible, the new investment must produce products meeting their international quality standards at competitive costs. Efficiency and technical capability are therefore critical requirements. Multinational corporations would choose to locate their production facilities where the policy and institutional environment, the infrastructural and other transaction costs, as well as the labor skills and productivity meet their standards. Their own need to stay internationally competitive would compel them to ascertain that these requirements are met before they commit to make a new investment in a host country. These must therefore be kept in mind as the entry requirements of most FDI. Domestic private investors, particularly those producing for export markets, must in most cases meet the same standards to be competitive in international markets. To minimize the impact of high transaction costs, and generally to facilitate and promote investment, countries have designated special economic zones or export processing zones (EPZs), and granted special privileges and incentives to investments located in such zones. Other countries have provided such incentives to enterprises meeting their investment criteria irrespective of location. While EPZs may enable more efficient provision of essential services to investors, the costs and benefits to the host country must be carefully weighed.

Investment promotion

Virtually every African country has attempted to actively promote investment, in one form or another. Many have established Investment Promotion Agencies with mandates ranging from providing initial applications and related services to foreign investors, participating in the screening and approval of investment projects, to post-approval services and supervision. Their successes have been limited, partly due to the wide scope of their mandate, but also due to inherent conflicts with the well-established traditional mandates of line Ministries. Inevitably, this has led to the perception of some of these agencies as "one-more-stop" shops instead of their claimed role of being one-stop shops. Such experiences should not, however, lead to the conclusion that such centers are not useful. They can serve as useful promotional vehicles if they reorient their focus mainly toward promotion.

Specifically, a national investment promotion agency ought to concentrate on first selling the country by projecting a good image (or removing a perceived bad image), and then following up with a more targeted promotion, with the eventual goal of identifying and reaching potential investors who may be persuaded to come and explore investment opportunities. Such promotional work would be greatly facilitated if supported by actual success stories from other investors already operating in the country. The screening, approval and other activities related to the permit-issuing process ought to be very much simplified and made investor-friendly, but these functions, to the extent they continue, may mostly be performed by other departments. It should be emphasized that the selling of an improved and investor-friendly

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BOX 1

INVESTMENT PROMOTION AGENCY: STRUCTURE AND FUNCTIONS

Most African countries have established autonomous Investment Promotion Agencies (IPAs) in order to encourage and facilitate investments. IPAs may have national mandates, or be more geographic or sector-oriented by focusing on attracting investors to specific sectors or areas such as oil, mining, and export processing zones. The following is a brief summary of the organizational and functional features of an IPA.

Organization: To ensure autonomy, and to facilitate coordination and access to relevant departments, the IPA is normally set up as a public agency under the direction of a Board of Directors or Committee. The Board usually includes representatives of government departments that share decision-making power on investments, as well as private sector persons to provide the business view. The effectiveness of the IPA may be enhanced when it reports directly to the head of state or government through its chairman. To be effective, the IPA needs adequate budgetary resources as well as the flexibility to employ officers who are attuned to the needs and "language" of private investors. Properly constituted and empowered, IPAs can serve as "one-stop-shops".

Functions: The functions of an IPA usually include the following:

Image Building: Provides general information about the country, its economy, people and opportunities for investors. Arranges effective dissemination of such information in order to fill the gaps in international investment guides, to present the country to potential investors as a safe and profitable investment destination, and to counter and correct any lingering adverse images. Vehicles utilized include brochures and videos circulated via embassies and other channels, advertisements in foreign media, and tours abroad for meetings with relevant firms and forums. IPAs may also arrange investment conferences nationally or abroad.

Investment generation: Generating new investment is the prime objective. It is important, therefore, for IPAs to focus on priority objectives, sectors and projects to be promoted, and to target relevant potential investors who might be persuaded to look at specific opportunities which have been identified. The availability of complete files of technical data regarding specific sectors and projects is essential in this regard, as is information about the business environment including infrastructure, taxation, labor markets, education and contract law. Advertising a country as friendly to investors is a useful beginning, but investors need to know where the opportunities lie.

