Infrastructure, manufacturing are ‘strategic investment sectors for Africa’

The continent “cannot achieve sustained economic growth and transformation” without diversifying sources of its economic growth both on the demand and supply sides of its economies, said UNCTAD’s ‘Economic Development in Africa Report 2014’ (110-page / 1.28 MB PDF).

According to the report, subtitled ‘Catalysing Investment for Transformative Growth in Africa’, African governments must ensure investment is allocated to “strategic or priority sectors, particularly infrastructure, agribusiness and manufacturing”.

The report urged governments to work with private sector partners to enhance “the role of investment in the growth process... particularly given the very low investment rates observed in Africa relative to investment requirements”.

The report said: “Recent evidence suggests that investment is a major driver of long-run growth in Africa and current-account deficit reversals, caused by investment booms which increase the production capacity for tradeable goods, are associated with better growth performance than those driven by consumption booms.”

UNCTAD said research studies indicate that if Africa is to make significant progress in reducing poverty, it will have to sustain average growth rates of about 7% and above in the medium to long term, which “will require investment rates of 25% of gross domestic product (GDP) and above”.

The report said: “Over the past two decades the average investment rate in Africa has hovered around 18%, which is well below the 25% threshold, and so it is not surprising that the continent has not achieved the 7% average growth rate required to make significant progress in reducing poverty.”

In infrastructure, it is estimated that countries in sub-Saharan Africa would need to invest $93 billion every year in order to meet development goals, UNCTAD said. “Actual investment on the subcontinent is $45bn, implying a funding gap of about $50bn per year”. The estimate does not include North Africa, “so adding this region will increase the infrastructure funding gap for the continent significantly”.

The report also highlighted “major challenges” faced by African governments in the short to medium term in closing funding gaps in the production sectors. “This task will become even more daunting when the post-2015 development agenda is adopted, because its implementation is likely to require additional investments and hence increase Africa’s investment needs,” the report said. “In this context, one of the issues African countries have to address as they seek to transform their economies is how to boost investment, particularly in infrastructure and in the production sectors of the economy.”

However, UNCTAD said while investment is important to the development process, it is “a necessary and not a sufficient condition for economic transformation and sustained growth”. If Africa’s governments want investment to “play an effective role in supporting economic transformation and development, the focus should not be solely on boosting the quantity of investment to levels deemed necessary to meet national development goals”, UNCTAD said. “Increasing investment (without) allocating it to sectors crucial to achieving Africa’s economic transformation agenda will be counterproductive.”

Africa must also examine how to improve the quality or productivity of investment, which is particularly important in the area of public investments “to avoid resource waste and achieve maximum impact”, UNCTAD said.

The report stressed the need for “policy coherence” at national and international levels for “strengthening linkages between local and foreign enterprises, stemming capital flight to release more resources for investment, using aid to stimulate investment and fostering international trade to boost investment”.