Good governance key to attract U.S investments to Africa

Semahagn G Abebe (PhD)

President Obama has convened a three-day U.S.-Africa Leaders Summit. The Summit aimed at strengthening ties between the United States and Africa, which is one of the world’s most dynamic and fastest growing regions. On August 5, the Summit deliberated on the opportunities and challenges of United States Foreign Direct Investment (FDI). Many of the CEOs and board chairs from different US big firms expressed their optimism to expand their presence in the continent. Nevertheless, the discussions did not reflect the full extent of determinants of investment in Africa. One of the recent focuses of the United States in Africa seems the alarming presence of China and other emerging economies in African economies. One of the reasons African governments favour Chinese investment over others from western countries is due to Chinese long-standing non-interference policy that overlooks the human rights violations and corruption in the region. The United States may not have the privilege to apply the ‘non-interference’ policy pursued by China. The democratic and accountable government structure in the U.S, the laws governing multinational companies as well as the scrutiny of American investments by civil society groups obliges firms to pay close attention to the governance structure in sub-Saharan Africa.

The key factor that determines the United States investment in Africa is closely tied with issues of governance in Africa. In spite of the substantial increment of attracting FDI to sub-Saharan Africa, compared to the flow of capital to other destinations such as to Asia and South America, the flow of FDI to the region remains low. There are various determinant factors for the limited flow of FDI to the African region. Particularly, the perception that Africa is characterized by war and social unrest made investors to consider the region the most risky environment for doing business. The region’s political instability and its bad international image are mainly linked to the high incidence of wars, religious and ethnic conflicts.  Furthermore, the reason why African countries failed to translate the vast resources to development include weak government institutions, lack of political will to fight corruption, absence of rule of law, transparency and accountability in government institutions.

The lack of good governance not only resulted in conflicts that devastated the stability and peace of the region but also due to the lack of transparency of the policies of many African countries, it is often difficult to sort-out what policies and rules are applicable in the areas of investment. Particularly in many resource-rich countries in Africa, the lack of accountability and transparency in the management of the revenues exacerbates poor governance and often fuels cycles of corruption, conflict, and poverty. Institutions in sub-Saharan Africa are largely plagued by corruption because they are weak and not independent from political interferences. The lack of rule of law and efficient judicial institutions in the region have highly undermined prospects for the flow of FDI to Africa, as investors closely monitor the availability of a system that guarantees protection of rights of property. In most cases, Investors prefer to make investments in countries with viable legal and judicial systems that guarantee the security of their investments.  In view of the diverse issues of governance in Africa, improving the quality of governance is thus vital to attract significant portion of American FDI to the region.

In light of the outstanding governance issues that continue to terrify United States firms from investing in Africa, the mere rhetoric on business opportunities in sub-Saharan Africa unlikely to convince American firms embark on flowing their capital and technology to Africa. It is rather high time for Barack Obama to execute what he promised in his African policy speech in Ghana in 2008. During his speech, President Obama reiterated that Africa needs ‘big institutions and not big men.’ The United States thus has the historical and political responsibility to ensure rule of law, democratic transformation, protection of human rights, accountable and transparent system of government in Africa. It is only when democratic governance is firmly rooted in the soils of Africa that the long-term economic and strategic interests of the United States are protected.