Servicing and Facilitation: Once an investor expresses an intention to make a commitment, facilitating his passage through the bureaucratic process is crucial. The IPA should provide efficient help with the application as well as with the acquisition of permits and licenses. It is in this phase that investors often become discouraged because of excessive delays, bureaucratic contradictions, and an absence of motivation on the part of some civil servants. The IPA should also take part in the process of screening investments to determine their adherence to the countrys social, economic and environmental goals and standards. After approval, the IPA should follow up to make sure the investor is both enjoying the incentives that were promised and fulfilling the conditions attached to such incentives. The IPA should also monitor progress to assess what additional reforms or measures are needed to attract future investors. At the end of the day, a satisfied investor is the best advertisement for attracting new investors.

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image needs to be based only on actual and significant improvements, i.e., after policy, institutional and other necessary reforms contributing to an enabling environment are in fact in place. Thus, a critical task for those engaged with investment promotion is to impress on policy makers the importance of first undertaking serious reforms and structural changes such that there indeed is an investor-friendly environment, prior to the launching of promotional campaigns to attract investment. In addition, investors must be able to confirm that policy-makers at all levels, as well as relevant civil servants, show the same degree of commitment to maintaining a hospitable investment environment.

In this connection, it should be re-emphasized that the domestic private investor should get all the incentives available to the foreign investor and receive equal, if not more, attention as FDI. While not underestimating the many beneficial spill-overs accruing from FDI, including in particular the technological, managerial and export-market accessing benefits, in reality, over the long-term, it is the investment performance of the domestic private sector that is more decisive for sustained growth. Thus, investment promotion, with appropriate tailoring, should also be directed at new and existing domestic investors (including previously established foreign investors). The investment promotion task will also be more effective if private sector bodies, including rejuvenated chambers of commerce, were coopted and fully involved in both the planning and implementation of promotional activities.

In short, investment promotion should focus first on selling potential opportunities and the welcoming environment provided by the host country, followed by the seeking out of potential investors with a view to persuading them to invest. Promotion agencies should be much more service-oriented, providing information, and engaging in facilitation, encouragement and support.

B. Actions at the Sub-Regional Level

Many of the investment environment-enhancing measures to be taken by individual countries would be more effective and persuasive if they were done in tandem with like-minded neighbors. Such coordinated reform actions are best taken within the framework of sub-regional economic integration groupings.

Sub-Regional Peace and Security

A countrys internal stability is more secure if all other countries in its neighborhood are also conflict-free and stable. If such neighborhood stability is explicitly reflected as an objective to be jointly adhered to and, when necessary, to be enforced, then it will serve as a good foundation for longer-lasting stability. A secure and peaceful sub-region can be one important element in presenting a favorable image to potential investors. Regional integration groupings can provide the framework for sub-regional stability if they incorporate "peace and security" chapters in their charters; SADC, for example has such a provision which its member countries have demonstrated a readiness to enforce when threats to internal stability have arisen within individual member countries. Such joint approaches to ensuring stability and security will have positive dividends, by among other things, creating a favorable investment environment. Countries need, therefore, to go beyond the confines of their borders, and plan and work within a framework of appropriate regional groupings to establish and maintain stable and peaceful neighborhoods.

Broader and More Integrated Market

As indicated earlier, the size of market and economic growth are important determinants for investment decisions. The limited size of the typical African economy has been a significant hindering factor for the promotion of private investment. These small, balkanized economies, would thus be more attractive to investors if African countries broadened their markets by organizing themselves into effective regional integration groupings. But this would require the removal of existing barriers to free and unimpeded movement of goods, capital and labor. These barriers remain despite the adoption of the enabling agreements in many existing African integration arrangements.

To facilitate easier links between member countries, it will be necessary to make large investments in roads, transport and communication facilities. In addition, the countries will all have to take parallel measures to ensure the reduction of tariffs and the removal of regulatory barriers to trade and investment. In this respect, it may be prudent and practical to implement a faster pace of tariff reduction among member countries in an integration grouping before embarking on a similar degree of openness with the rest of the world. The "costs" of adjustment will be smaller and more manageable with this approach to liberalization. It must however be acknowledged that because of the investments required, and revenues to be foregone, implementation of these measures will not be easy. For example, reduction and elimination of tariffs will mean the loss of revenue at the national level, and is therefore likely to be explicitly or implicitly resisted. Regulatory and administrative obstacles can only be removed if all member countries agree to simultaneously undertake appropriate reforms, rationalization and simplification. Interest groups outside government, particularly elements of the business sector benefiting from the continuation of protected domestic markets, will also be part of the resistance. But the broader benefits to all of facilitating and motivating new private investment, whether foreign, regional or national, should outweigh the narrow interests of such protectionist elements. In short, well organized and managed regional integration groupings can serve as large and attractive markets for new investors.

