Financing sustainable development in africa

contents Simplice Asongu Part I Financing in Africa for Sustainable Development Financing Mechanisms African Governments Should Pursue in Financing Sustainable Development in the Next 2

Uchenna R Efobi & Simplice Asongu

in Africa

Uchenna R Efobi · Simplice Asongu

EditorsFinancing Sustainable Development in Africa

Uchenna R Efobi

Covenant University

Ota, Nigeria

Simplice Asongu African Governance and Development Institute

Yaoundé, Cameroon

https://doi.org/10.1007/978-3-319-78843-2

Library of Congress Control Number: 2018937869

© The Editor(s) (if applicable) and The Author(s) 2018

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Acknowledgements

The research materials on which this book is based have been through well thought out incarnations by the array of talented contributors and their research assistants, all of whom have in some way enhanced the content and quality of this book The editors specifically would like to thank and acknowledge the contributions and substantive input of each

of the contributors who have co-worked on this edition Other tant input to the finalization of this book was received from Kathleen

impor-G Beegle and the UNCTAD Virtual Institute Secretariat for the quality publicizing of the call for wider contribution from African scholars We are also grateful for comments from our peer reviewers for this edition

We gratefully acknowledge the support and enthusiasm for this ject from Sarah Lawrence and Allison Neuburger, who helped in craft-ing the initial conceptualization of the ideas of this book The Palgrave reviewers are also acknowledged for their suggestions that further shaped this book

pro-Through the efforts of all that are acknowledged, we were able to learn step by step the best content to include in the book for both pol-icy and academic audience to learn about sustainable finance options for African development We hope this book reflects this idea

contents

Simplice Asongu

Part I Financing in Africa for Sustainable Development

Financing Mechanisms African Governments Should Pursue

in Financing Sustainable Development in the Next 20 Years 13

Nomahlubi Nkume

Financial Inclusion and Foreign Market Participation

Uchenna R Efobi, Emmanuel Orkoh and Scholastica Atata

Business Regulations and Foreign Direct Investment

in Sub-Saharan Africa: Implications for Regulatory Reform 63

Ben Katoka and Huck-ju Kwon

Broadening Financial Intermediation in Sub-Saharan Africa 93

Murat A Yülek and Vivien Yeda

Institutions, Fiscal Performance, and Development

Ibukun Beecroft, Evans Osabuohien and Isaiah Olurinola

Part II Domestic or Foreign Investment for

African Development

Capital Flows and Economic Growth: Does the Role of State

Temitope Joseph Laniran

Changing Patterns of the Official Development Assistance

Emmanuel Maliti

Financing Sustainable Energy Access with Oil Revenues

Ishmael Ackah

Seedwell Hove and Gladys Gamariel

Part III Human Development in Africa for Sustainability

Does the Implementation of Social Safety Net Intervention

Affect Indigenous Social Capital Systems for Coping with

Livelihood Shocks? Ethnographic Evidence of Agro-pastoral

Getachew Shambel Endris, Paul Kibwika, Bernard B Obaa

and Jemal Yousuf Hassan

Issues in Sustainable Development: The

Oluwabunmi O Adejumo

Microcredit, Child Education, and Health Outcomes:

James Atta Peprah

Part IV Industrial Development in Africa for Sustainability

Financial Inclusion and Growth of Non-farm Enterprises in

Isaac Koomson and Muazu Ibrahim

The Role of Cooperative Organizations in Tanzania’s

list of figures

Financing Mechanisms African Governments Should Pursue

in Financing Sustainable Development in the Next 20 Years

Fig 2 Global private finance mobilised for climate change

Financial Inclusion and Foreign Market Participation of Firms:

A Quasi-experiment from Nigeria

Business Regulations and Foreign Direct Investment in Sub-Saharan

Africa: Implications for Regulatory Reform

Fig 1 FDI inflows (in $ million) to SSA 2000–2014 (Source UNCTAD

Fig 2 FDI inflows to SSA by sub-region, 2005–2014

Changing Patterns of the Official Development Assistance

to Sub-Saharan Africa

Fig 1 Net ODA to SSA countries (US$ billion) (Source OECD 2015d) 178

Fig 2 Net ODA from non-DAC to SSA (US$ billion)

Fig 3 ODA as a percentage of SSA’s Gross National Income (GNI)

