Fair and ethical investments are key to Africa’s economic transformation

The Ahafo mine, in dense forest in central Ghana, is operated by Newmont Gold Ghana Limited (NGGL), a subsidiary of US-based Newmont Mining Corporation. When I visited the area in February 2014, the communities that host the mine looked very small in comparison with the scale of NGGL’s revenues: US$528 million in 2009, about 10% of Ghana’s total exports and 4.5% of its total foreign direct investment.

Newmont’s position in Ghana demonstrates the key economic role that foreign investments play in Africa – including investments from US companies. It is also an example of the remarkable profits that foreign investors can make.

Despite the investments pouring into Africa, however, poverty is widespread, education and health infrastructure is inadequate, and millions of children go to bed hungry. Why such a disconnect? One reason is that many investments are not made in a transparent and accountable manner. As a result African governments lose huge sums of money.

Making investments fair, ethical and mutually beneficial ought to be at the heart of discussions as 50 Africa leaders gather in Washington D.C at the historic U.S.–Africa Leaders Summit on August 4-6, 2014. The summit –the first time a sitting U.S. president has invited so many African heads of state and government – offers an opportunity to lay down some ground rules for ethical investment that benefits the greatest number of Africans.

Africa has some of the fastest-growing economies in the world, with an average growth rate of 5% per year. It also has abundant natural and human resources, making it a region with tremendous investment opportunities. Today, foreign direct investment (FDI) is the largest source of private capital in Africa. The continent’s share of FDI projects – though it decreased from 774 in 2012 to 750 in 2013 – has reached the highest level in a decade. It now depends far less on aid than it did a decade ago.

Many of these investments are going into sectors that are not necessarily improving Africans’ livelihoods, however. The oil, gas and mining sectors tend to operate in enclaves that have weak links to the local economy. The other part of the story is that Africa too often gets unethical investments that stifle efforts to foster inclusive growth, reduce poverty, and enhance food and nutrition security.

For example, Africa loses an estimated 5.7% of its GDP annually in illicit financial flows, principally because of tax evasion. The 2013 Africa Progress Report, Equity in Extractives: Stewarding Africa’s natural resources for all, reveals how these practices deny governments in resource-rich African regions billions of dollars to support development.

Agriculture and fisheries suffer from chronic underinvestment and from unethical investment. The plunder of fisheries and forestry resources as a result of corrupt practices and unscrupulous investment activities causes West Africa to lose an estimated US$1.3 billion, according to this year’s Africa Progress Report, Grain, Fish, Money: Financing Africa’s Green and Blue Revolutions. Another US$17 billion is lost through illicit logging activities. Kofi Annan, former UN Secretary General and chair of the Africa Progress Panel, adds that the “natural resource plunder is organized theft disguised as commerce”.

Africa needs to transform its economy so that growth benefits all and reduces poverty and inequality. Investment is a vital ingredient of such a transformation – but only if they are transparent and fair.

Ethical investments in agriculture are particularly important, because agriculture’s potential is huge. With two-thirds of Africans depending on farming, boosting agriculture is a highly effective way to reduce poverty and inequality. “We have to significantly boost our agriculture and fisheries, which together provide livelihoods for roughly two-thirds of all Africans,” says Mr. Annan.

Photo credit: John Rae

Related articles