A Contribution to the Analyses of the Effects of Foreign Agricultural Investment on the Food Sector and Trade in Sub-Saharan Africa

The growing interest of foreign investors in Sub-Saharan Africa’s vast agricultural potential raises debates about the investment impacts on the food sector and the economy at large. This paper analyzes the likely effects of foreign agricultural investment in Sub-Saharan Africa with a focus on the impacts on the food sector by simulating the effects of the reduction of investment risks triggering an entry of foreign investment flow. The analysis employs the Global Trade Analysis and Policy (GTAP) model and simulates three investment scenarios that affect land uses, labour market conditions, and technological progress. The data are aggregated over three main sectors: food, manufacturing and services. Simulation results show that although foreign agricultural investment in Sub-Saharan Africa would lead to an increase in food prices and a decline in domestic food supply that would in turn cause an increase in food imports, the increases in factor returns and in employment would boost households’ real income to offset the loss from higher food prices. The positive income effects would be magnified if the agricultural investment brought technological progress to the food sector. Moreover, foreign agricultural investment would widen the current account deficit but improve terms of trade, whose effect on total welfare is large. The improvement of the terms of trade in the model is mainly due to a strong increase in the export price of tradable goods from the manufacturing sector. The service sector would unambiguously experience the strongest output growth as it benefitted from the formation of capital goods. Overall, the simulation results show that entry of foreign agricultural investment would generate a net welfare gain.