1. Review of Investment Policy in the IGAD region and Its Implications for Improvement
Alemayehu Geda
Department of Economics
Addis Ababa University
and
Web: and
Presentation at Khartoum
Sept 2017
Addis Ababa ,Ethiopia

2. Outline of the Presentation
I. Introduction: Recent Growth in Africa & Investment Policy
II. Investment Policies and Performance in the IGAD Region
III. Investment Policy and the Challenge of Inclusive Growth, Job Creation and Poverty
IV. Conclusion and Policy Implications
Lessons from Successful East Asian and African Developmental States’ Investment Policy
Summary and Conclusion
Policy Implications

3. I. Introduction: Recent African Economic Growth and Investment Policies
Recently Africa saw impressive economic growth, averaging above 5% per annum for over a decade that remained until the year 2012/13.
This good economic performance is primarily propelled by global price surge for African commodities (reversal of Africa's terms of trade deterioration since 2003 –)
This in turn is driven by a demand surge for such commodities in the emerging South, especially in China.
It has also to do with the prudent policies pursue and increased investment observed in the continent lately.
This growth is significant, especially when compared to the decimal growth registered in the 1980s and 1990s .

4. Africa’s Recent Growth?

5. Africa’s Recent Growth….Cont’d

6. Africa’s Recent Growth?

7. Africa’s Recent Growth?

8. Africa’s Recent Growth (Across Regions)

9. Africa’s Recent Growth?
In terms of sources of growth (Expenditure side of GDP)growth is propelled by the growth of consumption, followed by growth of investment and public consumption.
The trend about the role of investment in GDP growth shows a continuously declining share of investment for growth: from 2.1% (or 54% of the 3.9% growth) in 2014 to 1% (27% of the 3.7% growth) in 2015 and 0.5% (29% of the 1.7% growth) in This is estimated to bounce back to 1.1% (or 34% of the 3.2% growth) in [see Next slide]
This declining (but reviving) contribution of investment to GDP points at the importance of appropriate and better investment policy in the region (NB. Investment has SS side effect, however)

10. Africa’s Recent Growth

11. Africa’s Recent Growth?
In addition, this impressive growth failed to bring about meaningful change on the level of poverty in the continent, where nearly half of the African population today are below poverty line. [discussed in section III]
This is generally related to the nature of this African growth which is characterized by lack of structural transformation (industrialization) and inclusiveness.
The latter is more powerful for poverty reduction [Discussed in section III below]
The importance of investment and hence the need to focus on an appropriate investment policy to bring about growth and shape the nature of that growth is crucial

12. Africa’s Recent Growth?
Investment, especially foreign, is important in IGAD because:
Countries in the IGAD region are characterized by a significant gap between I and S (about 10% of GDP)
Countries in the region are characterized by persistent and significant trade (BoP) deficit eg Eth TB 17% of GDP -5% is danger zone
Thus, Foreign investment (FDI) is helpful to bridge the gap, broaden the financial base of the economy & tackle FX shortage common in IGAD
Its contribution to job creation is crucial for poverty reduction
FDI offers host country firms the opportunity to learn through linkages and to accumulate technological capability through the transfer and diffusion of technology/ give access to market of source country too
Foreign firms, if rightly guided by a smart investment policy, are also important in creating linkages with local firms and bring about local firms development through sourcing; value chain inclusion etc

13. II. Country Investment Policies: Challenges and Opportunities
A. The General Format of the Presentation for Each IGAD Members
This is the format used for each member Country
Example: Kenya [ I will give here summary, pls Refer the paper for country details]
A. Investment Policy: What is it?
B. Investment Opportunities and Incentives : What are they?
C. Implementation & Monitoring Mechanisms and Performance
i). Implementation and Monitoring Mechanisms
ii). Performance and Challenges

14. Africa’s Recent Growth?
Illustration with Kenya
Policy Kenya’s Vision 2030 stipulate a 10 percent growth per annum.
This is aimed at achieving a middle income industrializing country status by 2030.
To achieve this, an investment policy aimed at expanding both foreign and domestic investment is needed. Kenya drafted this policy recently, in 2017.
The Kenya Investment Policy (KIP) envisages increasing private investment to 24 per cent of GDP by 2030 (less than 19% now).
It also aims to improve the overall ease of doing business and competitiveness
This policy is guided by six core principles: (i) openness and transparency, (ii) inclusivity, (iii) sustainable development, (iv) economic diversification, (v) domestic empowerment, and (vi) healthy global integration (GoK, 2017).
KIP aims at offering targeted incentives by aligning them to the country's development priorities
Implementation: the government has established a One Stop Centre
Performance: Kenya’s national savings rate, which stood at 11 per cent of GDP in total investment accounted for 24.7% of Kenya’s GDP in 2015 => high DD for FDI….But FDI 1.4 (about 2% GDP in 2015 cf to 4 &8 in Tanz & Ghana)
Similar analysis is done for each country [see paper]