Coordination and Harmonization of Economic Policies

As many African countries have been implementing economic reform programs aimed at macroeconomic stabilization as well as trade and exchange liberalization, it should be possible and beneficial for neighboring countries to coordinate and harmonize their economic policies. The Cross-Border Initiative, in which more than a dozen countries in Eastern and Southern Africa are participants, has the objective of promoting and encouraging such coordination and harmonization. The revival of the East African Cooperation appears to have been partly aided by this approach, although the bulk of the credit should go to the political will demonstrated by policy-makers and to the evolution of a private-public consultative mechanism in support of integration in the three member countries. In West Africa, UEMOA could potentially serve as a strong mechanism for policy coordination and convergence. Member countries of UEMOA have recently moved towards harmonization of business-related laws and regulations, including investment codes. Of course, UEMOA, as well its Central African counterpart (CEMAC), have the in-built advantage of possessing well-established instruments for convergence and policy harmonization, as their member countries have a common currency, the CFA Franc, and a central monetary authority.

In any event, if sound policies pursued by individual member countries are harmonized and coordinated within a sub-regional arrangement, there should be much better prospects of the group attracting investment as compared to the countries acting individually. On the other hand, if some members fail to adopt sound policies or continue with poor policies, the poor policies of such members may have adverse spill-over effects on their neighbors, and limit investment interest in the group of countries as a whole. In general though, the growing convergence of macroeconomic policies and increasing liberalization of trade and payments arrangement should enhance the possibilities for cross-border investment. The establishment of regional stock exchanges or cross-listing on national exchanges, as well as the creation of regional investment banks and other regional financial institutions, would enhance and facilitate investment aimed at sub-regional markets. More efforts will be needed, however, to harmonize investment codes and incentives both to minimize and eliminate the "beggar thy neighbor" elements of competition for foreign investment and to ensure that all investors, domestic or foreign, operate on the same "level playing field". The recent initiative of the East African Cooperation which brought together the investment promotion agencies of the member countries, for the purpose of agreeing to present, in their promotional efforts, the whole sub-region as "one investment area", deserves to be encouraged and replicated in other sub-regions. SADCs sector coordinating unit on finance and investment has the potential of enabling member countries to move in a similar direction with regard to investment promotion.

Sub-regional arrangements for Enhancing Policy Credibility

Countries that have been undertaking serious reforms and adhering to sound policies are frustrated by the lack of adequate and early investment response. A major explanation for the investment lag has been that investors want to "wait and see" until the country establishes a good track record of policy consistency and irreversibility. This implies that credibility as to a countrys commitment to uniformly and consistently follow sound policies can only be gained over time. Meanwhile the explicit or implicit risk rating of the country remains low irrespective of how thorough-going and deep are its reforms. To address this dilemma, suggestions have been made for the adoption of mechanisms for a "faster track" to credibility, by creating or designating, and empowering "agencies of restraint" to enforce country consistency in adhering to prudent policies or reforms.

A component or variant of the "agencies of restraint' proposal is to adopt a sub-regional approach to establishing and enhancing the reputation of individual countries for policy consistency and credibility. Essentially, this variant requires that member countries enter a regional stability pact whereby they agree among themselves on the elements of sound policies each intends to follow, as well as on what would constitute deviation from their commitments. There would be a mechanism for surveillance whose findings of deviation or bad behavior would presumably trigger a procedure for "enforcing" compliance. Peer review and pressure may be the main means of ensuring such compliance and restraint. The international dimension of this suggested mechanism is discussed below.

Concerted and coordinated actions and approaches by groups of African countries, preferably within the framework of regional integration groupings, would provide considerable scope and potential for creating the larger markets and the enabling environment for promoting investment in such countries. For the potential to be realized, it will be necessary for countries to show stronger political will and commitment towards the strengthening, rationalization and empowerement of their integration institutions.

