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Sep 30, 2010

Infrastructure deficit deters foreign investment in Africa

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The World Bank African chief economist Shantanyanan Devarajan speaks about possible economic challenges in South Africa
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Economic growth in Africa is expected to reach 6% in 2011, but the continent continues to battle to attract foreign investment, a World Bank economist said on Thursday.

Africa only draws about half the private foreign investment that China attracts, at around 15% of the continent's gross domestic product (GDP) growth.

Speaking at a lecture at the University of the Witwatersrand in Johannesburg, World Bank African chief economist Shantanyanan Devarajan said that this was mainly as a result of infrastructure and educational deficits playing a deterring role.

Interestingly, he pointed out that these deficits were rather being brought on by governmental failures than a lack of capital.

Nevertheless, Devarajan said that the continent had made some "impressive" strides in the past two decades as far as policy reform goes.

"Overall, progressive political decisions over certain economic policies that previously hindered growth had significantly improved across the continent."

In 1995, 13 African countries showed inflation rates above 20%, while only two countries showed inflation rates over 20% by 2007.

The progressive policy changes had led to growth accelerating to around 6%, alleviating poverty at around 1% a year for more than a decade, faster than the poverty decline in India.

Devarajan emphasised that the growth also took place outside the traditional oil, resources and commodities sectors.

With the onslaught of the economic recession, however, the continent's growth rate dropped to 1% again, but most African governments continued to follow sound economic policies, which catapulted the continent back to strong economic growth as the world economy started to recover. Africa is set to show GDP growth of around 5% for 2010.

Yet, the continent battles with certain developmental deficits and attracting foreign investment.

Devarajan said that greater African integration through cooperation, rather than trade, could greatly assist the continent in relieving some of its infrastructure challenges.

"Infrastructure, specifically in areas such as power, water, and transport, requires the benefit of economies of scale. This benefit could be leveraged from greater cooperation between the different countries in Africa. The problem is politics, and nations running scared of losing their sovereignty, so when push comes to shove, nobody wants to cooperate."

Further, Devarajan showed that progress had been made in attendance rates at schools, with an average of 80% of pupils now enrolled for primary education across the continent. However, a study done by the World Bank showed that 50% of grade three graduates could not write a complete sentence in their mother language.

The study further showed that 20% of the time teachers were not present at schools, while of those that were present, only 18% were actually busy teaching pupils.

These statistics emphasised Devarajan's earlier point, that these developmental deficits could easily be overcome by some fundamental intervention rather than increased capital investment.

He recommended several changes that could revolutionise the way most African countries and their citizen's operate, including the spread of information, especially relating to funding and where the funding goes, transferring the power to the client such as the communities, and implementing incentive structures that would motivate production.

Devarajan said that Africa was at the brink of a growth offtake, similar to where China found itself 30 years ago, or India, 20 years ago. Nevertheless, it still needed to work on some of the developmental challenges that the continent was faced with and pull increased foreign investment going into the future.

SA STORY

Meanwhile, South Africa has shown an average growth of around 3% over the last decade.

Finance Minister Pravin Gordhan recently declared the country's ambitions of 6% to 7% sustainable growth over the next 20 to 30 years, to eradicate poverty and grow employment rates.

While South Africa has been known as a relatively free economy, certain calls had recently been made for increased State intervention in the country's economic policies, mainly from the side of labour unions. The country has also been plagued with continuous industrial action in recent times.

Devarajan said that foreign investors were always looking for economic and political stability, paired with a competitive labour environment and added that these recent issues could be seen as a deterrent for foreign investment into the country.

 

Edited by: Mariaan Webb
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