Introduction

The public has since the 1980s demonstrated their protest of the current model of globalization and liberalization through the battles of Seattle, the rejection of the Multilateral Agreement on Investment (MAI), and of recent the stalement of the World Trade Organization talks of 2003. Today\'s global financial crisis poses a grave threat to the prosperity of the world\'s people and environment. But it also provides an opportunity to rethink and reshape the rules of the international economy.

Global developments over the last two decades have shown that global economy especially its financial flows is too important to be left in the hands of few bankers, financiers, economists and multilateral corporations. It is also no secret that in order for the global economy and its financial flows to work for the progress and benefit of all, public participation, inclusiveness and ownership are vital. If there is to be a \'new economic architecture\' for the global economy, all those it affects must be able to help shape it.

The fact that a number of countries in Latin America, Asia and Africa have been exposed to the tyranny of international finance through anti-democratic and counter productive tendencies requires us to revisit the question of whether capital flows are governable or ungovernable or simply in the face of global crisis shall one try to civilize global capital and if so -how? Most poor countries in the South especially in Sub-Saharan Africa have been exposed to the tyranny of international finance as they have experienced distorted economies, reduced self-sufficiency and determination of their economics, extraction of natural resources and prices of various essential commodities remaining outside the purview of government control. Financial liberalization has meant the removal of financial systems from the ambit of public accountability, with speculative capital replacing productive capital.

Africa’s share of global wealth over the last two decades has decreased tremendously in a number of frontiers-world trade, world production, net financial flows even in the era of reforms, and foreign direct investments have been hindered either by poor governance, the heavy debt burden or by conflict and political instability.

International commitments

The six main areas for the Financing for Development Conference in Mexico, Monterrey were as follows:

• Raising financial resources within countries for development – most of the money a government spends on development comes from taxation systems
• Increasing international resources for development – Most developing countries need supplementary resources to the ones they can raise. They attract private finance from abroad, loans from banks and aid.
• Opening access to markets and ensuring fair and equitable trade regimes – earnings from trade are important for financing development. However, so far developing countries have not received significant benefits from liberalizing their economies.
• Strengthening official development assistance – such assistance has been declining but is still vital for developing countries. Increased Overseas Development Aid (ODA) is essential for developing countries to achieve the international development targets.
• Addressing developing country debt difficulties – some debt relief has been granted but the Heavily Indebted Poor Country (HIPC) initiative has not gone far enough. Over half the HIPC countries still pay more in debt servicing than they spend on healthcare and education.
• Improving the coherence of global and regional financial structures and the fair representation of developing countries in international decision-making – developing country participation in international decision-making has thus far been negligible. The UN has a role to play in ensuring that in the future there is increased policy coherence amongst the various institutions and governments and that developing countries can participate on an equal basis

Of the above bulleted issues the main issues that were discussed at Monterrey and codified in the Monterrey Consensus are as follows;

•good governance, especially efforts to eradicate corruption;

• excessive allocation of government resources to military uses;

• the preferred role of foreign direct investment, compared to short-term capital and volatile credit;

• implementation of the World Trade Organization’s Doha Ministerial Declaration, especially improved market access for agricultural products;

• the effective functioning of small entrepreneurs in international trade and finance;

• implementation of the enhanced Heavily Indebted Poor Countries (HIPC) initiative;

• the rise of donor countries aid quantities to 0.7% of GNP, and enhanced quality of Official Development Assistance (ODA);

• capacity-building support for developing countries;

• consistency and coherence of the international monetary, trading and financial systems; and

• reform of the Bretton Woods institutions and increased participation of developing countries in economic decision-making.

Flaws in development-financing policy sidelined at Monterrey.

