Economic Development in Africa 2005

Rethinking the Role of Foreign Direct Investment

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Africa’s particular combination of geographical, historical and structural features has traditionally attracted Foreign Direct Investment into enclaves of export-oriented primary production with limited linkages to the rest of the economy. This situation has not changed much in recent years and has contributed to undermining a self-sustaining and dynamic investment process. This Report calls for a rethinking of the one-sided emphasis on attracting FDI and its replacement with a more balanced and more strategic approach tailored to African socio-economic conditions and development challenges.

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In order to achieve the Millennium Development Goals by 2015, Africa needs to grow at an annual rate of at least 7 per cent. While several countries have posted such growth rates since the mid-1990s, these results have been episodic, with few being sustained over long periods, and remain closely bound to changes in external conditions. Since the end of 2003, these changes have included a favourable rise in commodity prices, in particular for fuels and minerals. But dependence on commodities for sustained growth has proven to be a mixed blessing in the past, in part because commodity booms tend to have been shorter than subsequent slumps, and because such booms, particularly when improperly managed, have had a distorting effect on other parts of the productive economy. Accordingly, and even if commodity markets can offer African producers a more favourable future, policies are still needed to address structural constraints that have hindered diversification of the economic base.

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