Chapter

2 How to Facilitate Private Investment in Africa Based on the Experiences in East Asia

Author(s):
Claire Liuksila
Published Date:
December 1995
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Author(s)
Toshihiko Kinoshita

There are a number of issues that must be addressed when we examine how countries in Africa might facilitate private investment by utilizing the experience of the East Asian economies. We need to look at the underlying factors that motivate both foreign investors and local entrepreneurs; how entrepreneurial development is influenced by the relations between the private sector and the government; and how donor countries might facilitate private investment in Africa. We also need to examine the basic differences in the current politico-economic performance of African countries and East Asian countries, such as savings and investment ratios, the growth of trade, the volume of foreign direct investment, debt and debt service pressures, population growth rates, and these countries’ respective sociopolitical situations. All of these factors are interrelated.

While the East Asian economies have enjoyed a “virtuous” economic circle over the past two decades, most African countries have suffered from a “vicious” economic circle. However, in the 1950s and 1960s, many believed that African countries would have a more rosy future than most Asian countries. What happened to alter this view? Industrialization and trade in manufactures became powerful engines of growth in East Asia, and private entrepreneurs, including foreign investors, have been major economic players there. But what made the difference between East Asia’s and Africa’s economic performance in general?

Among a number of important factors, adaptability to the expansion of world trade seems to be crucial. As world trade volumes multiplied over the past two decades, Asians took advantage of it. African countries did not or could not do so, however, and depended instead on traditional primary products, whose terms of trade continued to deteriorate. This eventually led to a decisive gap between them and the Asian countries. This development is related to the fact that there has been an extreme shortage of competitive entrepreneurs in sub-Saharan Africa.

Why do private entrepreneurs appear and why do they invest? Without individuals with entrepreneurial skills, private investment does not take place. Such individuals are oriented toward profit-making and, what is more important, are ready to take risks. Hence, their existence is a precondition for private investment and subsequent economic development. But entrepreneurs need the right environment—they need to have access to technology, financial markets, good human resources, sales networks, etc., and to develop management skills.

Max Weber said that it is Protestantism that produces such capitalists. That is not exactly true, as shown by the economic success in Asia over the past decades. In East Asia, indigenous entrepreneurs, ranging from big family groups to small, grass-roots businesses, burgeoned in the post-World War II period, first in Hong Kong, Taiwan Province of China, and Singapore, and later, in Thailand, and on a smaller scale in Indonesia and Malaysia. These countries have enjoyed political stability, a more deregulated economy, and good macroeconomic management. In short, a good sociopolitical and economic framework and good policies have led to good results in East Asia.

Not all East Asian countries have been successful, though. The Philippines, which used to be a star developing country in the 1950s and 1960s, with many potential entrepreneurs, failed to remain so in the 1970s and 1980s. Finding out why this happened may provide lessons for Africa. China also has something to teach us. Entrepreneurship in China had been contained under the closed regime without competition for three decades after its independence in 1949 until the Chinese authorities adopted “open and reform” policies in 1978. This change in policy had an extremely dynamic effect on the economy, and especially in the coastal areas, entrepreneurship has become widespread.

What factors determine private investment, including inward foreign direct investment? The major determinants of private investment are the existence of open markets with growth potential, and factor endowments that lead to comparative advantage in specific industries under an appropriate exchange rate. Moreover, potential investors, particularly foreigners, carefully assess the investment climate before investing. They are concerned with the stability of the sociopolitical situation, the soundness of macroeconomic management, the country’s economic and social infrastructure, the government’s (central and local) treatment of foreign investors, and other factors such as regulations, taxes, and the like. Host governments should try to improve the investment climate and enhance possible donor support by paying attention to these concerns. They should remember that investors, particularly multinationals, can select any site in the world for their investment.

Governments also need to improve the country’s infrastructure. To have a better infrastructure, more investment must be undertaken by the government, but also by the private sector. It is obvious that fast economic development in East Asia has been related to huge investments in infrastructure. Donors such as Japan have more or less focussed official development financing (ODF) on infrastructure. The continuation of this type of cooperation in Africa should be very beneficial. Donors could support the self-help efforts of recipients by supplying official or private sourced funds to the local governments or local firms through local financial institutions.

In addition to infrastructure, governments should foster institution building. Building a sound financial system, a fair legal system, and well-equipped money and capital markets are very important.

It is also important to provide local investors with the best business-related information. New entrepreneurs cannot set up international (or even national) information networks by themselves. Governments can support them by, for instance, setting up a centralized information center. Donors can also help by sending technical assistance experts such as those provided by Japan through JETRO, and by Korea through KOTRA.

Human resource development is also very important. Emphasis by each state should be placed on primary and secondary education. These factors are vital to nurture entrepreneurs and their supporters and to provide them with skills and technologies.

Given the current severe political and economic situation prevailing in most African countries, namely low skills, rapid population growth, poor information network, and a lack of funding for investment, as well as inadequate technological capacity, there may be a role for South-South economic cooperation. The difference in the technology level is not so great (there exists in Asian developing countries capital-saving technology in agriculture as well as in manufacturing), and some active Asian entrepreneurs may wish to expand trade with and invest in African countries. In fact, many Asian countries once experienced the economic conditions now facing many African countries, namely a heavy foreign debt, a fast-growing population, heavy reliance on one main crop (monoculture), lack of skilled labor, low inward foreign direct investment (FDI), low saving and investment ratios, and worsening terms of trade of commodities. These countries could provide good advice to African countries.

In fact, in an attempt to achieve export-led growth, several countries in sub-Saharan Africa have initiated policy reforms, including trade liberalization, to change their industrialization strategy from import substitution to an export orientation. East Asian countries could send advisors or businessmen to assist them.

We can learn much from the success story of Mauritius, which has taken up export-oriented and open-door policies, thereby succeeding in inducing Hong Kong capital investment in textiles. The country took advantage of its geographical position and historical legacy. Now Mauritius is trying to upgrade its industrial/trade structure.

Conclusion

As the economies of East Asia are developing rapidly, the industries in any country that has comparative advantage will surely change over time. Such changes will always provide lucrative niches to the late starters such as other Asian economies and sub-Saharan African countries. Thriving Malaysia, for instance, began to invite many guest workers from neighboring countries to work in its manufacturing enterprises.

The donors, namely developed nations as well as international financial institutions, ought to continue to support the self-help efforts of African states with some conditionality to make their economies more efficient and more open, with more discipline in macroeconomic management. They should recognize the significance of fostering an economic and social infrastructure with which the private sector can efficiently work. For this objective to be realized, how to nurture and keep an efficient bureaucracy is also an important issue. There also exists a human resource problem, and donors could assist by sending advisors or training more people from African countries.

Given the pervasive imperfections and market failures in Africa, certain forms of selective intervention by government might be necessary to stimulate industrial growth and achieve international competitiveness. Possible areas of intervention would be export promotion, specialized training, technology capacity building, information marketing, foreign investment and technology inflows, not to mention infrastructure and institution building. However, such interventions must be efficiently managed and market friendly if they are to overcome market failures. Donors can assist much of this effort by providing technical assistance.

South-South economic cooperation is not just a mere slogan. It is good to see that Asians and Africans visit more often with each other and conferences are often held for these objectives. It would be worthwhile also to set up an educational center somewhere in Asia as one form of South-South economic cooperation. Some of the donors, notably the Japanese Government, are committed to supporting cooperation of this sort financially. It is expected that this cooperation will have a favorable impact by enhancing entrepreneurship in Africa.

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