Fig 4 ODA from DAC countries as percentage of SSA’s GNI

(Source IMFWEO (2015) for the GNI data and ODA data

Fig 5 Declining role of tax revenue in SSA (Tax revenue

Fig 6 Declining share of ODA to the social sectors

Financing Sustainable Energy Access with Oil Revenues

in Sub-Saharan Africa: Trends and Strategies

Fig 2 Oil production in Africa (Source World Development

Fig 3 Proved oil reserves in Africa (Source Outlook BP Energy 2016) 205

Fig 4 Primary energy production and consumption in Africa

Fig 5 Foreign Direct Investment inflows to the energy sector

Fig 6 ODF inflows to the energy sector of LDC and other

Fig 7 Sources of financial support for off-grid electricity solution

Fig 8 Oil rents as a percentage of GDP in sub-Saharan Africa

Fig 9 Selected petroleum revenue management frameworks

in sub-Saharan Africa (Source Developed by author based

Maximizing the Gains from Natural Resources

Fig 1 Nonrenewable resource exports for resource-rich countries

in Africa (% total exports) (Note The values in the figure are

the averages for the period 1995–2015 The countries in the

figure are the resource-rich countries that have nonrenewable

natural resources exports that consist of at least 25% of total

exports Source UNCTAD 2016 Database Classification: Fuels

(SITC 3), Ores and Metals (SITC 27 + 28 + 68 + 667 + 971)) 239

Fig 2 Total natural resource rents (% of GDP) and GDP per capita

Fig 3 Total natural resource rents (% of GDP) and GDP growth

Fig 4 Wealth per capita in Africa (US$) (Note The data is based

on the 2005 estimates of the wealth of nations Source World

Does the Implementation of Social Safety Net Intervention Affect

Indigenous Social Capital Systems for Coping with Livelihood

Shocks? Ethnographic Evidence of Agro-pastoral Communities

in Eastern Ethiopia

Fig 1 Ranking of most frequently employed household coping

Fig 2 Characteristics of individuals in a household network

Microcredit, Child Education, and Health Outcomes: A Case Study

from Ghana

Fig 1 Distribution of BMI scores (Graphed from Survey Data,

Financial Inclusion and Growth of Non-farm Enterprises in Ghana

Fig 1 The link between financial inclusion and firm growth

Fig 2 SMEs as the missing middle in financial inclusion (Source Access

Finance, A World Bank bi-monthly newsletter Issue No 30,

The Role of Cooperative Organizations in Tanzania’s

Industrialization

Textile and Clothing Sector, and the Industrialization of

Sub-Saharan Africa

Fig 1 Breakdown of sectorial contribution to growth, SSA

Fig 2 GDP growth rates, share of industry in total value-added,

and gross capital formation as share of GDP in SSA

(Source United Nations Conference on Trade

Fig 3 Share of manufacturing in total GDP, SSA (Source World Bank

Fig 4 Manufacturing and growth (Source Yülek 2018) 429

Fig 6 Textile and clothing cycle along with industrialization cycle

list of tAbles

Financial Inclusion and Foreign Market Participation of Firms:

A Quasi-experiment from Nigeria

Business Regulations and Foreign Direct Investment in Sub-Saharan

Africa: Implications for Regulatory Reform

Doing Business ranking (Source Calculations based on data

Table 6 Average FDI inflows by economies grouped by their overall

distance-to-frontier, 2013–2014 (Source Calculation based

on data from Doing Business database (2016) and UNCTAD

Table 12 Results of the random effects estimation for 44 SSA countries

Broadening Financial Intermediation in Sub-Saharan Africa

countries and comparators (Source World Development

Institutions, Fiscal Performance, and Development Trajectories

in ECOWAS: Implications for Sustainability

Capital Flows and Economic Growth: Does the Role of State

Fragility Really Matter for Sustainability?

Financing Sustainable Energy Access with Oil Revenues

in Sub-Saharan Africa: Trends and Strategies

(including minerals) should be allocated to citizens to

eliminate poverty in SSA (Source Guigale and Nguyen 2014) 218

Maximizing the Gains from Natural Resources

(% of GDP) (2000–2015) (Source UNCTAD 2016 Database) 240

ESADE geo (2015), Investment Frontier (2015), Sovereign

Average 2000–2015 (Source WDI, World Bank UNCTAD

Does the Implementation of Social Safety Net Intervention Affect

Indigenous Social Capital Systems for Coping with Livelihood

Shocks? Ethnographic Evidence of Agro-pastoral Communities in

Eastern Ethiopia

Issues in Sustainable Development: The Environment–Income

Relationship

Microcredit, Child Education, and Health Outcomes: A Case Study

from Ghana

Table 7 Regression results for child health (Source Authors’

Financial Inclusion and Growth of Non-farm Enterprises in Ghana

enterprises (Source Author’s computation using GLSS 6 data) 384

The Role of Cooperative Organizations in Tanzania’s

Industrialization

(Source Tanzania Cooperative Development Commission

of March 31, 2011 (Source Tanzania Cooperative

Textile and Clothing Sector, and the Industrialization of

Sub-Saharan Africa

in reading and understanding the policy recommendations and empirical analyses In essence, the book is richly-policy relevant and easy-to-read for both non-specialists and specialists.