15. Summary of Country Policies and Challenges

16. Summary of Country Policies and Challenges

17. Summary of Country Policies and Challenges

18. III. Challenges of Inclusive Growth, Job Creation and Poverty
A. Inclusive Growth and Investment Policy
AfDB (2014) "inclusive growth refers to economic growth which results in a wider access to sustainable socio- economic opportunities for the majority of people, while protecting the vulnerable, all being done in an environment of fairness, equality and political plurality".
In African context , the following broad and mutually reinforcing pillars underpin the concept of inclusive growth:
(i) improved agricultural productivity;
(ii) enhanced regional integration,
(iii) job creation, including improving skills, & support SMSEs
(iv) raising productivity and competitiveness;
(v) wider equal access to basic infrastructure & basic social services;
(vi) improved access to business opportunities, social protection and inclusion; and wider access to productive knowledge

19. Challenges of Inclusive Growth
Africa's recent high growth has not been matched with a commensurate reduction in unemployment and poverty.
It has rather been accompanied by inequality. The Gini index ranges from 30 percent in Ethiopia to 74 percent in Namibia.
The continent’s average Gini index for the same period being 45 percent (AfDB, 2014).
It brought limited progress in poverty reduction.
Thus, between 2000 and 2008, the proportion of people living on less than USD 1.25 a day has declined only slightly, from 57 percent to 48 percent (AfDB, 2014).
Micro level evidence in the IGAD supports this finding. In Djibouti hh data shows that although the overall level of poverty in Djibouti declined in the last decade, growth has not been inclusive and benefitted mainly those in the upper part of the income distribution (Kireyev, 2017). Same in Ethiopia (Geda & Addis 2015)

20. Challenges of Inclusive Growth
Three inter related determinants of the effectiveness of growth in reducing poverty through inclusive growth are usually cited in the literature:
a) generation of growth in the agriculture and rural sectors and SMEs;
b) enhancement of productive capacity, particularly in infrastructure;
c) and management of aid & related inflows (see eg. Pattillo et al, 2005)
Thus, investment policies in the IGAD region need to focus on triggering these factors.
In relation to this, it is also imperative to note that the inequality debate from a practical perspective &a robust inclusive-growth strategy needs to be both pro-labor and pro-business [they need not be contradictory]
to advocate a strengthening of both social inclusion and efficiency of markets through a stronger focus on institutions (WEF, 2017).
Moreover,
Lack of inclusive-growth/inequality generally associated with conflict in Africa. This makes states in the region/IGAD fragile and not conducive for investment (60% Africa is fragile)
Once in conflict It takes years to get back normal so work hard on that

22. Challenges of Inclusive Growth
There are various angels to look at the quality of growth. One of the best attributes for good quality growth is if it is a shared growth and achieved in a stable (non-inflationary and healthy fiscal and external balance) macroeconomic environment
Thus, one of the root causes of conflict and a fundamental problem for investment and sustained growth in the region is the possibility that growth could be accompanied by unequal distribution of income – inequality (both horizontal and vertical)
Thus, investment policies in the IGAD region need to be informed by such political-economy consideration for sustainability. To have an inclusive growth and associated investment policy, there is a need for political consensus among the political elite of each country in the region
The elite need to have a common social project – a project where these elites could peacefully and democratically compete to govern a country in question.
Without such political environment the sustainability of growth and attracting investment towards that end will be a daunting task

23. Challenges of Inclusive Growth
B. Investment Policy, Job Creation and Poverty Reduction
Inclusive growth and poverty reduction comes through investment in sectors with the capacity to employ more and where the poor is located.
Investment projects that bring about a rise in agricultural productivity and structural transformation of the economy are key factors for this.
Thus, investment policies in the region need to be directed towards attracting such investment projects
Investment in IGAD region is generally coming from developed/industrialized countries. This is changing recently to the emerging South (China, India and Turkey in particular).
These source countries seem to have a strategy of engaging with Africa. However, Africans do not seem to have such a strategy.
This implies that IGAD countries need to have a strategic engagement with source countries in relation to FDI and investment financing
This needs to be guided by the principles of using the current engagement and hence the incoming investment:
(i) for structural transformation and hence building up of a resilient and sustainably growing economy as well as
(ii) for job creation which is central for poverty reduction and social stability. The link between structural transformation, job creation and poverty reduction in Africa is very strong.

