A study into Africa’s economy, which is valued at $3 trillion has revealed that foreign direct investment (FDI) and intra-African trade are valuable practices that have the capacity to propel stimulation in the continent’s economy.
The study, undertaken by the African Export-Import Bank (Afreximbank) and published in Afreximbank’s Policy Research Working Papers was released in March 2024.
According to information made available, it employed a sample of 54 African nations between 2004 and 2022 using a statistical method known as system generalised method.
The research led to a discovery that intra-African trade increases overall economic growth with an increasing flow of FDI into an economy. It also finds that FDI inflows have a positive effect on intra-African trade and that intra-African trade has a direct positive effect on economic growth.
The study however argues that there is an overall economic growth when the level of FDI increases in an economy and at the same time, contends that Africa’s development can accelerate when roadblocks to FDI and trade are removed.
“With the growth of intraAfrican trade, there is a steadily increasing complementarity between FDI and intra-African trade,” it says.
“Thus, intra-African trade and FDI are complementary in the determination of economic growth.”
Results in the research reveal that intra-African trade is a major driver of economic growth as it supports the trade-growth hypothesis.
By implication, dimensions of a country’s intra-African trade “are robust in achieving sustainable economic growth.”
Meanwhile, Africa’s exports and intracontinental trade are still behind those of the majority of its counterparts. According to UN Trade and Development (UNCTAD), in 2017 intra-African exports accounted for 16.6% of all exports, while in Europe, Asia and the United States, the percentages were 68.1, 59.4% and 55%, respectively. It barely outperformed Oceania’s 7%.
Between 2015 and 2017, intra-African trade accounted for about 2% of total commerce, according to AZA Finance. With the African Continental Free commercial Area (AfCFTA), however, Africa has made a significant commercial advancement to close this disparity.
In addition to permitting unrestricted trade and investment throughout the continent, the deal aims to create a unified market for goods and services spanning 54 nations while it makes effort to also create a unified customs union to streamline trade on the continent.
In lieu of this, if all of the participating nations take the AfCFTA seriously, it is predicted that by 2035, exports from Africa to the rest of the world will increase by 32% while exports within the continent, driven mostly by manufactured goods, might increase by 109%.
By 2035, about 50 million people might also be lifted out of extreme poverty, and if all the countries meet the necessary requirements, real income might increase by 9%. These estimates are corroborated by Afreximbank research, which concludes that nations with more developed financial sectors can draw in regional commerce.
“Our results agree that countries that invest more money in productivity are able to improve trade,” it argues.
In addition, the study finds that industry employment has a positive effect on intra-African nations as nations that open their economies for more people to work in the industrial sector are able to enforce more regional trade.
According to Statista, the FDI in Africa was $80 billion in 2021 but fell to $45 billion in 2022. 2023 saw $48 billion, as reported by UNCTAD even as FDI in Europe decreased to $340 billion in 2023 from $382 billion in the year before. In 2023, however, the amount in Asia was $621 billion while in 2023, FDI into Oceania totalled $467 billion.
The Afreximbank report however warns that “A country could receive influx of FDI but may not channel those investments into productive sectors of the economy, and thus, dampen the overall effect on economic growth.”