At least two fundamental factors motivate the positioning of this book, notably: growing non-inclusive development in Africa on the one hand and on the other, the inherent and logical nexus between inclu-siveness and sustainability The factors are substantiated in chronological order

First, recent stream of African inclusive development literature has essentially be underpinned by the fact that extreme poverty has been decreasing in all regions of the world with the exception of Africa (Asongu and Nwachukwu 2017a, b; Kuada 2015) The fact motivating this strand of literature is further substantiated by a 2015 World Bank report of Millennium Development Goals (MDGs) which has con-cluded that close of half of countries in Sub-Saharan African (SSA) were

substantially off-course from achieving the MDG extreme poverty get (Asongu and Kodila-Tedika 2017) The tendency translates growing exclusive development because the sub-region has been enjoying more than two decades of growth resurgence, which began in the mid-1990s (Fosu 2015) The corresponding evidence of immiserizing growth is evi-dence of non-inclusive growth because output has been growing but yet

tar-a gretar-at proportion of the popultar-ation htar-as remtar-ained trtar-apped in extreme poverty

Second, the concept of sustainability underlying the book is ent with recent inclusive development literature (Amavilah et al 2017; Asongu et al 2017, 2018) In accordance with the narrative, for sus-tained development to be sustainable it should be inclusive and for inclu-sive development to be sustainable, it must be sustained In the light of the briefly discussed factors motivating this book, it is apparent that sus-tainable development, especially by means of inclusive policies is a sub-stantial policy concern in the post-2015 development agenda

consist-Sustainable development includes the ability of African countries to meeting the present economic, social and environmental needs without compromising the ability of future generations to meet their own needs This implies that there must be a clear balance and prioritisation on what works best for development without further escalating other societal problems The SDGs are focused on building adequate structures and productive capacity that will create a platform for which development can be sustained Among the structures that are of interest are economic and environmental structures, which are also key features of the common African position on the Post-2015 development agenda In the light of the importance of sustaining African development and the economic welfare that can be accrued from this action, a recurring issue will be to understand the means and processes by which this agenda will be funded (Asongu and Nwachukwu 2017a, )

In terms of finance, Africa has heavily relied on foreign capital inflow

in the form of foreign direct investment (FDI) and aid, as well as tances that are transferred from diaspora to indigenous recipients These forms of capital have been argued to have their merits and some have been heavily criticised as harming the economy of African countries (see Moyo 2009; Easterly 1999, 2008; Asongu 2016) However, it will be fair to say that these forms of capital have to a large extent contributed its margin to the development experiences of African countries For instance, with the benevolence of foreign aid, many African countries like

remit-(Rwanda) have improved their human capital in the form of education, infrastructure and health because of foreign aid Also, foreign investment

is seen as an important capital input that can be a big-push for the trialisation outcome of African countries (Asiedu 2002, 2006) This is apart from the many other benefits that are derivable from their presence (Anyanwu 2012) A similar trend is observed for remittances Therefore, given this insight, it will be most important to observe the re-invention

indus-of these forms indus-of capital in driving sustainable development, and the extent to which they complement other forms of domestic and indige-nous capital

The issue of identifying, reconfiguring and reinventing financial flows

to African countries for efficient provision of structures that can aid in the sustenance of development is an important issue for finance and development This book also appreciates new and innovative financing schemes that can be leveraged upon for sustainable development For instance, with the growth of religious movements in most African coun-tries, the strength of pool-funding is manifest with the rise of human capital and investment schemes that are advanced by these organisa-tions Also, the recent initiative put forward by the International Food and Agricultural Development to encourage the engagement of migrant workers in sustained economic development of their home countries through investment in agriculture is another case in point of innovative financing that has been explored in this book

Apart from the sources of funding African development, the book focuses on institutional and public management issues that can enhance the effectiveness of funding in Africa (whether external or internal) Issues surrounding institutional constraints that can constitute a major hindrance to the use of finance for public interest are looked into in this volume Most importantly, case studies that relate to effective manage-ment of public funds for development are considered

