Economic Impact of G20 Compact with Africa Initiative on Member Countries

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

The Compact with Africa (CwA) is an initiative launched in 2017 under Germany's G20 Presidency to promote private investment in Africa through creating a more attractive environment for private investment through policy reforms and improved macroeconomic and business frameworks in member countries. This paper attempts to quantify the impact of CwA membership on FDI inflows. We employ the entropy balancing methodology to improve the credibility of a causal inference between CwA membership and FDI inflows. While we could not conclusively establish causality, our analysis offers other useful insights. Inward FDI data suggests that CwA countries have experienced stronger FDI inflows on average, including during the pre-CwA years. Furthermore, these countries tend to have stronger institutions, better infrastructure and human development, which are among the key factors that help attract FDI to developing countries. Hence, continued efforts of African governments to implement structural reforms, strengthen institutions, improve infrastructure and develop human capital are vital to create an attractive FDI environment, while the CwA initiative could provide a platform for peer-to-peer learning and exchange, capacity building, policy dialogue and collaboration.

Subject: Balance of payments, Environment, Financial services, Foreign direct investment, Gross fixed investment, Health, Human capital, Infrastructure, Labor, Labor force, National accounts, Natural resources, Private investment, Real interest rates, Return on investment

Keywords: Africa, Capacity development delivery, Caribbean, Compact with Africa, Foreign direct investment, Foreign Direct Investment, Global, Gross capital formation, Gross fixed investment, Guinea, Human capital, Infrastructure, Labor force, Morocco, Natural resources, Private investment, Real interest rates, Return on investment, Sub-Saharan Africa, Urbanization