Transcript Trade Capacity Building in Sub-Saharan Africa: Impact and

Private Capital Flows to Africa: Opportunities,
Risks and Way Forward
Patrick N. Osakwe
UN Economic Commission for Africa
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I. Background
 The most important challenge facing Africa is how to
eradicate poverty and extreme hunger
 Africa is still the region with the highest percentage of
people in extreme poverty and deprivation
 The 2007 MDG Report indicates that it is the only
region at risk of not meeting any of the MDGs.
 Mobilization of finance is crucial to reversing the current
trend and increasing the likelihood of African countries
meeting the MDGs by the target date.
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 World leaders recognized the importance of finance in
meeting the MDGs when they adopted the Monterrey
Consensus in 2002
 The mobilization of private capital flows is one of the six core
areas of the Monterrey Consensus.
 Mobilization of domestic resources for development
 Mobilization of international financial resources (Private Capital Flows)
 Promoting international trade as an engine of development
 Increasing international financial and technical cooperation for
development
 External debt
 Systemic issues
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II. Forms of Private Capital Flows
 Equity Flows

FDI (equity stake with control)

Portfolio investment (equity stake without control)
 Debt Flows

Bank loans

Bonds
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Trends in Private Capital Flows (US$ billion)
1998
2000
2005
Developing
countries
193.4
187
551.4
East Asia &
the Pacific
6.5
28.8
169.7
Middle East &
North Africa
9.2
3.9
24.3
Sub-Saharan
Africa
13.9
10.2
29.6
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Private Capital Flows to North Africa (billion $)
1990
2005
Net FDI Inflows
0.96
11.2
Portfolio Equity
0.01
0.80
Net Debt Flows
-0.52
3.14
Worker’s Remittances
7.25
13.97
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III. Theoretical Arguments for Capital Mobility
 Lifts the constraints on domestic investment
imposed by low national savings
 Leads to more efficient allocation of resources
 Allows countries to smooth consumption over time
 Borrow during a negative shock and repay during a positive shock
thereby making consumption less volatile than income
 In practice investors are reluctant to lend to developing countries
experiencing negative shocks (case of Chile in 1998)
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 Permits domestic residents to diversify risks through holding
diversified international portfolios
 Risks are less correlated between countries than within countries
 Provides access to intellectual property
 Technological know-how
 Managerial expertise
 Access to foreign markets
 It subjects countries to the discipline of the international
market
 Fear of capital flow reversal is often a stimulus to more responsible
economic policies
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IV. Concerns about Capital Mobility
 Capital mobility increases macroeconomic volatility and this
has negative consequences for an economy
 Exposes countries to new shocks (external)
 Can magnify the effect of domestic shocks
 It increases vulnerability to large and rapid reversals of
capital flows (often leading to financial crises)
 These crises are very costly. In the case of East Asia it led to losses of
more than 10 percent of GDP.
 Large inflows resulting from capital mobility also contribute to
real exchange rate appreciation and loss of competitiveness
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V. The Evidence
 The key question here is whether the benefits of capital
mobility offset the costs? The evidence is mixed
 Several studies found no evidence that capital account
liberalization leads to faster growth (Rodrik 1998; Kraay 1998;
Edison 2002; Prasad et al 2003)
 Few studies found that liberalization had a positive impact (Quinn
1997)
 There are several messages from these results
 If there is a relationship between capital mobility and growth, it is
neither strong nor robust
 The composition of capital flows as well as domestic economic
conditions may be important in determining whether or not capital
mobility has a positive impact on an economy.
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VI. Managing Capital Flows: The Way Forward
 The benefits of capital mobility are not automatic.
 They accrue to countries that have taken appropriate steps to
exploit them
 The key policy challenge facing African countries is
how to maximize the benefits and minimize the
costs.
 This requires several actions at the national level
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 Adopting a gradual approach to capital account
liberalization. This gives room for
 Development of financial infrastructure
 Complementary investments in education and physical
infrastructure to increase absorptive capacity of flows
 Paying more attention to the composition of capital
flows and ensuring that they go to sectors with high
potential for employment creation
 Putting in place policies to limit vulnerability to
financial crises
 Sound Macroeconomic Policies
 Protection of property rights and the rule of law
 Political stability
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 Managing capital flows to avoid risk of real
exchange rate appreciations that lead to loss
of competitiveness
 Adoption of exchange rate regimes that give room for
dealing with capital flows
 Use of selective capital controls when necessary
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THANK
YOU
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