C. International Cooperation to Facilitate Investmentin Africa

Africas bilateral and multilateral development partners can facilitate the revitalization and growth of investment in the region. For many of the national or sub-regional-level measures already recommended, there is scope for supportive and accompanying actions that can be taken at the international level. Many of these would merely require the strengthening and expansion of existing programs and initiatives. In particular, such proposals for international-level action would appear to be quite consistent with bilateral and multilateral measures and institutional arrangements implemented elsewhere, including in particular, those undertaken in support of the reconstruction and development of Eastern Europe and the CIS states. The suggestions are also broadly in keeping with the concept of the new development partnership, which is expected to be oriented progressively toward trade and investment, but will in the interim require a reasonable transition period of continued adequate levels of concessional assistance.

Debt, Aid and Market Access

The African debt overhang has been identified as one of the major obstacles to increased private investment. The HIPC initiative is in principle a welcome movement in the right direction. However, there have been some doubts as to the speed of its implementation and in particular the commitment of all creditors to take early action. There have also been questions as to whether the current HIPC formula would be sufficient to restore the confidence of investors on the candidate countries future capacity to service the post-HIPC balance of their outstanding debt stocks. Resolving the debt problems of African countries thus remains an issue that requires continued and urgent attention, if it is to contribute to improving the environment for investment.

Likewise, the continued availability to African countries, particularly to those with demonstrated commitment to reforms, of adequate volumes of concessional assistance needs to be ensured, because of the critical role aid plays in financing education, health, rural development, essential infrastructure and other priority programs. With appropriate tailoring, aid can also be effectively used to catalyze increased private capital flows, including foreign direct investment.

Market access under preferential terms is another form of support that needs to be continued and further expanded, for preferential market access can serve as a powerful incentive for multinational corporations and other potential investors to locate their production facilities in African countries. If for example, Africa-produced textiles, clothing, and footwear were assured of quota and tariff-free access to the markets of the developed countries, then there would be improved possibilities of new investments coming to Africa for the production of these products, as well as expansions and up-grading of existing capacities. In this respect, technical assistance to help African countries take full advantage of existing GSP and other preferential provisions will also be useful.

Encouraging FDI in Africa

As investment decisions are greatly influenced by risk considerations, there are various ways for Africas development partners to minimize and address investors perceptions of risk. The first and well-practiced avenue of addressing risk is to provide insurance and guarantees, usually against non-commercial risks. Most developed country governments, and international institutions such as the World Bank Groups Multilateral Investment Guarantee Agency (MIGA), are well known providers of such guarantees. Host countries have in many cases given their counter-commitment to projects of foreign investments by entering into relevant bilateral or international investment protection treaties. However, with respect to investments in low-income countries, there appears to be a gap in providing coverage for external long and medium-term credit accompanying FDI.

This raises the broader issue of how to adequately underwrite the total financing package of private investment, both foreign and domestic. The overall arrangement for financing is an important issue in considering the practicality and feasibility of investments. The lack of sources for long-term finance, in most African countries, has already been raised. The lead investor-promoter may also want to have other equity partners, partly for reasons related to the minimization and spreading of risk-exposure and mostly because it may be necessary to have the financial participation of such partners to complete the financing package. There are bilateral and multilateral agencies with some mandate in this area, including the International Finance Corporation or IFC (of the World Bank Group), the United Kingdoms Commonwealth Development Corporation, the Dutch FMO, the German DEG, Frances Caisse Française de Dévelopemment, and Swedens Swedefund, to mention only a few. The IFC, for example, has done considerable work in promoting, underwriting, and catalyzing FDI, as well as in the establishment and strengthening of stock exchanges, leasing companies and various financial institutions in Africa. The bilateral financial institutions have also played useful roles in Africa and elsewhere as catalysts, promoters, and significant sources of investment finance. The African Development Bank too is strengthening its role in promoting and supporting the development of the private sector. However, there still is much more that can be done in these areas. In particular, possibilities of using the soft loans from multilateral financial institutions and the equivalent loans and grants from bilateral sources to guarantee private medium and long-term credit, and other avenues for using concessional assistance for catalyzing and leveraging larger flows of private investment finance to African countries, need to be examined and pursued more actively and seriously.

