Towards a Common Investment Area in the African Continental Free Trade Area: Levelling the Playing Field for Intra-African Investment

Abstract

Responsible investments creating jobs, generating taxes to reinvest in the local economy, complying with domestic regulations and promoting corporate social responsibility are needed more than ever to catalyse Africa’s development. But foreign direct investment (FDI) in Africa was already in decline before the COVID–19 pandemic— in 2019 it was down 10.3 per cent from 2018. At $45.4 billion, Africa’s share of global FDI in 2019 was a low 2.9 percent. FDI in Africa remained strongly skewed towards the primary sector. Though 2019 saw increased investments in the service and manufacturing sectors, the lion’s share went to natural resources such as oil and gas, responding to growing demand and anticipated new discoveries. That resource-seeking bias limits Africa’s structural transformation prospects, keeping the continent from channelling more FDI towards such promising sectors as the digital economy. The bias, coupled with many countries’ slow progress in making reforms to open structural productivity bottlenecks, is likely to stifle the continent’s growth. For most of 2020, prospects worldwide were dampened by rising protectionism and the COVID–19 pandemic, stiffening the competition among countries seeking investment. How might this affect Africa in its quest for structural transformation? The continent will require out-of-the-box thinking for development financing, going beyond unpredictable official development assistance and uncertain amounts of FDI—the traditional sources—distributed unevenly across countries and sectors. And with the outbreak of COVID–19 and its associated costs, new financing is required more than ever by African countries to build back better. Africa must thus turn to alternative finance for more productive investment in sectors contributing to lasting growth.