• Government Ministers at Monterrey left out commitments to review trade policies that block access to markets in rich countries. They left out commitments to review trade policies that block access to markets in rich countries.
• Governments overlooked the urgent need to cancel the crippling debt of developing countries. How can you develop, when you are locked in a aid-and-debt trap?
• Existing macroeconomic policies go beyond the insufficient attention they pay to social issues and poverty reduction. Policy reforms have suffered from serious design weaknesses in relation to African -type economies because they neglected the impact of structural constraints, lack of economic and social infrastructure, weakness of market development, thinness of the entrepreneurial class, and low private-sector production capabilities. As a result, the new policy environment does not deliver high growth rates.
• The efficacy of market-opening policy prescriptions counseled by donors and international financial institutions have proved to be irrelevant and inapplicable in Africa with recent financing policies stressing the need for structural reforms to be accompanied by social and poverty reduction policies.
• The private sector is ill suited to allocate international credit. It provides either too little or too much. It does not have the information with which to form a balanced judgment. Moreover, it is not concerned with maintaining macroeconomic balance in the borrowing countries. Its goals are to maximize profit and minimize risk. This makes it move in a herd-like fashion in both directions. The excess always begins with over expansion, and the correction is always associated with pain.[1]
• Genuine ownership of national development policy (including PRSPs) is a meaningless concept without effective state capacities to control the allocation of aid funds and have a say in formulating the policy agenda and monitoring the outcomes[2]. It is the lack of coordination on the part of donors of their aid projects in individual countries that undermines the sustainability of aid programmes and negatively affects resource allocation and growth. Moreover, the volatility of aid flows can result in financial instability and hinder stable macroeconomic development.

Concerns

Foreign direct investments (FDIs) still remain elusive in Sub-Saharan Africa despite the fact that many of the economic fundamentals are improving and enabling policy frameworks for investment are being put in place. FDI flows to Africa (excluding South Africa) were just 3 per cent of total flows to developing countries in 1997 with a volume of US$4.7 billion (US$4.8 billion in 1996). Nigeria, Egypt, Morocco, Tunisia and Angola accounted for two-thirds of this total. Inflows of FDI to Africa have to a considerable extent been related to natural resources. In most cases, smaller countries like Lesotho and Malawi attract high FDI inflows because of the existence of the rich reserves of natural resources that they possess. In some cases, despite the political instability FDIs continue to increase, Angola is a case in point.  

Besides the natural resources; investment in Africa seems to be confined to banking, food supply and very little in terms of huge capital projects as investors are not sure of the political stability.  Most investments and business deals in Africa have been done by Barclays Bank, Citibank, Coca-Cola, Marubeni, Nestlé, Novartis, Royal Dutch/Shell, Standard Chartered, Unilever and Vodafone to mention just but the few major investors.

Source: UNCTAD (2002).

There is little hope for most African countries of balancing their accounts by attracting steady inflows of Foreign Direct Investment (FDI). The main critic of FDI as a financing for development strategy, Yash Tandon of the Southern and Eastern African Trade Information and Negotiations Initiative concluded that,

FDI is falsely marketed to the developing countries as a solution to their underdevelopment. There is no necessary correlation between FDI and growth, nor between growth and development. Development itself is a complex phenomenon. Its reduction to an economic phenomenon has been one of the most egregious faults of neoliberal economics… FDI is really a bundle of assets in the service of TNCs in their perpetual quest for profits, markets and sources of raw materials. FDI is a means for foreign owners of capital to acquire assets in the host country.[3]

The most damning critique of FDI is that no matter how conditions improve, foreign investors have a whimsical and Afro-pessimistic perspective, and are unreliable partners. South African president Thabo Mbeki made the following case:

In our own country, we have been assured that our economic fundamentals are correct and sound. We have developed a stable and effective financial and fiscal system. We have reduced tariffs to levels that are comparable to the advanced industrial countries. We have reformed agriculture to make it the least subsidized of all the major agricultural trading nations. We have restructured our public sector through privatization, strategic partners and regulation… Yet, the flow of investment into South Africa has not met our expectations while the levels of poverty and unemployment remain high.[4]

At the empirical level, reviewing the data on investment flows to Africa as a whole is depressing. Africa’s share of FDI fell from 25% of all multinational corporate investments during the 1970s to less than 5% during the late 1990s. And even the tiny amounts of FDI in Sub-Saharan Africa in recent years can be attributed in large part to oil company investments in Angola ($1.8 billion in 1999) and Nigeria ($1.4 billion). The only substantive FDI flows into Sub-Saharan Africa unrelated to extractive minerals by 1999 went into South Africa ($1.4 billion).[5] In any event, the bulk of FDI into South Africa was based on mergers and acquisitions. Many thousands of jobs were lost in the process, and inappropriate technology transfer made South Africa all the more dependent and vulnerable. In all these regards, FDI exacerbated Africa’s vulnerabilities.