In this introduction, we present an overview of chapters that are ered in the current book Such coverage strives to provide a compre-hensive insight of the engaged mechanisms and policy suggestions on how sustainable development can be financed in Africa in the post-2015 development agenda In what follows, the summary to the fifteen chap-ters the book comprises is not in order of importance

cov-Nomahlubi Nkume in Chapter 1 covers alternative financing anisms that African governments can pursue in financing sustaina-ble development The study critically assesses financing methods for

mech-sustainable development in Africa Traditional mechanisms of financing that have been employed in the region as well as the apparent challenges constraining these channels in the light of the evolving global context The study also explores solutions to the financing of sustainable devel-opment models that have worked in different nations of the continent and further articulates the relevance of local governments in ensuring that the sustainability of such financial mechanisms The author also presents its model of finance and how the proposed model can be lev-eraged upon on achieving sustainable financing It is important to note that the discourse of local models is broadly consistent with the narrative

on local cooperatives from the preceding chapter on financing Africa’s industrialisation

Efobi Uchenna, Orkoh Emmanuel and Atata Scholastica use foreign market participation as an example of foreign investment to extend the narrative in Chapter 2 Given that good institutions are essential for financial inclusion, the study explores the effect of financial inclusion on the export capacity of manufacturing firms in Nigeria The findings sug-gest that access to financial services increase the export capacity of firms with the effect contingent on the firm’s location

Ben Katoka and Huck-ju Kwon in Chapter 3 assessed the impact of business regulation on FDI inflows in SSA The authors establish that FDI

is sensitive to variations in starting a business, protection of investors and trading across borders, when a number of factors are considered in the analysis notably: inflation, government effectiveness, natural resources, income levels and population size Building on the results, the study rec-ommends regulatory reform in view of improving the doing business environment in order to sustainably boost the inflow of FDI to SSA.Along the same line of improving financial access, existing deficiencies

to increasing financial services by means of broadening financial mediation are considered by Murat Yülek and Vivien Yeda in Chapter

inter-4 The review which proposes a blueprint for reforms recommends the relevance of integrating more segments for the long term financing of Africa’s development, notably: development banks and capital makers.The relevance of fiscal performance and institutions in the sustaina-bility of the Economic Community of West African States (ECOWAS) is the concern of Ibukun Beecroft, Evans Osabuohien and Isaiah Olurinola

in Chapter 5 The authors establish that there is a significant nexus between institutions and fiscal performance in the sub-region Among the governance dynamics, regulatory quality has the most significant

relevance Given the prevalence of weak institutions in the sub-region

in particular and Africa in general, the study recommends the support for fiscal discipline policies that anchor on a strong institutional frame-

work, which is needed for, inter alia: financing sustainable

develop-ment by means of enhanced fiscal performance and attraction of foreign investment

The question as to whether state fragility matter in the process of tainability is examined by Temitope Laniran from capital flows and eco-nomic connections in Nigeria in Chapter 6 In essence, the study aims to assess the significance of state fragility in economic growth by introduc-ing state fragility into an economic growth model The results, which are engaged in the light post-2015 challenges to sustainable development, are of vital policy relevance to other African countries because of state fragility remain a major policy syndrome across the continent

sus-Emmanuel Maliti surveys the changing patterns of Official opment Assistance (ODA) in Sub-Saharan Africa (SSA) in Chapter 7 He discloses six principal patterns through which ODA has evolved over the past decade Some of the observed patterns are as follows While ODA

Devel-in the sub-region has been Devel-increasDevel-ing, its rate of Devel-increase is lower pared to other competing regions Relative to traditional ODA members, ODA from non-DAC countries is increasing at a faster rate In the same vein, comparative small and merging DAC members are considerably boosting their ODA to the sub-region in relation to traditional and large DAC countries Other sources are crowding-out the relevance of ODA

com-as a dominant financial source The increcom-asing importance of ODA to the production and economic sectors far outweigh ODA being directed

to the social sector

In Chapter 8, Ishmael Ackah provides trends and strategies on ing sustainable energy with oil revenues in SSA Given the decreasing financial support from development partners, the author discusses how governments in oil-producing countries in the sub-region can leverage

financ-on their comparatively better financial resources to finance their quota

on investments in energy access in order to ensure universal access across the continent by 2030 It is important to clarify that just about half of the population in SSA has access to energy, with the population in rural areas characterised with a relatively lower rate of access, notably: 18% Moreover, an estimated 24 billion USD is needed to ensure universal access by 2030 The current investments show that a financing gap of between 10 billion and 18 billion USD is still apparent and governments

are anticipated to commit approximately 5.4 billion USD on an annual basis, which represents about 13% of total revenues accruing from the oil sector in 2014.

