Rethinking Trade and Foreign Investment in Africa


“The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.”
― Albert Einstein

Trade and investment have long been key drivers of economic growth and development globally. In Africa, where there has been significant levels of poverty and inequality, transforming economies and improving the livelihood of the masses have been noted to be extremely consequential to the effectual implementation of trade and foreign investment initiatives. For this reason, on the operational level, trade and investment policies have frequently run simultaneously with each other. The popular supported notion behind this is, that the successful performance of one would in turn affect the other.

Hence, it wouldn’t be overly presumptuous to say that policy, be it economic or political, cannot function in a vacuum. But as proponents of the intellect, they are influenced by thought which usually reveals itself in approach, operation or implementation. Consequently, to further discuss rethinking trade and foreign investments in Africa, it is pertinent to look at what it means, the objectives as economic instruments, the present approach, and what a reformed method would look like.

What is Trade and Foreign investment?

In simple terms, trade is the buying and selling or exchange of goods and services between two or more parties. Investments are the deposit of fiscal wealth or assets with the anticipation of a greater pay off, income or profit in the future. Conversely, in respect to foreign investment there is an absence of a generic legal definition of what it constitutes. This vacuum has been attributed to the varying nature of the objectives investment instruments possess. Even so, the rudiments which make up the activities of foreign investment consist of but are not limited to, licensing to explore natural resources, together with the construction or operation of infrastructure projects, mergers and acquisitions, financing to subsidiaries, and the acquisition of real property.

The major objective of foreign investment is to not solely bring profit to the investor but similarly increase value add to produced goods, help reduce the cost of production, create employment, improve trade, and facilitate higher competitiveness. You’ll find however, that with the objectives or purpose of foreign investment and trade there is a reasonable overlap especially in expected outcomes. All the same, the basic objectives of trade aside increasing exports is to also improve economies of scale, create employment, increase purchasing power and encourage the transfer of technologies. How has this played out in the African context?

Disproportionate Trade in Africa

Africa has played a dynamic role in shaping the global trade trajectory. As the cradle of natural resources for the rest of the world, it has managed to unconventionally drive economic activities, which have, in turn, sustained the global economy. An occurrence which dates as far back as the 15th century, when Portuguese explorers arrived in the continent with trade interests. Yet this thoroughbred reality of trade experience has been contradicted by the continent’s share of global trade exports.

According to data by the United Nation’s Conference on Trade and Development (UNCTAD), Africa’s share of global exports is only 2 percent. One of Africa’s best performances was 1981 when the continent’s share of global exports was 4.1 percent. After declining to 1.7 percent in 1998 it rose to roughly 2.4 percent in 2009. Since then, Africa has continued to perform at the same subpar level.

One of the key reasons attributed to this phenomenon has been the continent’s lingering dependence on raw materials. A colonial economic model instituted to make the region a consistent source of natural resources for industrial economies mainly in the Northern hemisphere. One which has become so systemically entrenched that attempts to reverse it have proven unsuccessful.

Moreover, another element of the trade model in sub-Saharan Africa is that, foreign trade calculated in terms of both exports and imports constitutes more that 50 percent of GDP. However, these figures only reveal the lopsided nature of trade activities in the region. Irrespective of the noticeable trade undertakings, there is a heavy dependence on imports inadequately balanced by the equivalent in exports. Trade data from UNCTAD’s 2019 economic development in Africa report showed that, intra-Africa exports with Europe, Asia and the US was 68.1%, 59.4%, 55% respectively. While that of intra African exports only accounted for 15% of trade activities. Yet, in other trade competing regions like Europe, intra-regional trade accounts for approximately 70% of all trade.

The Bane of Foreign Investment

African governments have for a long period, placed significant emphasis on formulating policies targeted at attracting more FDIs (Foreign Direct Investments) to the continent. One of the major approaches used has been the hasty downsizing and liberalization of 60% of African states through Structural Adjustment Programs (SAPs) instituted by the IMF and World Bank in the early 1990’s.  A set of economic policies which was birthed out of the Washington Consensus for developing countries in 1989 to facilitate growth and development through trade and investment directly associated with the securing of loans from the Bretton Woods Institutions.

In 2019, FDI flows into Africa was $32 billion with South Africa receiving the highest inflows of $4.4 billion. These numbers are three times more than the average inflow of FDI into the continent in the 1990’s. On that account, it is expected that a greater increase in the demand for African resources and interest in business activities on the continent would produce a reasonable correlation between the input (investment) and output (economic growth and development).

So far, statistical analysis by UNCTAD in “Rethinking the Role of Foreign Direct Investment” has revealed that, Africa is not benefiting much from the inflow of these investments. Rather, the outflow of profits is extremely higher and disproportionate to the capital received through foreign investment. In more direct terms, more money leaves the region than what is received through FDI or even aid.

A study by Political Economy Research Institute, in ‘Capital Flight from Africa” has further shown that, there is a wave of “capital flight” occurring in the continent, as multinationals and many foreign companies safeguard profits from the state’s tax authorities. As a result, tax avoidance has become a major industry through which foreign investment ends up benefiting predominantly the investor. Leaving the host state with a semblance of economic growth through the assessment of GDP, while the real standard of living determined by the HDI (Human Development Index) remains low.

