africa

Africa at a Fork in the Road: Taking Off or Disappointment Once Again?
others (2009) show that foreign aid lowers the risk of expropriation in host countries
and thereby facilitates FDI flows. However, aid cannot completely eliminate
this risk. This suggests that multilateral organizations such as the World Bank can
play an important role in facilitating FDI to SSA. Nevertheless, countries need to
take steps to reduce FDI risk, since aid cannot completely neutralize the adverse
effect of risk on FDI.
The results also suggest that regional economic cooperation may facilitate FDI to
SSA (Elbadawi and Mwega, 1997; Bartels and Crombrugghe, 2009). 14 There are
two reasons for this. First, regionalism allows countries to coordinate their policies.
For example, members of a regional bloc may require all participating countries to
curb corruption, implement sound and stable macroeconomic policies, and adopt
an “investor friendly” regulatory framework (such as by removing restrictions on
profit repatriation). Errant countries may face costly sanctions or be barred from
membership. Here, the threat of sanctions or losing access to the benefits that
accrue from regionalism serves as an incentive for countries to implement “good”
policies. Another advantage of regionalism is that it expands the size of the market,
and therefore makes the region more attractive for FDI (recall that market size is an
important determinant of FDI in non-extractive industries). The importance of large
markets for FDI in Africa has been documented in several surveys. 15
The market size advantage of regionalism is particularly important for Africa because
countries in the region are small in terms of population and income. For example, 15
out of the 48 countries in SSA have a population of less than two million and about
half of the countries have a population of less than six million. With regard to income,
about half of the countries have a GDP of less than US$3 billion. Indeed, the total
GDP of Sub-Saharan Africa in 2009 was US$956 billion, which was about equal to
the GDP of Mexico or about 61 percent of the GDP of Brazil (World Bank, 2011).
Furthermore, SSA’s GDP falls to about US$498 billion (i.e., about 30 percent of the
GDP of Brazil and about 57 percent the GDP of Mexico) when Nigeria and South
Africa are excluded. 16 Thus, given the small income and population size of African
countries, a large number of countries would have to be included in the regional
bloc in order to achieve a large enough market size to attract foreign investors.
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