In the light of Africa’s huge natural resource capacities, it is relevant for policy to understand how gains from such resources can be max-imised, especially in the light of the sustainable development agenda Building on the evidence of how some countries have managed natural resources for economic and sustainable development Seedwell Hove and Gladys Gamariel in Chapter 9, argue that if good strategies are imple-mented, natural resources can substantially boost economic develop-ment According to the authors, these strategies should be implemented throughout the value chain of natural resources, notably: from when natural resources are discovered to when they are extracted and their proceeds from exportation managed The narrative further articulates that such management entails the consolidation of institutions required

for, inter alia: the effective and efficient exploitation of the underlying

resources, appropriate fiscal measures and establishment of wealth funds such as sovereign wealth funds Moreover, at the continental level, eco-nomic development policies should factor-in such the cross-country availability of natural resources

In Chapter 10, using ethnographic evidence of agro-pastoral munities in Eastern Ethiopia, Getachew Endris, Paul Kibwika, Bernard Obaa and Jemal Hassan investigate whether the implementation of social safety net intervention influences indigenous social capital in view of coping with livelihood shocks The authors recommend better commu-nity targeting because whereas the provision and development of formal safety nets are essential in ameliorating adaptation capacity and risk- coping ability of the poor, pre-existing informal safety nets should not

com-be crowded in the process The recommendation builds on the evidence that households’ willingness to cooperate and participate in informal net-works is required for coping with uncertainties diminishes in research sites where poor targeting performance is associated with safety net programs

Oluwabunmi Adejumo in Chapter 11 investigates issues ing to sustainable development in the light of the environment-income nexus within the context of Nigeria The study essentially seeks to assess whether economic wealth accruing from heightened economic activ-ities have affected the demand for environmental-friendly standards by citizens of the country Upon investigating the Environmental Kuznets

pertain-Curve (EKC) hypothesis, the study concludes that the desire to spend in ensuring and/or financing environmental sustainability in Nigeria is low.

In Chapter 12, James Peprah examines the relationships between micro-credit, child education and health outcomes with a case study from Ghana The author investigates the impact of parental borrowing

of micro-credit on health and education outcomes of children in the two Districts in the Central and Western regions of the country The findings show that compared to non-clients, the children of clients are healthier and more regular in school Based on these results, the author recom-mends that traditional microfinance programmes should integrate prod-ucts related the health and education of children with specific emphasis

on low income households, in view of promoting inclusive human development

Isaac Koomson and Muazu Ibrahim in Ghana investigate the ship between financial inclusion and the economic prosperity of non-farm enterprises The findings of the corresponding Chapter 13 show that enhancement of non-farm entrepreneurs’ level of financial inclu-sive increases the growth of attendant enterprises, with a comparatively higher beneficial effect in urban compared to rural areas Ultimately, policies designed to enhance financial inclusion will go beyond spurring firms’ growth to expanding non-farm enterprises and by extension, tax income from corresponding increased economic activity

relation-An internal financing mechanism by which industrialisation in African can be boosted is in the role of cooperative organisations Using the example of the Tanzanian Development Vision of 2025 in Chapter 14, Mangasini Katundu argues the country has a good network of coopera-tives that can ease the coordination and implementation of the country’s industrialisation agenda The argument builds on an underlying assump-tion that cooperatives are institutions, which can translate industrial pol-icies of government into action The article discloses how cooperatives can be leveraged for rural industrialisation, partly because their flexibility and conjunction with responsive governance can repair structural imbal-ances and eliminate cross-sectorial and regional differences In summary the article addresses two fundamental issues: on the one hand, existing cooperatives can be used for industrialisation and on the other, how lev-eraging on such cooperatives is sustainable in the long term Given that most African countries already have well implanted cooperatives, other African governments in the financing of sustainable development can consider the suggested financing mechanism

In Chapter 15, Murat Yülek and Mete Yağmur extend the discourse

by exploring the textile and clothing sector can be industralised in SSA Several factors are established to provide an enabling environment for

the development is this sector in the sub region, inter alia: logistical

advantages, cotton production and low wages The suggestions of how the fashion industry in Africa can be consolidated in light of the growing African fashion industry will ultimately increase fiscal performance owing

to the economic prosperity of the promoted industry

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Financing in Africa for Sustainable

