Published in Eastern Africa magazine, December 2005

Who does foreign investment help in Africa?

The impact from foreign investments in Africa in general and in East Africa in particular has been question lately. In a new report from the UN agency UNCTAD – UN Conference on Trade and Development – the conclusion is that foreign direct investments (FDIs) have been to little help to African countries. The benefits for anyone but the investors have been few, says the report. Earlier this year a report from the University of Dar es Salaam concluded that globalization - were a higher degree of foreign investments is one important component - has increased income inequality as well as created more insecure working conditions in Tanzania.

Except from the argument that one may focus more on future job creation than preservation of the jobs of today and that the main problem is why those who lose their jobs can´t get any new ones one should ask why do African countries, in this case the East African countries, need foreign investments, or, at least to say, are supposed to need foreign investments.

One of the most common explanations is the scarcity of domestic capital in the East African countries. If there is not enough supply of capital within the country, necessary and desirable investments must be financed by foreign capital.

But why is there a scarcity of capital in the East African Countries? Is there really a scarcity of capital at all? The answer to the latter question is No!

There are a lot of domestic assets and therefore a lot of domestic capital in the African countries, the East African countries included. According to the Peruvian economist Hernando de Soto, an esteemed economist with a special interest for developing countries, the present value of the total domestic capital within the third world as a whole is bigger than the total inflow from foreign investments over the past twenty years!

But, there is a lack of policy to make this capital available for investments. This problem is probably greater in Africa than in other developing countries in other parts of the world. The capital is locked in real estate assets - mainly houses – and since there are no appropriate rules of property rights the owners of these assets cannot use the assets as collateral when applying for loans. The capital is idle, or dead as de Soto himself choose to defined it. Because without any collateral there is no access to bank loans. And no access to bank loans means no money for new investments.

This problem refers mainly to the vast informal sector in many African countries, East Africa included, where the assets are not registered by any authorities, and therefore have no formal owners. According to a recent study by de Soto´s institute the total value of informal assets in Tanzania amount to $29billions. In 2003 foreign direct investment (FDIs) to Tanzania amounted to about $200 millions. The total inward stock of FDIs in Tanzania amounted the same year $2,5 billions – less than a tenth of the value of domestic informal assets. Within the country itself there is much more capital than capital supplied by FDIs - the same FDIs that are supposed to be a condition for the country´s development. But due to the policy in the country – mainly lack of property rights rules – the domestic capital is not available for investments.

So don´t blame foreign investors! Blame the domestic policy that have done many African countries depended on foreign capital! With a more appropriate policy these countries would be able to finance many urgent investments themselves. The capital is already there. Lets make it available for business creation! This would hopefully also mean new jobs available for the workers who over the past years lost their jobs due to necessary rationalizations. And foreign investments could then be looked upon in the same way as they are looked upon in developed countries; as a complement and a natural element in a modern economy – not as a condition for development.