24. Challenges of Inclusive Growth
According to recent survey structural transformation is more powerful than average growth in per capita GDP to bring about meaningful impact job creation/& poverty reduction.
between 1981 and 2008 the percentage of SSA's poverty declined only by 4 percentage points.
At the same time, the comparable figure for East Asia, where growth was accompanied by structural transformation, was 63 percentage points! (from 77% to 14%).
Similarly, during the recent robust growth of Africa since 2001, poverty has declined only by 5 percentage points (see McKay, 2004; Abebe 2014Alemayehu, 2017a).
This contrasting result points at the importance of the nature of growth - ie. Whether the growth is inclusive and with structural transformation and job creation or not
Investment policy is one of the key policy instruments that could be used to determine the nature of growth and this was the case in East Asia (see below).

25. Challenges of Inclusive Growth
Understanding the link between the nature of investment and job creation in each IGAD member countries requires detailed country level study
the pattern can be illustrated by taking the recent investment boom in Ethiopia as a cases study
Net annual FDI inflows reached over a billion US$ per annum since In terms of distribution by sector, manufacturing leads the list (with 70.6 % share of total FDI inflows). This is followed by the Service (10.7%) and Agriculture (8.7%) sectors.
Given the fact that the manufacturing sector in Ethiopia comprises only 5% of GDP while the agriculture sector averages around 46% of the GDP, the importance of manufacturing or structural transformation for job creation and hence poverty reduction needs to be underscored (see Table below).
This is more apparent in investment projects that came from the emerging economies, such as those from China which is the dominant one

26. Challenges of Inclusive Growth

27. Challenges of Inclusive Growth
Regarding these emerging economies: The official definition based figure of Chinese FDI greatly understates the actual investment engagement of China in Ethiopia. This is the case both for Turkish as well as India's investment in Ethiopia and across IGAD too
Quasi-FDI /EXIM Bank finance- are much more important than FDI.
For instance, according to China global investment tracer (2016), Chinese investments and contracts in Ethiopia from to 2016 is estimated to worth about $17.62billion. A simple comparison of this to the Chinese official definition- based annual FDI flow of US$122 million in 2012, or its FDI stock of US$600 million show the point

28. Challenges of Inclusive Growth
The lesson from this snapshot picture of investment & job creation in Ethiopia is:
. First, both domestic and foreign investments are crucial for employment
However, given the significant youth unemployment their contribution is significantly below what is needed.
Second, generally employment creation is significant when the investment is carried in the manufacturing sector.
Investment policy in the region need to be biased to attract investment projects and investment financing that create more jobs and bring about structural transformation.
These are generally projects in the manufacturing sector and those that raise productivity in the agricultural sector
Third, and finally, investment financing from the emerging economies are generally more important than that of the FDI and thus need to be the focus of investment policy in the IGAD region.

29. Challenges of Inclusive Growth

30. IV. Conclusion and Policy Implications
A. Summary and conclusion

31. Africa’s Recent Growth?
In addition, IGAD saw EXIM bank credit becoming more important than traditional FDI.
Such investments can't be captured by the traditional definition of FDI as the investment is carried by the host country in question and may be referred as quasi-FDI.
It is imperative to attract, optimally manage and properly guide such investment with the objective of (a) bringing about structural transformation, (b) job-creation and poverty reduction, (c) cost- effectiveness and (d) avoiding strategic vulnerability
Finally, notwithstanding the general similarity of the economy of countries in the IGAD region, each country has its unique economic, political and social features. Thus, an investment policy in the IGAD region cannot be "one-fits-all' type of policy. It has to be tailor-made to suite its specific PE and other features

32. IV. Conclusion and Policy Implications
B. Policy Implications

33. Conclusion…Cont’d
 During the

34. Conclusion…Cont’d

35. Conclusion…Cont’d

36. The End
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