Editor’s Note: This paper was written in partnership with CrossBoundary Group, an investment firm that focuses on emerging markets and has six offices in Africa.
Covid-19 is causing countries in Africa and other parts of the developing world to face multiple overlapping crises: the pandemic itself, a wider health crisis, a food security crisis and an economic crisis that is further exacerbated by low commodity prices and a decline in global travel and trade as well as financial flows.[_] As Africa grapples with this new reality and what it means for its economic outlook in the short, medium and long terms, many governments are already planning for economic recovery. In doing so, they seek not only to revive economic growth to be able to handle these overlapping crises but also to deliver economic transformation that can increase the resilience of economies to future economic shocks and of health and social welfare systems to future pandemics and natural catastrophes. And with Africa’s population forecast to rise from 1.3 billion today to 4 billion by 2100, pressure is fast rising to accelerate the economic development of the continent in such a way that it creates sufficient jobs and economic opportunity for the rapidly increasing youth population.[_]
Robust economic recovery plans need to focus on scaling up private investment that can create jobs, sustain livelihoods, widen the tax base to pay for social welfare, increase net exports and strengthen markets for the informal sector. Such investment needs to be facilitated and directed to the areas of greatest impact, for both short-term recovery and long-term transformation.
Covid-19 has reinforced the need for both short-term investment in critical sectors that may underpin economic and political security in many African economies (e.g. medical equipment manufacturing, delivery and logistics, and food), as well as long-term investment in sectors which may be more permanently disrupted by the changing global order (e.g. agro-processing and pharmaceutical drug manufacturing).
As a result of extensive market failures and investment risks across many African economies – which are likely to be exacerbated as a result of Covid-19 – the public sector’s role in creating an enabling environment to unlock investment is heightened. Job-creating and value-adding investment needs to be underpinned by effective governments that can facilitate investors and create the right conditions to manage risks. Governments play a key role in scaling up investment, whether through running a fair and competitive procurement process for infrastructure projects, ensuring the availability of suitable land and rural roads for agriculture investors, or coordinating a suitable regulatory framework for telecommunications firms. Further, governments also play a fundamental role in creating the right conditions to allow innovative businesses – including small ones – to flourish in conditions of crisis, enabling new sectors to grow as companies respond to the changing market needs.
Yet governments cannot do it alone. Securing the right type of investment at a sufficiently large scale requires the support of investors: development investors (such as development finance institutions and impact investors) and commercial investors with business models that invest in local value addition. Prior to Covid-19, development finance institutions and impact investors in Africa recorded strong returns. In 2018 there were $18.3 billion worth of assets under management on the continent and, of these, $12.9 billion were invested at competitive market rates of return.[_]
Returns on foreign direct investment in Africa have also been robust, averaging 6.5 per cent in 2018, compared to 6.2 per cent in Latin America and the Caribbean, 6.0 per cent in developed countries and 5.3 per cent in South Asia. On this metric, Africa is second only to East and South-East Asia.[_]
In order to maintain these levels of investment in the new Covid-19 reality–and to make investment more transformative and build economic resilience –coordination is needed. Development investors and international development partners should work together with governments on their national economic recovery responses, their development planning processes and their plans to develop key sectors such as agriculture, manufacturing and technology solutions.
This paper argues that to scale up private investment in a way that can support Africa’s economic recovery from Covid-19 and deliver economic transformation, these three players need to align their approaches and synchronise their efforts better. It suggests three ways to do this:
Governments, development partners and development investors should adopt a more targeted analytical framework to identify which sectors and subsectors to prioritise for development. This paper suggests such a framework. It prioritises sectors for both economic transformation and private returns. Such analysis should be conducted jointly among these three players.
Development finance institutions and development investors should proactively prioritise investment in firms within these sectors, even if returns may be lower than in other areas. While development finance must sometimes synchronise with purely commercial investor interests in order to leverage additional capital, we argue that development investment could maximise impact by better focusing on the most transformative sectors.
Support for both private-sector and public-sector investment facilitation should be substantially increased, especially in light of Covid-19, as a key feature of economic recovery plans. On the private-sector side this should be for locally present investment intermediaries that can lower transaction costs and reduce information asymmetries. On the public-sector side, facilitating low-capability governments to play their role in enabling private investment is equally essential. Facilitation of both private- and public sector investment has been under-supported across Africa and both are crucial to secure a step change that can lead to large-scale job creation and continent-wide economic transformation. Facilitation allows investment to be gently and adaptively steered towards the most impactful sectors without resorting to excessive top-down planning or overly centralised industrial policy. This paper sets out a framework for how to facilitate both the private sector and governments to scale up investment in transformative sectors. The implementation of this framework as part of Covid-19 recovery plans–including by development finance institutions, impact investors and development partners, beyond African governments themselves–would go a long way towards delivering Africa’s economic transformation.