Author: Hassen A. Wako Title:Foreign Direct Investment in Sub-Saharan Africa: Beyond its Growth Effect Nature of Study: Article (Research in Globalisation, Vol 3) Place: University of Amsterdam. Year: 2021
Reviewed by: Claiton Masotsha, Master’s Student in International Trading Systems
Hassen A. Wako’s articles gives a perceptive and varied analysis of the role of Foreign Direct Investment(FDI) in Sub-Saharan Africa(SSA). Wako differs from the traditional literature which looks at FDI as a main actor of economic growth. He extends the discussion by examining the long term effects of FDI on institutional quality and structural change. This is crucial, especially for SSA where governance weaknesses and limited industrialisation continue to determine or shape development outcomes.
In this article, Wako takes a panel data approach, specifically the Pooled Mean Group (PMG) estimator which he used to analyse data from 46 SSA countries between 1970-2014. The results agree that FDI contributes positively to long run economic growth even though the short run impact is weak. The article further reveals that strong institutional quality which include rule of law, civil liberties and political rights also have a positive impact on grown and this strengthen idea that governance plays a pivotal role in shaping development matters.
The article gives substantial contribution as it examines how FDI influence institutional quality. Even though better institutions attract more FDI, Wako notes that the reverse effect is not always a benefactor. Through the use of governance indicators from Worldwide Governance Indicators (WGI), he uncovers that FDI tends to weaken institutional quality in the long term by reducing voice and accountability, which in turn undermines the rule of law and increases corruption. These findings confront the assumption that FDI automatically improves governance, suggesting that foreign investors may exploit regulatory weaknesses.
The study also shows the role of FDI in SSA’s structural transformation. Using evidence, Wako highlights that FDI contributes to premature industrial development mainly because most FDI inflows are channeled to natural resource extraction rather than manufacturing. This, therefore, limits the region’s ability to diversity their exports and build productive capacities.
Overall, Wako’s article is an important piece of work which prompts one to rethink FDI in SSA by pointing out that not all FDI enhances development. The findings propose that policy makers should adopt a more selective approach to FDI attractions and to strengthen institutional quality so as to ensure long term development gains.
