Recent Statistical evidence is consistent that overall economic performance in Africa is on a positive trend, as a result of growing improvements in the policy and governance environment. Africa needs sustained growth rates of about 7%-8% to make a visible impact on poverty – the most intractable problem facing the African continent. The achievement of this desired growth rate requires a much higher level of investment, increased intra-Africa and external trade flows, and a more efficient use of resources. Trade and investment are thus two vital complementary elements in any credible strategy to accelerate Africa’s development, enhance the rate of economic growth, and sustain progress towards the eventual eradication of poverty.

• Investment

The desired growth rate required in Africa needs a sustained high rate of investment in excess of 30%. Domestic savings and foreign direct investment (FDI) will need to play a more prominent role in the financing of the investment requirements. Relative to official development assistance (ODA), FDI offers a more convenient resource base and brings to a country new technologies; new high-value products; more efficient production processes; more effective management techniques; and access to important global export markets. The United Nations Conference on Trade and Development (UNCTAD) has estimated that about two-thirds of world trade flows through multi-national corporations, which control a sizeable flow of FDI. Quite unfortunately, Africa is not a significant beneficiary of FDI - about 1.7% of global FDI inflows in 2002. On average, Africa’s share of developing countries’ inflows has suffered more than 50% reduction since the mid 1980s (from 12% in 1985 to 5% in 2002). At the same time, the share of Asia in world trade is much higher and has been increasing over the years (from 17.9% of world exports in 1980 to about 23% in 2002; from about 13.1% of world imports in 1980 to about 20.8% in 2002). Asian countries have seen their outward FDI stock grow rapidly from about 2% in 1990 to about 9% in 2001.

Sustaining high investment rates is a monumental challenge for the African continent, given that gross domestic investment as a proportion of gross domestic product is below 20%. Boosting investment requires stable and responsive macro and sectoral policies and programs, good governance, a sizeable market for investments requiring appreciable economies of scale, enhancement of international competitiveness through improved infrastructure, better information on the continent, enhanced public-private sector partnership for more efficient use of resources, a propitious policy environment for private sector development, deregulation of domestic markets, development and maintenance of adequate legal, judicial and regulatory frameworks and reasonable reduction of trade barriers, among other factors. Although there is appreciable progress in meeting these requirements in most African countries, a great deal remains to be done.

• Trade

Trade is vital for African countries, as export earnings are essentially the most important form of external resource inflows. The continent’s share of world trade has not only declined in absolute terms, but also by product mix. For instance, Africa was once the most important producer of copper alloys, accounting for about 32% of all Organization for Economic Cooperation and Development (OECD) imports during the period 1962-1964. By the first half of the 1990s, specifically 1991-1993, the continent’s share had plummeted by 22 percentage points to about 10%. This has translated into significant trade losses for the continent, estimated at about US$11.0 billion annually.

The Africa Growth and Opportunity Act of the U.S. Administration, which stresses trade and private sector investment, is an example, among other promising bilateral interventions, that recognizes the importance of trade and investment for Africa’s future.

In contrast, OECD official development assistance received by Africa in 1991 was $10.9 billion. Current statistics show that Africa’s share in world trade has been falling since 1980 (from about 6.0% of world exports in 1980 to 2.0% in 2002; from about 4.6% of world imports in 1980 to about 2.1% in 2002).

What is therefore obvious is that, like investment flows, Africa’s trade performance is grossly inadequate. The continent’s unsatisfactory performance in trade can be attributed to a number of factors, prominent among which are:

• Protectionism in the markets of the industrialized countries. This is being compounded in the OECD countries by the strong growth of regionalism, which has had severe impact on African exports competing with those from countries that are members of regional arrangements with free-trade access. Regional trade arrangements in the OECD include the European Union (EU), the European Free Trade Association (EFTA), and the North American Free Trade Areas (NAFTA);
  
• Export subsidies, especially farm subsidies by industrialized countries;
• Inappropriate domestic policies;
• Uncoordinated and inadequately sequenced trade liberalization programs not accompanied by requisite policy measures and programs;
• Policies constraining private sector development;
• High transport costs ;
• Poor infrastructure – electricity, water supplies, telecommunications, transportation networks and facilities, etc.;
• Bureaucratic red tape and high transaction costs;
• Political instability;
• Inadequate supply response capacity;
• Inadequate access to trade information and weak negotiations skills of private and private sector officials in charge of trade policy;
• Lack of integration of trade and investment policies into countries’ overall development policies and programs; and
• Insufficient regional cooperation and integration.

Lessons of development experience over the last thirty years encouragingly point to potential opportunities and benefits for developing countries with liberalized economies. Open and liberal trade regimes have placed a number of developing countries at vantage positions to gain access to newer, more appropriate technologies, while financial liberalization has increased their access to international private capital, permitting them to achieve much higher rates of investment and growth.

Given the compelling need to increase investment, African countries are making greater efforts to raise domestic savings rates and mobilize private capital. They are making progress towards meeting the aforementioned trade and investment-retarding challenges through appropriate policies. The policies for strengthening domestic savings include pursuing macroeconomic stability through appropriate, market-determined interest and exchange rates, prudent fiscal policies, and reform of domestic financial systems. The perceived riskiness of investment on the continent is being addressed through a number of reforms and programs including:

(i) legal reforms to simplify commercial jurisprudence and improve the functioning of the courts, enforce contracts fairly and impartially, and protect property rights;
(ii) regulatory reforms that provide an efficient structure of incentives;

(iii) targeted government spending, which ensures that the necessary human capital and physical infrastructure are created and extended; and

• The Need for Commensurate Response

• Improve the quality of macroeconomic policy framework
• Reform public sectors and streamline bureaucratic procedures to facilitate the growth and development of the private sector in the capital cities, as well as in urban and rural areas
• Accelerate the process of regional integration
• Strengthen trade negotiations capacity
• Design and effectively implement export-oriented development strategies in an environmentally-friendly manner
• Pursue reasonably liberalized trade policies
• Design and implement optimal tax policies to support private sector investment and promote public-private sector partnerships
• Develop financial systems and instruments for export growth and diversification
• Modernize and diversify productive sectors to improve supply response capacities
• Promote greater efficiency and productivity among local producers
• Strengthen international competitiveness of national economies
• Undertake better analysis of current and prospective export markets
  Improve transport, tele-communications, power supply and related infrastructure.