• Saturday, July 13, 2024
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Study shows FDI, trade can bolster Africa’s $3trn economy

Foreign investment is not a magic wand

A study by the African Export-Import Bank (Afreximbank) has shown that foreign direct investment (FDI) and intra-African trade have the capacity to stimulate the continent’s $3 trillion economy.

The study, which employed a sample of 54 African nations between 2004 and 2022 using a statistical method known as system generalised method, finds that intra-African trade increases overall economic growth with an increasing flow of FDI into an economy.

The study further finds that FDI inflows have a positive effect on intra-African trade and that intra-African trade has a direct positive effect on economic growth.

It argues that there is an overall economic growth when the level of FDI increases in an economy.

The study, published in Afreximbank’s Policy Research Working Papers and released in March 2024, contends that Africa’s development can accelerate when roadblocks to FDI and trade are removed.

“With the growth of intraAfrican trade, there is a steadily increasing complementarity between FDI and intra-African trade,” it says.

“Thus, intra-African trade and FDI are complementary in the determination of economic growth.”

Results in the research reveal that intra-African trade is a major driver of economic growth as it supports the trade-growth hypothesis.

By implication, dimensions of a

country’s intra-African trade “are robust in achieving sustainable economic growth.”

Africa is still lagging most of its peers in intra-continental trade and exports. The UN Trade and Development (UNCTAD) says that intra-African exports were 16.6 percent of total exports in 2017, compared with 68.1 percent in Europe, 59.4 percent in Asia, and 55 percent in America. It only bettered Oceania’s 7 percent.

Intra-African trade was around 2 percent during the period 2015–17, AZA Finance reported.

But Africa has taken a major trade step to close this gap through the African Continental Free Trade Area (AfCFTA). The agreement eyes a single market for goods and services across 54 countries, while allowing for the free movement of business persons and investments across the continent.

It will also create a unified customs union to streamline trade on the continent.

It is expected that Africa’s exports to the rest of the world will go up by 32 percent by 2035, while intra-African exports can grow by 109 percent, led by manufactured goods, if all countries are serious with the AfCFTA.

About 50 million people could also escape extreme poverty by 2035, while real income could rise by nine percent if all the conditions are met by the nations.

The Afreximbank research supports these projections, surmising that countries that increase financial sector development are able to attract regional trade.

“Our results agree that countries that invest more money in productivity

are able to improve trade,” it argues.

It finds that industry employment has a positive effect on intra-African nations as nations that open their economies for more people to work in the industrial sector are able to enforce more regional trade.

The FDI in Africa stood at $80 billion in 2021 but dropped to $45 billion in 2022, according to Statista. It was $48 billion in 2023, according to UNCTAD. The FDI in Europe was $340 billion in 2023 as against $382 billion the previous year. In Asia, it was $621 billion in 2023. Oceania’s FDI was $467 billion in 2023.

“A country could receive influx of FDI but may not channel those investments into productive sectors of the economy, and thus, dampen the overall effect on economic growth,” the Afreximbank report warns.