Academic journal article International Advances in Economic Research

A Regional Perspective on Aid and FDI in Southern Africa

Academic journal article International Advances in Economic Research

A Regional Perspective on Aid and FDI in Southern Africa

Article excerpt

Abstract During the last decade international aid flows diminished while Africa's relative share of global foreign direct investment (FDI) declined. This went together with lacklustre growth and low human development levels, In 2005, the G8 countries announced that they would increase aid to Africa by some $25 billion per annum. The pledge for increasing aid seems to have triggered an extensive debate about the role of aid and other international capital flows in the development of poorer countries. This study contributes to this debate. Specifically it addresses the role of foreign direct investment and aid to growth and human development. Panel estimations are used to determine the relationships between aid, FDI and growth in the Southern Africa region from 1990 to 2005. Negative relationships are found between FDI and growth while aid and growth turned out to be unrelated.

Keywords Foreign direct investment (FDI) * Aid * SACU SADC * South Africa * Growth * Human capital development * Regional integration

JEL F15 * F21 * F35 * O15 * O19

  We have agreed to double aid for Africa by 2010. Aid for all
  developing countries will increase, according to the OECD, by around
  $50bn per year by 2010, of which at least $25bn extra per year for
  Africa

  (Excerpts from Chair's summary, Gleneagles G8 Summit July 8, 2005)

Introduction

The debate regarding the contribution of aid to development and growth in Africa is highly emotive with many opposing views and diverging empirical results. Extending the debate to cover foreign direct investment raises more questions as to the effectiveness of the two funding methods to development and economic growth.

Currently, there exist divergent views about aid to developing countries. Certain political groups tend to support substantial increases in aid to developing countries as indicated by the excerpts from the Chair's summary of the G8, Gleneagles Summit (G8 2005). This support is echoed by others (Sachs et al. (2004) who call for substantial increases in aid to pull Africa out of its poverty trap. The poverty trap implies that most African countries are simply too poor to finance or initiate their own development (Teunissen and Akkerman 2006).

In contrast to this view, an alternative hypothesis has been put forth, which calls for investment rather than aid. According to this view, investment will lead to sustainable long-term development in Africa (Kosack and Tobin 2006). Apart from the fact that the new hypothesis emphasizes investment as opposed to aid, which appears to be gaining ground, it would appear that the aid campaign is encountering more criticism such that policy makers are moving away from aid as was originally outlined in 2005.

The relevance of this debate--aid versus investment--is critical for Southern African countries development as the region represents one of the most-impoverished and least-developed regions in the world. (1)

According to the NEPAD initiative, Africa requires about $64 billion annually in capital to be able to generate a growth rate of 7% per annum which is required to achieve the Millennium Development Goals (Asiedu 2004; UNCTAD 2005). Thus far, Africa has failed to attract and sustain sufficient fund flows. Undoubtedly, this is due to the fact that the continent is a high-risk environment for private capital, owing to various institutional mi geographical features (Naude and Krugell 2007; Asiedu 2006).

In view of declining international aid flows and Africa's failure to attract sufficient amounts of investment, there is also an urgent concern regarding the way in alleviating poverty and creating a climate of long-term sustainable development on the African continent This paper establishes a framework for assessing the role of FDT and aid in the development of the Southern African region.

The paper is organized as follows; "A Literature Review" gives a brief overview of the recent literature. …

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