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THE ROLE OF
FOREIGN DIRECT INVESTMENTS IN
AFRICA’S HUMAN DEVELOPMENT
by Yash Tandon
ABSTRACT: The reigning orthodoxy about Foreign Direct Investments (FDIs) places them at the center of the development process in Africa. Without FDIs, Africa apparently would foreclose its option to growth. With growth foreclosed, there would be no way out of Africa’s poverty, and its attendant problems including unemployment, premature death through malaria, AIDS, etc., and technological backwardness.
Is this theory valid? Is it really the case that without FDIs, Africa has no future?
This paper puts to question this orthodoxy. It finds that this idea about FDIs is based on false premises, backed by a vast amount of "empirical" and theoretical literature, which has serious conceptual and methodological problems. The body that collects the empirical justification for this orthodoxy is the United Nations Conference on Trade and Development (UNCTAD), which is commissioned within the UN system to collect relevant data on FDIs and on Transnational Corporations (TNCs).
The paper finds that the premises on which UNCTAD experts rest their case is derived from a "development" paradigm that has serious problems, both in theory and in its application to reality. Economism is a kind of reductionism that mystifies reality. Locating FDIs in the center of development further mystifies reality and pushes reductionism to its absurdity. The paper finds that, contrary to received wisdom, Africa does not suffer from "low savings rate", leaving an "investment gap" that then has to be "filled in" by FDIs. On the contrary, Africa’s savings rate is high. However, those savings are not described as "savings" in the dominant economic literature. They are described, by some accounting convention, as dividends, interest on loans, debt payments, etc. These then are externalized, and when they come back, in another guise, they are described as "fresh investments". This is a serious case of moral hazard that has so far evaded the attention of political economists. The paper investigates the nature of this moral hazard, and its consequences for Africa.
The paper was commissioned under a project funded by UNCTAD. Part of the terms of reference included an examination of how FDIs might be attracted to Africa, and made to be sensitive to "Human Sustainable Development" (SHD). The paper argues that there is, in fact, a net outflow of capital from Africa, and hence trying to attract SHD-sensitive FDIs is not the issue; the issue rather is that of making TNCs that already control much of the resources of Africa to be development oriented. The paper lays down a three-pronged short term strategy on how to deal with FDIs, and recommends to UNCTAD to distance itself from acting as advocates for FDIs and TNCs.