NEWS: Why Africa Needs Foreign Investors

Critics of capitalism and advocates of traditional development aid concepts fear that foreign investment brings turbo-capitalism. Why they are wrong.

Last year the aid organization “Brot für die Welt” published a study called “Private Sector Cooperation for Development”? In it, author Frauke Banse from the University of Kassel criticizes the paradigm shift in development policy initiated by the G20’s Compact with Africa (CwA) initiative.

Her message is that it is wrong and dangerous to focus on promoting private investment. This could trigger the privatization of public infrastructure and social security systems, as well as the end of projects that are “not marketable“. She also warns that foreign investors could quickly withdraw their capital and leave a shambles.

The political scientist argues for limiting “the dependence on foreign direct investment and financial investors” and their “influence on political processes in Africa”. What is needed, she says, is to “abandon the paradigm of financing development projects through the financial markets” and stop relying on foreign direct investment as the main driving force.

Great opportunities, manageable risks

All this sounds as if the paradigm shift in development policy is preparing the ground for turbo-capitalism. However, ideologically shaped cirticism of capitalism and sweeping judgments seem to obscure the picture here. After all, the mobilization of capital offers great opportunities, while the risks mentioned can be minimized with smart concepts. In detail:

First, infrastructure development. Many African countries lack capital, while it is available en masse in the global north – at low interest rates. If some of it can be mobilized for Africa’s development, this can trigger a sustainable growth spurt.

Second, State ownership. Investing does not mean privatizing! In our book AfrikaFirst, we propose infrastructure bonds, with which African states borrow money on the global capital market. Infrastructure then remains state property, and that is important to promote inclusive growth.

Third, good debt. The low interest rates in the global North are an opportunity to lend our creditworthiness to our reform partners in Africa – with interest rate guarantees. This would allow them to raise capital on favorable terms (while minimizing the risk of investors bailing out on bad news and shaking the financial system).

Fourth, long-term commitment. Beyond that, the risk of the economy and financial markets becoming the plaything of investors can also be reduced – for example, with funds in which state development banks act as initiators and anchor investors or guarantors.

Fifth, good investors. It is particularly important to note in this context that not all investors are short-term profit maximizers. On the contrary, the proportion of long-term investors who take ESG criteria into account or even explicitly focus on “impact” is growing rapidly – especially in Europe. They could make a decisive contribution to jump-starting Africa – as bridge-builders between the European capital markets and the local economy.

Building up the capital market, promoting the social market economy

But it is indeed important – and in this respect the Bread for the World study puts its finger in the wound – that foreign donors do not invest exclusively in infrastructure bonds and development funds.

African governments must therefore lead or be closely involved in financing projects. This is crucial to mobilize domestic capital together with development banks and private financial institutions on the ground. To this end, it is also important to establish and expand capital markets.

Incidentally, turbo-capitalism cannot be prevented by placing foreign companies and investors under blanket suspicion, but rather through intelligent market regulation and standards in the spirit of the social market economy. Several African reform states have made great progress in this area in recent years – and now need capital to continue on this path.

Europe can and should support it. Also in its own interest. Because together, we can build a flourishing economic area, drive forward the global energy transition and succeed in systems competition with Chinese digital Leninism.