A new working paper released by the African Development Bank (AfDB) has stressed close links between Foreign Direct Investment (FDI) and the growth of the six North African countries’ economies.

Entitled “Does Foreign Direct Investment Improve Welfare in North African Countries?”, the paper assesses the impact of FDI on welfare in six North Africa countries, Egypt, Morocco, Algeria, Tunisia, Libya, and Mauritania, using the Human Development Index (HDI) and real per capita GDP as welfare measures.

FDI variations are positively related to annual variations in the living standards indicators of Egypt, Mauritania and Tunisia. Gains from investments in the petroleum sector in Egypt and Mauritania and in the utilities sector in Tunisia contribute positively to the total wealth of these countries; they are in turn used to improve the populations’ wellbeing through investments in education and health facilities.

“FDI is relatively well diversified in Egypt (when excluding the petroleum extraction sector) and Tunisia (when excluding utilities) compared to other countries in the region.”

“The lack of diversification of FDI in the economies of the region partly explains the differences from one country to another as to the links between FDI and the welfare of the people.”

“Few of these investments are directed towards non-extractive primary industries which are pro-poor and highly labor-intensive, or towards the manufacturing sector, with high potential for spillover effects in the economy,” the paper added.

The African Development Bank makes three recommendations to strengthen the impact of FDI on the welfare of North African populations.

First, policies should be carefully designed to direct those investments toward the most productive sectors of the economy, namely the manufacturing sector.

Second, to reduce the inequalities within a country, sufficient incentives should be provided to encourage foreign investments in labor-intensive and pro-poor sectors such as agriculture, fishing, education, health and infrastructural development.

The third recommendation aims at better redistributing wealth within the region, reduce poverty and improve human development, governments in the region need to improve the quality of their institutions and their governance.