A recent example of this problematic trend of tax avoidance was revealed in an ongoing dispute between Ghana and MTN (a South African multinational telecommunications company) over the likelihood of a loss of nearly $70 million in taxes. MTN in Ghana decided to sell one of its investments of a mobile phone tower. According to reports by the tax justice network, in its article, “MTN uses Netherlands tax haven to escape African tax bills” the “transaction was carried out in a company in the tax haven of the Netherlands.”  Thus, after making a profit of nearly $300 million, MTN claimed its sale is “non-taxable” since it took place offshore.

This is among many other financial “tricks’ pulled off by foreign investors and has been termed as “offshore indirect transfer.” Another research by Petr Jansky & Miroslav Palasky published in the International Tax and Public Finance Journal, has exposed that an estimated US$420 billion in corporate profits is shifted out of 79 countries every year. The three leading processes that multinationals use to move their profits are, “strategic transfer pricing,” registering intangible assets such as trademarks or copyrights in tax havens and debt shifting. The IMF and World Bank have noted such actions as an issue of concern in many developing states.

A New Approach

Intra African Trade

Europe is noted to be the largest exporter of manufactured goods and services across the world. The region accounts for 16% of all global trade. One noteworthy detail to take into consideration as mentioned previously, is that intra-regional trade accounts for 70% of all trade in the region.

Thus, Africa in its attempt to move beyond aid must recognize that prioritizing trade, specifically intra-African trade is the best and only alternative.  The long maintained approach to strengthening solely North-South/ East-South trade relationships, while striving to compete on the global market, is stifling development and growth processes of states in the sub-region.  Consolidation and capitalization of shared goals, resources, capacities and strengths through trade amongst the various regional economic communities, would better facilitate integration into the global economy.

The African Continental Free Trade Area (AfCFTA), which forms a part of one of the AU’s flagship programmes, is the representation of rethinking trade in Africa. The AfCFTA which is the largest free trade area since the World Trade Organisation (WTO) was established in 1995, is Africa’s opportunity to have a single market of over a billion consumers including a total GDP of over $3 trillion. It is also an opportunity for collaboration to have a competitive advantage, augment production capacity, improve economies of scales, create jobs, export finished goods and utilize one of its most vital yet neglected resources – the youth.

Though trade is expected to facilitate competition, it is relevant to recognize that rethinking trade, Africa must rather focus on fostering partnerships and cooperation within the continent to compete efficiently outside. Though competitive markets help enrich productivity, competition in a region which has struggled with growth and development must be strategically tailored towards increasing value, and the standard of living. At the same time, safeguarding against trade wars, as has been played out on the global sphere among developed economies.

Foreign Investment

Commercial Negotiations

Foreign Investments have the capacity to transform economies drastically. As the famous saying goes, “Life doesn’t give you what you deserve but what you bargain for.  For example, economies of Hong Kong and Singapore are composed predominantly of foreign direct investment and still happen to be among the most developed in the world. For the African story to be different, foreign investment must be negotiated to factor in the interests of the various economies in the region.

Research evidence from UNCTAD, through assessment of economies like Mozambique, has shown that investment gains are not always automatic for the host state. It is for this reason that African states must use their national investment policies strategically to prod investors toward preferred outcomes. Key elements such as well stipulated tax laws, enforceable labor laws and consideration of environmental degradation are fundamental in the concept of rethinking foreign investment.

The effort to attract foreign investment must not undermine the goal of empowering local industries, as they should be the front and center of all investment arrangements. In order to arrive at more inclusive outcomes, data has revealed that it is better to prioritize small to medium size investments. This has proven to be more effective in attaining social objectives such as, the wide distribution of economic activities, and the creation of employment. Regulatory laws that are solely biased towards mega projects to attain more FDI for infrastructure development, mostly fail to transform the living standards of the wider population. Furthermore, governing or legal procedures which are resource sapping must be addressed to support the growth of smaller businesses and create a level playing field for healthy and fair competition.

In the case of tax avoidance, economist have proposed a unitary taxation by all states. With this model, instead of implementing taxes based on where profits were made, taxes would rather be imposed on the profit depending on where the economic activity which produces it actually takes place. This strategy would require a clear definition of what “economic activity which creates profits” means. According to the Organization for Economic Co-operation and Development (OECD), though this characterizes a noble and viable solution, it perceives it as an unrealistic requirement. In the scope of international taxation, it would involve colossal administrative and political complexity.

Nevertheless, Africa does not have the luxury to sit back and wait for the rest of the world for such impediments to be addressed. In the interim, with the institution of the AFCTA, which is projected to attract remarkable foreign investment, it is vital to ensure effective collaboration between governments and the private sector. Inclusive consultations for an extensive expanse of growth and development should safeguard that, investment opportunities support and do not undermine economic independence of African states.

For rethinking trade and foreign investment in Africa can only be effective if African interests are put first i.e. collaborating within to compete without.


The writer is an international trade law expert consultant at Blackbridge Consulting Ltd.

Email: [email protected]

Tel: 0247881597

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