Growing with the flow

The 2008 economic crisis shook up the landscape of financial flows to Africa and brought to the fore two major trends: an upsurge in foreign direct investment (FDI) and a parallel rise in remittances from abroad. Indeed, remittances outpaced both aid and FDI inflows with a compound growth rate over the past decade of 7.7%.

This confirms recent research which posits that remittances are less volatile than other forms of financial flows. The economic and financial crisis led to worsening economic prospects which, combined with lower access to finance, negatively affected FDI flows, in particular in developed countries. All in all, foreign investment, remittances and development aid to Africa quadrupled between 2000 and 2012, amounting to an estimated $186.3 billion in 2012. External financial flows are projected to keep increasing, topping $200 billion in 2013.

The past decade witnessed the “re-discovery” of Africa as a profitable investment destination by international investors. FDI to Africa grew at an annual compound rate of 6.1% between 2000 and 2011, climbing to nearly $50 billion according to IMF estimates. These surging investment flows paved the way for the “emerging Africa” discourse, which closes off the lost decade of the 1990s, when Afro-pessimism was the tune.

Several trends support the gradual diversification of FDI to Africa. First, investors from non-OECD countries, led by the United Arab Emirates, India and China  are on the rise. In 2012, they accounted for 60% of total greenfield FDI to Africa, up from only 25% in 2003.

New economic sectors, such as metals, renewable energy, automotive equipment and financial services also help attract an increasing share of the new greenfield FDI projects. Sustained economic growth of over 5%, improved macro-economic indicators, such as lower inflation and sustainable debt levels, and rising purchasing power, are beginning to open alternative investment opportunities to natural resources, which still account for some 60% of greenfield FDI.

And finally, investment from other African countries has been growing at a healthy clip too, underpinning the diversification away from natural resources. In fact, the share of total African FDI more than doubled between 2003 and 2012, rising from 8% to 18%. Six sectors have received close to 90% of total intra-African FDI since 2003: hydrocarbons, metals, chemicals, communications, construction materials and tourism. Despite this, intra-African greenfield investment tends to be less concentrated than non-African investment and has been increasingly directed towards financial services, construction materials and communications.

Remittances from abroad have also changed the landscape for financial flows to Africa. Remittances are now the largest single financial inflow into Africa, reaching $60.4 billion in 2012 according to the World Bank. The total is even larger if money sent through unofficial channels is taken into account.

While remittances have become an increasingly important source of revenue for some 120 million African households, the cost of sending them to the continent is the highest in the world, twice that of sending to South Asia for example. In 2012 transaction costs accounted for an average of 12.4% of the money transferred to Africa, and this figure climbs to around 20% for South Africa, Tanzania and Ghana.

Empirical evidence of the impact of remittances on growth  remains mixed, but they are often used for consumption, thereby reducing poverty. Increasing competition for cross-border payments would lower those transaction costs and get more money where it is needed. Banks, the most expensive remittance service provider, are often the only channel available to African migrants. Regulatory hurdles slow down the introduction of cheaper alternatives and new technologies such as mobile money transfers. M-Pesa (a mobile phone-based money transfer and microfinancing service for Safaricom and Vodacom) in Kenya and Tanzania are successful examples, but the regulatory void between telecom and financial regulations complicates the development of international mobile remittances.

Nevertheless, financial flows remain unequally distributed across African countries. The top 15 recipients of FDI perceived roughly 75% of total greenfield FDI in 2012. This is also the case with remittances. Since 2000 North Africa and West Africa have accounted for over 80% of total remittances to Africa, driven by their proximity to Europe and a strong diaspora. Nigeria and Egypt alone, represented 64% of total remittances.

The strong increase in aggregate external financial flows reflects Africa’s economic dynamism and improved macroeconomic management. But not all African countries have been invited to the banquet. The incoming tide of foreign financial flows has rightfully ignited optimism about Africa’s economic future, but it needs to float all African boats before term “emerging Africa” can be used with conviction.

References

UNCTAD (2012a), World Investment Report 2012: Towards a New Generation of Investment Policies, United Nations Conference on Trade and Development, Geneva.

Chami, R. et al. (2008), “Macroeconomic consequences of remittances”, IMF Occasional Paper259, IMF, Washington, DC.

See also www.oecd.org/dev and www.oecd.org/development

© OECD Observer No 296 Q3 2013




Economic data

GDP growth: +0.6% Q4 2017 year-on-year
Consumer price inflation: 2.6% May 2018 annual
Trade: +2.7% exp, +3.0% imp, Q4 2017
Unemployment: 5.4% Mar 2018
Last update: 06 Jul 2018

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Watch the webcast of the final press conference of the OECD annual ministerial meeting 2018.
  • International co-operation, inclusive growth and digitalisation lead the themes of the 2018 OECD Forum in Paris on 29-30 May, under the banner of What brings us together www.oecd.org/forum. It is held alongside the annual OECD Ministerial Council Meeting on 30-31 May, chaired this year by France with a focus on multilateralism www.oecd.org/mcm.
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • Ambassador Aleksander Surdej, Permanent Representative of Poland to the OECD, was a guest on France 24’s English-language show “The Debate”, where he discussed French President Emmanuel Macron’s speech at the World Economic Forum in Davos.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Rousseau
  • Do you trust your government? The OECD’s How's life 2017 report finds that only 38% of people in OECD countries trust their government. How can we improve our old "Social contract?" Read more.
  • Papers show “past coming back to haunt us”: OECD Secretary-General Angel Gurria tells Sky News that the so-called "Paradise Papers" show a past coming back to haunt us, but one which is now being dismantled. Please watch the video.
  • When someone asks me to describe an ideal girl, in my head, she is a person who is physically and mentally independent, brave to speak her mind, treated with respect just like she treats others, and inspiring to herself and others. But I know that the reality is still so much different. By Alda, 18, on International Day of the Girl. Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2018