Development

Financing Mechanisms African Governments Should Pursue in Financing Sustainable Development in the Next 20 Years

Nomahlubi Nkume

1 introductionThis paper begins by providing a definition for sustainable development

in Africa In doing this, I offer a lens through which financing options should be viewed in the continent in order to achieve robust and more inclusive development I subsequently give an overview of traditional methods of financing followed by the challenges these modes of financ-ing face I then present three mechanisms for financing sustainable development Finally, I present a financing model and the role of local government in financing development in Africa

The last two decades have seen much work globally to construct a universal definition for sustainable development The gains achieved over the years in redefining development (that is more robust than eco-nomic growth, and increases in GNI) towards a more inclusive term that incorporates HDI has resulted in the birth of a widely used definition

© The Author(s) 2018

U R Efobi and S Asongu (eds.), Financing Sustainable Development

in Africa, https://doi.org/10.1007/978-3-319-78843-2_2

N Nkume (*)

School of Governance, University of the Witwatersrand,

Johannesburg, South Africa

for sustainable development The World Commission on Environment and Development defines sustainable development as, “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WC Development 1987) This definition contains two key concepts within it “They include the concept of needs, in which priority should be given to meeting the needs

of the poor; and the concept of limitations, imposed by the state of nology, and social organisation on the environment’s ability to meet the current and future needs” (WC Development 1987) This remains the most commonly used definition in conceptualising sustainable develop-ment The United Nations, OECD, African Union (AU) and the African Development Bank (AfDB) all use the above definition in conceptualis-ing sustainable development in their specific context and policies

tech-It is both shocking and worrisome that Africa’s key development organisations (African Union, and the African Development Bank) do not have their own definition for sustainable development, despite the peculiar context and specific structures of African economies For exam-ple, certain words contained in the sustainable development by WC Development (1987) have different meanings in Africa The use of the word “poor”, in the idea that sustainable development should meet the needs of the poor should be considered contextually Some important issues to be considered include: (i) “who is the poor in Africa?”, “is it the man without access to finance?” “is it the man who finds himself hav-ing to abandon his traditions in order to embrace globalization?” “is it the smallholder who makes less than a dollar a day?” Though the World Bank has a standard definition of the poor (individuals living on less than

$1.90 a day), it is important to contextualise the definition of the poor

to enhance relevant policy recommendations, and (ii) the concept of

“limitations” is so vast in Africa and requires unbundling This implies that the definition of limitations in the context of Africa masks some important information that warrants more enquiry In this paper, I pro-pose a working definition that can be taken up by development organ-isations that are targeted at African issues like the AU, AfDB and other African policymakers The definition therefore is:

Sustainable development in Africa means development that ensures marginalised individuals and communities are granted access (finan-cially, educationally, etc.) to participate in the economy in a manner that ensures their future generations remain active participants in the econ-omy, while preserving cultural practices in a manner that respects the need to preserve the environment for future use

This study, therefore, proceeds with this definition and critically ines the finance option for such development The chapter proceeds by discussing the traditional sources of financing sustainable development, which is immediately followed by the discussion on the changing global context and challenges that are faced by the traditional sources of financ-ing such development The fourth section is focused on suggesting some pragmatic solutions for financing sustainable development in Africa based

exam-on the working definitiexam-on proposed above The fifth sectiexam-on includes a discussion on the role of the local government in driving the pragmatic definition of sustainable development provided in this study The conclu-sion and policy recommendations are included in the sixth section

2 trAditionAl sources of finAncing sustAinAble

development in AfricAThis section is a brief overview of the most commonly used traditional sources for financing development in Africa The section also consid-ers the situation of Africa in terms of how Africa has been faring with regard to the identified funding The section also succinctly looks at the criticisms of these types of financing for development on the continent, specifically looking at Official Development Assistance (ODA)

Development in Africa has previously been financed by huge funds from the public sector This has been the case for many decades, and only in the last decade was there a rising shift in discourse, that is aim-ing to involve the private sector as a key player in the development nar-rative, specifically for raising finance to fund development Thus, key financiers have historically been International Development Financing (IDF) that are leveraged from both public and private investors, with private investors consisting mainly of philanthropists, while the public sector remained as lead investor IDF also consists of ODA administered

by multilateral banks and development banks and Other Official Flows (OOF) with ODA as the most common kind (SDSN 2015) IDF seeks

to address mainly six areas of development; human development, social development, intellectual capital development, natural development, infrastructure and business development (SDSN 2015) The primary aim of ODA is to address economic, sociopolitical, and environmental deficiencies in developing countries, especially in the Least Developed Countries (LDC) ODA also aims at leveraging other sources of funds

in the economy from either public, private, local and/or external funders (Boussichas and Guillaumont 2015)

