macroafricaintel | [#StopTheKillings] Why is West Africa less attractive to foreign investors?

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

How is it that West Africa only accounts for 5 percent of foreign direct investment (FDI) into the African continent? The World Bank so wondered in an article in July 2017. This is the region that includes the continent’s largest economy, Nigeria, with gross domestic product (GDP) of US$406 billion in 2016, about 29 percent of Sub-Saharan African output of US$1.4 trillion. For comparison, South Africa, the continent’s most advanced economy has a size of US$294 billion. Furthermore, the largest and most dynamic francophone African country, Ivory Coast, with a US$36 billion economy, is also West African. So why the scant foreign investor interest? To buttress the point further, take the following example. Jack Ma, Asia’s richest man, led a cohort of similarly deep pockets from the region to East Africa in July. His first stop was Kenya, an economy barely one-fifth of Nigeria. Mr Ma also visited Rwanda, a tiny landlocked neighbour to Kenya. If perhaps corruption, terrorism and the occasional rebellion in Nigeria and Ivory Coast are disturbing, what about Ghana? With an economy (US$43 billion) almost as large as Kenya, Ghana has a better democratic record and has proved to be one of the most stable African countries. And just as Nigeria struggles to deal with the Boko Haram terrorist group in its northeast, so does Kenya with Al-Shabaab. Additionally, political violence is more of a problem in Kenya than it is in Nigeria.

It begs the question: Why would Mr Ma and his 38 billionaire friends find such relatively smaller African countries more attractive to larger coastal countries with such cosmopolitan cities like Lagos and Abidjan? The reasons are not farfetched. The World Bank asserts cumbersome administrative procedures and corruption at the ports hinder the speedy clearance of goods, for example. These apply to most African countries, though. It attributes access to finance as well. This is probably not as significant, though, because foreign investors are expected to bring their own capital. But if a country’s exchange rate policy is controlled and not transparent, this can be stymied. Incidentally, East African countries have been more reliable in this regard, allowing their currencies to trade without much interference and not hindering the free flow of capital in and out of their jurisdicitions, even during crisis periods. This has not been historically the case in West Africa, especially Nigeria, which until recently not only rationed hard currency but blocked the repatriation of capital, causing great losses to foreign investors. So myriad bottlenecks around doing business in most West African countries are worse than they are in East Africa. Little wonder the World Bank ranks Rwanda and Kenya 56th and 92nd out of 190 countries respectively in its latest Doing Business ranking. Ghana and Nigeria are ranked 108th and 169th respectively. Even though corruption underpines the relatively more difficult business conditions in West African countries, it is not likely why they are less attractive investment destinations, however. Kenya is perceived to be more corrupt than Nigeria, for instance. Infact, Transparency International ranks the largest East African economy 145th out of 176 countries in its 2016 corruption perception index, with Nigeria more favourably ranked at 136th.

That East African countries are more economically integrated may be why though. Because in contrast, West African countries under the aegis of the Economic Community of West African States (ECOWAS) have been more successful at political integration than economic cohesion. A more innovative streak is also a factor, especially in regard of information technology; albeit West African countries like Ghana, Senegal and Nigeria are increasingly demonstrating technological progress as well. Facebook’s chief executive, Mark Zuckerberg, visited Nigeria in August 2016, for instance. East Africa’s strategic location at the horn of Africa is also an attraction. China recently opened it first African military base in Djibouti, joining earlier military complexes of the Americans and others. So what can West African governments do to attract more FDI? They must make doing business easier certainly. The World Bank is helping via a European Union funded 4-year “Improved Business and Investment Climate in West Africa Project”. An ECOWAS Investment Climate Scorecard, it is hoped would engender quicker progress towards integration than the globally oriented Doing Business ranking, say, which though African countries can use to see how they are doing relative to each other, is not as sharp a tracking tool. With patronage-based politics continuing to be tremendously crucial to the stability of most West African countries, however, there is not much political will towards economic integration. Move too quickly and they might have bigger problems than just being difficult to do business in.

An edited version of these thoughts was published in my Forbes Africa magazine column in October 2017. Also published in my BusinessDay Nigeria newspaper column today (Tuesdays).

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