Overseas Development Institute - Written evidence (ZAF0022)

 

 

ABOUT ODI

 

ODI is an independent, global think tank, working for a sustainable and peaceful world in which every person thrives. We harness the power of evidence and ideas through research and partnership to confront challenges, develop solutions and create change.

 

This submission will focus on the priority of ‘driving prosperity’ outlined in the 2019 Joint Communiqué on the African Union-United Kingdom Partnership.

 

EXECUTIVE SUMMARY

 

  1. The UK-Africa Investment Summit provides a platform for the UK government to outline policies and commitments towards achieving its ambition of being the top G7 investor in Africa by 2022, and therein its role towards delivering the AU Agenda 2063’s aspiration of a ‘prosperous Africa based on inclusive growth and sustainable development’.

 

  1. Building on the momentum of the Summit, and to lay the foundations for a new medium-term economic partnership framework, the UK government should convene a joint high-level Prosperity Commission, together with Africa.

 

  1. The UK should diversify its Foreign Direct Investment in Africa. Industrialisation is a cornerstone of AU 2063, yet manufacturing has been largely untapped by UK businesses. The UK has a comparative advantage in financial, insurance, business and professional services that are essential to manufacturing.

 

  1. UK aid should continue to be used to facilitate coordination, help address bottlenecks and contribute to the provision of public goods that businesses may require so as to facilitate the economic development of Africa.

 

 

 

 

 

 

UK-AFRICA TRADE AND INVESTMENT – THE SUMMIT AND A NEW COMMISSION

 

  1. The UK government has stated its ambition to be the top G7 investor in Africa by 2022, which could benefit realisation of the AU’s Agenda 2063 aspiration of a ‘prosperous Africa based on inclusive growth and sustainable development’.[1]

 

  1. The Agenda 2063’s aspiration is geared towards securing the transition of African economies away from natural resources and towards modern industry. The African Continental Free Trade Agreement serves as a key manifestation of the will of collective governments to work towards achieving this aspiration.[2]

 

  1. The UK-Africa Investment Summit on 20 January 2020 provides the UK government with a clear and innovative platform to demonstrate how its policies can bolster UK-Africa trade and investment.

 

  1. Unlike other major economies (including the United States, China, Germany and France), the UK currently does not have a coherent, over-arching medium-term economic partnership framework with Africa.

 

  1. Building on the momentum of the UK-Africa Investment Summit and to deliver on the shared economic ambitions of the UK and Africa, the UK should convene a joint high-level Prosperity Commission - together with Africa - to lay the foundations for a new medium-term economic partnership framework.

 

  1. The Commission should assess the current status of economic relationships and current and planned initiatives, identify the priority opportunities, and chart innovative ways forward.

 

  1. With the UK’s imminent departure from the European Union, the Commission that could also assist in the development of an independent trade policy and relations.

 

 

 

 

UK FOREIGN DIRECT INVESTMENT IN AFRICA

 

  1. Notwithstanding the UK’s ambition to be the largest investor in Africa, as of 2017 it was the fourth - contributing 6% of the total Foreign Direct Investment (FDI) stock in the continent.[3]

 

  1. Furthermore, the share of Africa in total worldwide FDI stock from the UK has scarcely increased over the past decade. This is despite the increasing population and growing middle class in Africa – expected to account for over 40% of the population by 2030 – bringing increased opportunities for UK businesses.[4]

 

  1. Crucially, UK investment is highly concentrated in extractives (51%) and financial services (35%), as well as geographically in South Africa (30%).[5]

 

  1. However, there is a desire to develop manufacturing across Africa, which has been largely untapped by UK firms. Financial, insurance, business and professional services – including fintech – are essential to manufacturing and the UK has a strong comparative advantage in these fields.[6]

 

 

  1. Industrialisation is a cornerstone of AU 2063 and, with its comparative advantage in the fields above, the UK should diversify its investments and play a key role in delivering Africa’s economic transformation.