Africa, especially sub-Saharan Africa, is one of the largest recipients

of ODA Since the 2002 Monterrey Consensus, financial flows into the continent increased both in quality and in quantity ODA to Africa now consists of 75% private capital flows (UN 2014) There are many reasons for the increase in private capital flows into the continent First, investors

no longer see Africa as the continent in need of “aid”, but as one with opportunities with huge potential for returns on investments Second, the rise in the continent’s middle-class affords market expansion for new export markets and new technological developments such as mobile banking, and the use of mobile technology in the health sector

However, in the last decade three-quarters of investments were directed at resource-rich countries, and the extractive industries, thus stifling investments in other prospective economic sectors in the conti-nent (Sy 2015) Terrorist attacks in Nigeria, brutal civil wars in South Sudan, bloody conflicts in the Central African Republic, and Democratic Republic of Congo, coupled with highly contested and sometimes bloody elections, and even prevalent corruption continue to plague the continent and pose a serious threat to the mobilisation of private capital flows (Fig 1)

This new phenomenon of increased leverage of private capital flows, coupled with the increased leverage of domestic private capital, and interregional capital flows, is key in ensuring financing for sustainable development in the continent Alongside increases in private capital flows, increased ODA, and the growth in revenue from remittances, has been vital for the growth that Africa has witnessed in the last decade (OECD 2016)

In 2013, ODA provided by donors globally, reached $134.8 billion

in net terms, an all-time high, following declines in both 2011 and 2012 (UN 2014) Despite the all-time high levels, only five OECD DAC donors managed to reach the 0.7% target of gross national income (UN

2014) This highlights the difficulties most developed nations have been facing in funding assistance for development, which includes slow eco-nomic growth, increased nationalism, and protectionist policy utterances Despite sluggish growth by donor nations, ODA continues to be a vital instrument for financial and technical cooperation in LDC, landlocked developing countries, and to many African countries, in particular (UN

2014) Forty percent of ODA currently goes towards assisting least developed economies, of which there are 46 LDC countries listed with the UN, and 33 of these countries are located in Africa This has pro-found ramifications for ensuring sustainable financing for development

in Africa ODA alone, although largely beneficial, is not a sustainable method for financing development, thus African LDCs need to devise methods of accessing funds for development in a sustainable manner such that ODA can then be used as a means for unlocking other financ-ing methods.

Some other form of development finance is climate finance, which is

a recent form of development finance that is focused on mitigation and adaptation strategies to environmental challenges This form of finance has grown significantly over the past years A decade ago climate finance was provided by a small number of pull funds under the United Nations Framework Convention on Climate Change Currently, there are over

50 international public funds for climate change alongside private funds (UN 2014) A survey conducted by the OECD in 2016 showed a total

of USD81.1 billion was mobilised from the private sector alone by opment finance interventions in the form of syndicated loans, guaran-tees, credit lines and direct investments into companies (OECD 2017) The survey indicated an upward trend (see Fig 2) with an increase from USD15 billion in 2012 to 26.8 billion in 2015 Middle-income

countries were the largest recepeints of the funds, with 77% of the mobilised funds going into projects in these countries (OECD 2017) Africa was the main beneficiary region during this period, with a total of USD24.3 billion investments over the years (OECD 2017).

The literature on the effectiveness (or lack thereof) of ODA is vast The most commonly cited argument against ODA is that it tends to create a dependency from the recipient country to the donor country This dependency is said to hamper development as it does not allow the receiving nation to formulate creative ways to raise its own capital for development purposes (Moyo 2009) There is some validity to this argu-ment For instance, if a nation is aware that there is an annual funding source of about $98,770,000 (Gabon’s total ODA in 2015) in ODA, then it is logical to expect that such a country will not be incentivised to plan on raising such funds from other fiscal and non-fiscal means of rev-enue generation However, this assumption can be equated to a beggar who sits in the same corner every day and assumes he will get $10 every-day based on the fact that yesterday someone gave him $10