The hard facts

• Today, nine-tenths of capital flows are speculative, rather than productive in nature. One-fifth of all foreign-owned assets in the world is controlled by just 100 multinational corporations. This concentration of wealth and power is increasing due to record mergers and acquisitions. But meanwhile, globalization has distorted economies, reduced self-sufficiency, expanded unsustainable extraction and use of natural resources, displaced families and communities, and made billions of people dependent on fickle foreign markets.[6]

• In 2003, developing countries transferred a net $210 billion to the rich world – that is, it paid out $210bn more than it received in new inflows. By far the largest component of this was the purchase of $276bn of foreign exchange reserves, which far outweighed net equity flows - portfolio investment and Foreign Direct Investment - of $149bn. Interest payments alone continue to take $95bn of developing countries resources, almost three times the value of what they receive in grant aid[i]. These figures are an understatement, since they exclude capital flight. Although difficult to measure accurately, a seminal study found that over the period 1970 – 1996, the equivalent of $285bn left Africa.[ii]

• The fact that the global trading system discriminates against poor countries is well established. Tariff and non-tariff barriers, dumping, and product standards cost an estimated $100bn per year to developing countries, 50% more than total official aid.[iii] Again, these figures are underestimates, because they don’t include the costs of rich country protectionism in terms of reduced opportunities for employment, reduced incomes for essential goods such as food and health care, or loss of investment opportunities.

• Capital flows have been moving according to the basic tenets/holy trinity of neo-liberalism, which are privatization, liberalization and deregulation. What we call globalization - more honestly called global capitalism - has created a world which is unfair, unstable and unsustainable. The IMF recovery programmes in poor countries have also been attacked by conservatives and progressives alike for completely misdiagnosing both the problem and the cure. The IMF package of budget cuts and high interest rates exacerbates the problem by plunging the economies further into recession. Most African countries that underwent economic reforms as part of the condition to receive IMF loans, notched up negative growth rates, their financial sectors became clogged with unrecoverable non-performing loans, experienced burgeoning unemployment and underemployment; bankruptcy of thousands of small businesses and families used years of savings simply to survive..

• Financial flows are ideologically backed by influential think tanks, economists and political institutions, promoted at every turn by corporations, protected by the world\'s most powerful governments and promulgated by the International Monetary Fund, the World Bank and the World Trade Organization. They -- the Fund, the Bank and the WTO -- are the Trojan horses of trade and financial liberalization, and it is to these organizations that we need to turn our attention[7].

• Financial volatility is bringing massive economic breakdown, insecurity, increased poverty, unemployment and dislocation, assaults on environmental and labor conditions, loss of wilderness and biodiversity, massive population shifts, increased ethnic and racial tensions, and international conflict. The world has learned that \'hot money\' can flow out of a country as rapidly as it flowed in.

In the pursuit of capital markets, human rights have been downgraded and stripped of their legal force, and re-packaged as non- binding standards and principles to be determined by unaccountable and undemocratic institutions. Social capital is another concept that has been subsumed into the apparent (but not actually) mathematical neutrality of economics. According to the Bretton woods institutions social capital is a condition and means for unity necessary for economic growth. Anything that assures investors that their money is safe constitutes good governance and the rule of rule.

Controlling and democratizing financial Flows.

Generally, there is need especially in developing countries of Africa to regulate destabilizing speculative capital by encouraging long-term investment and ensuring maximum national government policy making to set exchange rates and regulate capital markets. Transparency and accountability with full and increased public participation will obviously help regulate and democratize global financial flows.

Developing countries need to know how to open doors to the right FDIs and close doors to the bad ones. A number of actions need to be taken by each stakeholder:

(a)   Investors

1. Transnational Corporations should be bound by an enforceable international agreement establishing core standards of behavior for TNCs. These standards, which would provide a floor, not a ceiling, include disclosure, respect for human rights, labor standards, working conditions, equality, consumer protection, taxation, indigenous and local community rights, business practices and competition, and sovereignty over development strategy.
2.  Investors need to have a good image and attitude about Africa. It has been argued that investments have not flown into Africa not because the environmental conditions are bad but it’s just because of investor bias. Some investors just do not want to associate with Africa and the stories fabricated about her.

