Obama’s Opportunity to Improve U.S. Investment in Africa

Which continent is home to six of the world’s 10 fastest-growing economies and is projected to grow by 5 percent in 2013, more than twice the U.S. rate? And which one gets only 1 percent of U.S. foreign direct investment?

Illustration by Bloomberg View

The answer, of course, is Africa, from which PresidentBarack Obama returned last week after a six-day trip. His visit focused much-needed attention on the uneven state of African development -- and the U.S.’s lack of a strategy to engage the continent economically.

The U.S. should be doing more, not just to reap the benefits of increased exports, more jobs and higher growth at home, but to improve the quality of African lives as well.

If that’s not reason enough, there is the geopolitical rationale: As of last year, China had poured more than $40 billion into Africa and has pledged $20 billion in foreign aidover the next three years. In 2009, China overtook the U.S. as Africa’s largest trading partner. Trade between China and Africa totaled $166 billion in 2011, compared with the U.S.’s $95 billion trade with Africa. China has more than 150 commercial attaches in sub-Saharan Africa. The U.S. has six.

Engaging Africa

The single best strategy for engaging Africa over the long haul is renewal and expansion of the African Growth and Opportunity Act, signed by President Bill Clinton in 2000. It allows 40 countries in sub-Saharan Africa to ship products to the U.S. tariff-free.

The Africa trade agreement is, by all accounts, a success. Since 2001, African exports to the U.S. have grown by more than 500 percent, to $54 billion in 2011. The African Coalition for Trade estimates that the pact has created as many as 1.3 million jobs.

The treaty expires at the end of next year, but Obama should ask Congress to renew it now -- and to broaden the law’s impact. Currently 88 percent of what the U.S. imports under the agreement is petroleum products. To break Africa’s dependency on its extractive industries, the Brookings Institution’s proposedAfrica Growth Initiative would give U.S. companies a bonus on certain investments -- a tax rate of zero on repatriated profits not derived from natural-resource removal. The idea, which could increase nonpetroleum investment by 20 percent with minimal tax-revenue losses, is worth considering.

Obama could do much more to improve trade relations. Trade Africa, one of four initiatives he announced while in Africa, focuses on an existing regional trade group, known as the East African Community, comprising Burundi, Kenya, Rwanda, Tanzaniaand Uganda. In five years, trade among them has doubled; over the last decade, their combined output has quadrupled, to $80 billion.

The opportunity to build on this model may arise when U.S. and African officials meet next month in Addis Ababa to assess the trade picture. They should push to drop the complex tariffs, needless checkpoints and other customs barriers that impede cross-border trade. A coffee exporter in the East African Community, for example, requires 29 days to fill out paperwork, transport the product to a port, clear customs and load it aboard a vessel -- twice as long as it takes in Brazil.

Common Market

The African continent includes 54 countries, only some of which are large enough to warrant a multinational corporation’s attention. Why not push for customs agencies that use common technology and ultimately a single customs authority for the entire region? Or why not think even bigger and open talks over a continent-wide free-trade agreement, like Europe’s early common market?

One problem is that U.S. exporters depend on an array of government agencies for financing. There should be a single investment-finance agency under a unified trade policy. The White House should also ask Congress to give the agency multiyear authorizations, so it can better predict its own funding, and the power to make equity investments, something now denied to the Overseas Private Investment Corp.

None of this means much unless African nations get a handle on corruption, which stifles competition and impedes fair bidding. U.S. executives point to high levels of corruption as the single biggest reason they steer clear of Africa. Obama could play a role by insisting that African countries, in exchange for U.S. assistance, adopt the Extractive Industries Transparency Initiative, which requires governments to make regular audited disclosures of their oil, gas and mining revenue. Such disclosures make it harder, though not impossible, for corrupt officials to pocket illegal payments.
It is in the U.S.’s interest to increase trade with Africa, not only to boost American exports, but also to promote U.S. values of transparency and the rule of law. (It is an added bonus that increased trade would also improve the U.S. position on the continent to compete with China, the world’s other superpower.) It is also in Africa’s interest to increase trade with the U.S., not only to expand its burgeoning middle class, but also to help lift out of poverty the millions of sub-Saharan Africans living on $1.25 a day or less.

If Obama demonstrates a long-term commitment, and demands fair play and transparency in return, he could vastly increase the flow of private money to Africa. The lives of millions of people would improve in the bargain.

Source: Bloomberg