External partners can also use various instruments and arrangements to support and encourage the strengthening and effectiveness of African regional integration organizations. They can, for example, participate in the financing of new and improved infrastructural links among member countries in such integration organizations. There are also suggestions, as indicated earlier, for relevant external partners such as the EU to serve as external anchors for ensuring adherence to reforms and adopted policy positions; this is expected to enable a much "faster track" to gaining credibility of reforms and policies. Other possible external means of anchoring, in order to gain policy credibility, include WTO-binding of trade liberalization measures already taken or soon to be taken, accession to the Multilateral Agreement on Investment currently being negotiated among member countries of the OECD (if, after careful analysis, this is found to be advantageous to SSA countries), and perhaps using appropriate mechanisms within the proposed US-Africa Trade and Investment arrangement for the same purpose. While such proposals may need to be further explored and pursued, it would appear that national and subregional arrangements for enforcing policy consistency and irreversibility are more practical and feasible, both politically and institutionally.

Assistance for Institutional Strengthening and Development

Public sector institutions directly involved with the promotion of investment as well as those engaged in processing applications, providing services or otherwise interfacing with investors would benefit from practical training and well-targeted technical assistance programs arranged by external partners. Assistance could also be directed at supporting institutional restructuring and reform of laws, regulations, and operating systems in the various relevant branches and departments of governments with a view of improving capability, transparency, and impartiality in the application of (investment-related) laws and regulations, including the protection of property rights and the enforcement of contracts.

External assistance may also be effectively deployed to facilitate training, exchange of experiences and acquisition of know-how by the African private sector. Such assistance may help in building the domestic private sector, particularly small and medium-scale enterprises. Development partners can take other initiatives directed at enhancing entrepreneurial capacities, and promoting arrangements in support of collaboration between African and foreign enterprises for the purpose of improving the technical, technological and managerial capabilities of the African business sector. A stronger and more vibrant domestic private sector would be an essential requirement for the sustained growth of investment. A diversified and technologically progressive domestic private sector would also be in a position to facilitate FDI by providing the supplies, components and inputs, and other necessary services required by foreign investors. A strengthened private sector, coupled with stronger and more diversified financial intermediation, would help accelerate investment in Africa. In addition to their traditional modes of collaboration, Africas external partners can facilitate the growth of investment by re-orienting their assistance to include practical support for the speedy development of the African private sector.

Table 1
Gross Domestic Investment (% of GDP)

Source: Global Coalition for Africa, 1996 Annual Report

Table 2
Gross Domestic Savings (% of GDP)

Source: Global Coalition for Africa, 1996 Annual Report

Table 3
FDI Inflows to Sub-Saharan Africa (US$ Million)

Notes: ... not available
Source: UNCTAD, World Investment Report, 1997

Table 4
Net FDI Flows to Developing Countries (in 1996 US$ Million)

Source: IFC, Foreign Direct Investment 1997

Table 5
Revenues from Privatization in Sub-Saharan Africa (US $ Million)

Source: World Bank Data

SELECTED REFERENCES

1. Bhattacharya, Amar, Peter J. Montiel & Sunil Sharma: Private Capital Flows to Sub-Saharan Africa: An Overview of Trends & Determinants: April 1997(mimeo), World Bank/IMF, Washington, D.C.

2. Cockroft, Laurence & Roger C. Riddel: Foreign Direct Investment in Sub-Saharan Africa: March 1991, PRE Working Papers, World Bank, Washington, D.C.

3. Collier, Paul: Globalization: Implications for Africa: November 1997(mimeo), Center for the Study of African Economies, Oxford University, Oxford.

4. Elbadawi, Ibrahim, Benno J. Ndulu & Njunguna Ndungi: Risks, Uncertainties & Debt Overhang as Determinants of Investment in Sub-Saharan Africa: April 1997(mimeo), African Economic Research Consortium, Nairobi.

5. IFC: Foreign Direct Investment: Washington D.C., 1997.

6. IFC: Building the Private Sector in Africa, Washington, D.C., 1996.

7. Olson, Mancur: Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor: Journal of Economic Perspectives, Vol. 10 N0 2, Spring 1996 pp. 3-24.

8. UNCTAD: Companies Without Borders: Trans-National Corporations in the 1990s: Thomsen Business Press, London, 1996.

9. UNCTAD: World Investment Report 1997: New York/Geneva, 1997.