 

  1. Ethiopia – Africa’s fastest growing economy – has illustrated the importance of investing in productive capacities, including manufacturing. In the absence of being natural resource rich, Ethiopia has developed capacity and attracted investment by building physical infrastructure and developing human capital.[7]

 

  1. UK aid has supported Ethiopia’s industrialisation. However, this has only succeeded because of the national government’s commitment to rapid economic growth and economic transformation through its own policies and actions.[8]

 

  1. The UK should work with governments across Africa to reduce barriers to trade and investment. Poor regulatory frameworks can facilitate corruption and uncertainty which hamper investment and raise business operation costs.[9]

 

INCENTIVISING INVESTMENT IN AFRICA

 

  1. Products and services from the UK are well-known and highly-regarded by consumers and companies in Africa, plus growing populations and incomes create growing opportunities for UK investment across the continent.[10]

 

  1. Yet, a range of factors influence investment decisions; including, human capacity, the quality and quantity of infrastructure (particularly electricity), the size of the market, business climate, the regulatory framework, levels of corruption and political risk and the security environment.[11]

 

  1. To combat these factors, governments in Africa should eliminate regulations that discriminate against foreign firms, reduce investment requirements and distribute equally between domestic and foreign firms the requirements of compliance with regulations and taxes. Infrastructure in energy and logistics should be improved to attract investment, including in manufacturing, and to prompt diversification of investments.[12]

 

  1. Increased foreign competition also increases the competitiveness of domestic industries, and so it is critical that African governments address the physical, political and institutional barriers that affect trade.[13]

 

  1. The UK had a good track record of Aid for Trade initiatives such as Trade Mark East Africa, which now is expanding to cover trade facilitation initiatives in Kenya, Uganda, Tanzania, Rwanda, Burundi, Ethiopia, DRC, Malawi, Zambia and Mozambique in its second five-year strategy. The UK is also a shareholder in/contributor to a range of relevant bilateral (CDC, AgDEVCO, LSE, infrastructure) and multilateral (AfDB, IFC, FSD, TCX) initiatives to stimulate investment.[14]

 

  1. UK aid should continue to be used to facilitate coordination, help address bottlenecks and contribute to the provision of public goods that companies may require. An adequate combination of trade policies, investment and aid will determine the creation of opportunities that benefit private sector activity in the UK but, crucially, also contribute to the economic transformation and development of Africa.[15]

 

Received 21 January 2020

 

 


[1] AU Agenda 2063: The Africa We Want (2015), (https://au.int/sites/default/files/documents/36204-doc-agenda2063_popular_version_en.pdf)

[2] Mendez-Parra M, Raga S and Sommer L, Africa and the United Kingdom: challenges and opportunities to expand UK investments (2020), (https://www.odi.org/publications/16536-africa-and-united-kingdom-challenges-and-opportunities-expand-uk-investments)

[3] Ibid

[4] Ibid

[5] Ibid

[6] Ibid

[7] Oqubay A, Will the 2020s be the decade of Africa’s economic transformation? (2020), (https://www.odi.org/blogs/16535-will-2020-be-decade-Africa-economic-transformation

[8] Ibid

[9] Mendez-Parra M, Raga S and Sommer L, Africa and the United Kingdom: challenges and opportunities to expand UK investments (2020), (https://www.odi.org/publications/16536-africa-and-united-kingdom-challenges-and-opportunities-expand-uk-investments)

[10] Ibid

[11] Ibid

[12] Ibid

[13] Ibid

[14] Te Velde DW and Pengelly T, A new initiative to enhance UK-Africa Economic Relations (2020), (http://tradeoutofpoverty.org/wp-content/uploads/2020/01/UK-African-Prosperity-Commission-2020-Concept-Note-1.pdf)

[15] Mendez-Parra M, Raga S and Sommer L, Africa and the United Kingdom: challenges and opportunities to expand UK investments (2020), (https://www.odi.org/publications/16536-africa-and-united-kingdom-challenges-and-opportunities-expand-uk-investments)