(b)   African governments

National control and regulation: Governments need to retain the right to control investments and exchange rate regimes so that foreign direct investments and transnational corporations should serve the needs of people by contributing to locally and nationally determined sustainable human development strategies. Financial liberalization and deregulation have left capital flows elusive to many governments and citizens in the south. Rolling back the state will be ideal in order to control speculative capital and capital flight in many African countries.

An enabling Environment: Needless to underscore the importance of political stability and financial prudence to most investors in making investment decisions. African leaders should be ready to create the economic, social and political environment in which companies can succeed. The ability to exercise stable trade and exchange rate regimes are features of the reforms designed to facilitate international investment and to achieve an economic climate that encourages business development. To a large extent, FDI flows to Africa reflect real differentiation between countries that enjoy political stability, are securing growth and enhancing their investment environment and other countries.

Investment promotion agencies: Although progress has also been noted in improvements in institutions, openness to trade and strengthening of the telecommunications infrastructure, the long awaited investments are hard to come-by. Investment promotion agencies are proliferating and awareness is rising in African governments of the need to strengthen the overall investment environment by reducing bureaucratic red tape and curbing corruption.

External assistance to boost investment : A  variety of external measures need to be taken to enhance FDI into Africa, such as securing development assistance to improve investment conditions, such as infrastructure facilities; opening up of developed countries´ markets for African exports; and, of particular importance, the reduction of the heavy external debt burden of many African countries.

(c) Civil Society: Civil Society organizations must work towards the promotion of the redistribution of wealth and power in society so that availability, equal access, and affordability of human basic needs become the lived realities for the millions of people excluded, marginalized and exploited by the maw of globalization through financial flows.

It is important that representatives of civil society organizations take an important and decisive participatory role in the international regulatory and decision-making processes. Locally, governments and transitional corporations must be accountable to their citizens through civil society organizations and locally- elected officials. Top -bottom decision making should give way to a human rights based approach to development where people are the masters of their own destiny, able to make informed choices and decisions about their own development. It is important to remember that people are not developed but they develop themselves. 

Conclusion:

A permanent resolution of Foreign Direct Investments problem in Africa is an important step to help change its image and put the continent back to the global investment-location map. Someone, somewhere has to realize that equity, self determination, justice, human rights, people centered development, environmental sustainability, pluralism, local control, and democracy and community participation come before markets and profits. It is time to ensure that the international economy of the future is built on a solid foundation of sustainable development, not unlimited profit for a few global corporations and elites.

- Charles Mutasa is Executive Director, African Forum & Network on Debt and Development (AFRODAD)

References:

1.      Bond, P. (2001), Against Global Apartheid: South Africa meets the World Bank, IMF and International Finance, Cape Town, University of Cape

2.      Boyce and Ndikumana (2000) Is Africa a net Creditor? New Estimates of Capital Flight from Severely Indebted Low Income Sub-Saharan African Countries, 1970 – 1996’

3.          Cheru, F. (2001), The Highly Indebted Poor Countries Initiative: A Human Rights Assessment of the Poverty Reduction Strategy Papers, Report submitted to the United Nations Economic and Social Council, New York,

4.      Global Development Finance 2004, Volumes 1 and 2

5.      ; Mkandawire, T. and C. Soludo (1999), Our Continent, Our Future, IDRC; Canada.

6.      Nicola Bullard (1999) Capital flows and global instability: or how the neo-liberals helped fuel the fire in East Timor, Paper presented at the ACFOA Annual Council Meeting, Canberra, Australia, 11-12 September 1999.

7.        New Partnership for Africa’s Development, 23 October 2001, http://www.nepad.org.

8.      Soros, G. (1997), ‘Avoiding a Global Breakdown,’ Financial Times, 31 December.

9.      Tandon, Y. (2002), ‘The Centrality of FDI in Contemporary Finance-for-Development Theory’, Seatini Bulletin, 5, 2, 31 January.

10.  UNCTAD (2002) Least Developed countries Report 2000, UNCTAD, Geneva

11.  Walton, J. and D.Seddon (1994), Free Markets and Food Riots, Basil Blackwell.

Oxford, UK.