Nothing illustrates the enormous problems that Africa has to overcome than the recent agreement by several AFrican nations to form the African Trade Insurance agency which will underwrite insurance policies to reduce the risk for investors wanting to move capital into Africa.
Why would such an agency be needed in the first place? According to the BBC, investments in Africa have an extremely high rate of return that approaches 30 percent. But by the time that rate of return is adjusted for risks such a military coups, government confiscation of assets, etc., the real rate of return is closer to 10 percent.
The new insurance agency will essentially compensate investors if their capital is wiped out by government actions. As Ugandan president Yoweri Musevini said, “The ATI is a scheme that is telling investors, ‘please go ahead and trade,’ and if a coup d’etat occurred, you will not lose because we shall cover you.
The seven countries initially putting up $100,000 each to start the bank (along with a $105 million loan from the World Bank) are Burundi, Kenya, Malawi, Tanzania, Rwanda, Uganda, and Zambia. This is an important, necessary first step, but a better long term solution would be stable liberal democracy (foreign investors in developed countries rarely are forced to take out insurance protecting their assets from military coups or illegal government confiscation).
Source:
African risk scheme aims for trade boost. The BBC, August 21, 2001.
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