From Africa Recovery, Vol.17 #2 (July 2003), page 14

"By mobilizing private capital, Africa can promote the economic growth needed to reduce poverty," Mr. Zéphirin Diabré writes in the foreword to the new Africa Stock Markets Handbook, published by the UN Development Programme (UNDP) in April. Following a career in both business and government (including as minister of finance) in his native Burkina Faso, Mr. Diabré joined UNDP in 1999 as associate administrator, the agency's second-highest position. He spoke with Africa Recovery at the close of the 14-15 April "African Capital Markets Development Forum," organized by UNDP in collaboration with the New York Stock Exchange and the African Stock Exchanges Association.

It's time to act on investment

Africa needs more reforms, says UNDP's Zéphirin Diabré

The New Partnership for Africa's Development stresses resource mobilization, both domestic and external. Compared with previous African plans, the external component is not just foreign aid, but also an explicit focus on attracting foreign investment. What does this shift in emphasis reflect?

Diabré:: It reflects an adaptation to the prevailing trend in the world. It is also a way of drawing lessons from past experience. As President Wade has so eloquently said, history has never shown an example of a country which has been able to lift itself out of poverty by relying solely on foreign assistance. Official development assistance resources are very important because they are a way of expressing solidarity between rich and poor countries, and they can help fund public goods, from health to education to environmental protection, and so on. But for an economy to grow, it needs a different type of resource. The same way the private sector has been the engine of growth in developed countries, it's time now that we realize the private sector should be the engine of growth in our countries in Africa.

What are the challenges facing African countries in actually drawing in foreign investors? What do they have to do?

Diabré: We know the gospel, most of the time. Why does someone go and invest somewhere else? He goes because first he is seeking a certain return on his money. And second he is going because he feels comfortable that it's a place where it is secure to do business. I do believe that a high return is there in Africa. What is lacking, according to potential investors, is that the environment sometimes is not 100 per cent conducive to promoting the private sector. They don't always feel secure that their investment will be protected against political or social upheaval. They're not sure that the law will be applied properly if there is a dispute to settle. African leaders are, in a certain way, aware of this problem. It's time now for them to start acting.

You are from Burkina Faso. How do you convince investors to come when a neighbouring country like Côte d'Ivoire, once considered very stable, is suddenly thrown into conflict?

Diabré: This is why we need to put in place in these African countries some sustainable institutions that can guarantee long-term stability. I definitely agree that what is happening in Côte d'Ivoire is a strong deterrent for anybody to come and put his money in Africa today.

Recently, there has been more discussion of using stock markets in Africa to attract portfolio investments. In light of the financial crises in Asia, Argentina and other countries in recent years, are there more risks for Africa in bringing in such short-term capital than in trying to attract longer-term foreign direct investment (FDI)?

Diabré: It depends on what side you're looking from. From the investor's perspective, and contrary to what some people believe for Africa, FDI is seen as more risky than portfolio investment, for one simple reason. FDI is a long-term commitment, and a fairly physical one. An investor doesn't always have a clear exit strategy in case of trouble. But portfolio investment doesn't translate into a physical presence or a long-term commitment. You can exit any time, by just selling your stocks and bonds. So for somebody in a developed country who is not willing to take the risk of being physically present, portfolio investment is an appropriate way to do business.

Of course, for the country, there is the risk of a sudden withdrawal [of capital] that can make the bubble collapse. But that is part of economics. It shouldn't be a deterrent. Most of the time such a withdrawal of investors is due to the absence of proper regulation of the financial system. The main issue is for a country to be able to attract the resources and manage them appropriately for its own economic growth.

There have been studies indicating that increased flows of official development assistance may encourage greater foreign investment.

Diabré: Definitely. Some things cannot be done by the private sector. The private sector likes to come to places where certain parameters have been put in place already. After the Second World War, the Marshall Plan provided that for many European countries, before the private sector would step in. I will venture to make the same comparison for Africa.

Some proponents of foreign investment seem to believe that its benefits will "trickle down," and in that way reduce poverty and spur development. Is that enough, or does something else need to be done?

Diabré: Attracting foreign investment can boost the growth of the economy. But that by itself is not sufficient to be able to alleviate poverty. You have to take appropriate measures to make sure that all segments of the population are benefiting. And that is where the role of government is critical, to ensure that there is good distribution of the wealth that has been created.

And the mobilization of domestic capital as well ...

Diabré: Definitely. That's very important too. Actually, foreign investors basically come when domestic ones already are active. If the citizens of a given country are themselves not confident enough to invest in their own country, why ask somebody from outside to come and do it for them?

What do African public sectors need to do to encourage investment?

Diabré: They have to be more efficient, and make sure that the regulation of the economy is smooth and well managed. They have to fight corruption, because that is one of the reasons why there is the flight of capital. The issue is the functioning of the state and those key mechanisms that an economy needs: a banking sector which is well regulated, a judicial system which is applying the law appropriately, some basic infrastructure - the whole set of parameters which a modern economy needs to be able to operate. These are areas in which sometimes states in Africa are not able to deliver, and in which we need deeper and stronger reform.

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