First, this argument of dependency assumes that recipient nations are not capable of using the ODA to leverage other investment types It fur-ther assumes a very docile nature about the recipient countries Finally,

it totally misunderstands how investments work Countries that receive

Fig 2 Global private finance mobilised for climate change in 2012–2015, USD

a lot of ODA are usually war-torn countries that lack functioning cial systems (which enable private donors to pull out their money with ease), and are plagued with corruption and inefficient governance sys-tems This makes these countries high-risk investment zones and deters private investors from investing in them What the ODA does is that it signals that “someone” is still willing to invest in such countries, which can help mobilise private investment from investors willing to take a financial risk by investing in these countries Coupled with other factors, this is typically the case in Gabon’s housing sector, where the govern-ment of Gabon, by investing in affordable housing managed to attract private foreign investment into the sector in the last five years.

finan-Touched on above the argument for ODA and its success is that it enables countries to leverage other kinds of investments like trade finance However, as in the case with Gabon, ODA has to be coupled with regulation and legislation reform which makes doing business in the country easy It also has to be accompanied by either strengthening existing financial systems or completely reforming them to facilitate easy interregional and international transfers Information gathering and shar-ing, especially in the African context is very key in making ODA suc-cessful, especially in its quest to mobilise private funds ODA also has the advantage of relieving national budgets that are under pressure and thereby releasing resources that are important for development (Boussichas and Guillaumont 2015) However, it is important to note that regulatory and policy reforms only yield benefits in the long run, thus making it extremely difficult for governments to implement

3 A chAnging globAl context And chAllenges fAced

by trAditionAl sources of finAncing developmentThis section explores the evolving global dynamics and growth trends for

2017 and how they affect traditional forms of financing development This section also looks at challenges financing for sustainable develop-ment needs to address in Africa I then construct elements of what a solution for financing development in Africa should look like and this is elaborated on in the final section of this paper

Developed nations have, since the 1980s experienced stagnation in real wages causing panic and resistance towards increased globalisation (Lysy 2013) The stagnation in real wages also resulted in decreased domestic demand, a key component in stimulating economic growth

Projected rise in global growth rate for 2017 is 2.7%, and expected to reach just above 3.5% in 2018 (OECD 2017) Developed economies are only expected to grow by 1.9% in 2017 (up by 0.2% from the previous year), while growth in emerging markets and developing countries are expected to adjust to 4.1% in the same year (World Bank 2017b).

New political realities around the world are shaping up in 2017 The United States, the world’s largest economy per nominal GDP and the world’s second-largest economy using GDP PPP (purchasing power par-ity), is faced with an unprecedented president, who holds different ideas and goals from his predecessors (IMF 2017) The immediate effects from the US elections on its economy have been an increased bond yield and an appreciation of the dollar due to expectations of faster growth (Deloitte 2017) Robust economic activity is thus expected in developed countries in 2017, supported by the upturn in the US economy

Europe experienced moderate growth in 2016 at 1.8% and is expected

to grow to only 1.7% in 2017 (World Bank 2017b) Unemployment still remains high in much of the continent (Deloitte 2017) The region

is facing critical elections, with Germany and France heading to the polls These elections will set the policy environment stage for the year (Deloitte 2017) France is expected to exit the European Union, in what analysts are calling FREXIT, with the Netherlands (NEXIT) also expected to follow suite (Frost and Sullivan 2017) In China, growth is stabilising but faces risks in the form of higher debts and rising trade ten-sions (World Bank 2017a)

Global economic growth has over the years been propelled by nological advances which increased growth opportunities However, this year the global political climate will eclipse growth from technological advances

tech-With a change in government in the US, we can expect decreases

in ODA contributions by the US Cutting aid has been one of Donald Trump’s policies and thus far he is living up to every policy proclama-tion he made during his campaign This shift in government and pol-icy also resulted in the United States pulling out of the Paris Agreement for renegotiation This could have significant ramifications for climate financing, especially if other countries follow suit With EU giants head-ing to the polls this year are facing increased populism from far-right opposition parties; the world could see more examples of BREXIT, via FREXIT and NEXIT and possibly more With 12% of ODA to Africa coming from EU institutions, any internal destabilisations of the union

could result in a significant decline in ODA inflows to Africa Although China’s economy faces risks from increased debt and rising trade ten-sions, ODA to Africa (especially in the form of infrastructure develop-ment) is expected to remain unchanged However, China’s contribution towards ODA inflows in Africa is small in comparison to the US and the EU.

Before we look at the challenges that financing for sustainable opment needs to address it’s important that I look at what sustainable development financing in Africa should aim to achieve To be sustaina-ble, financing has to address economic, social and environmental vulner-abilities in Africa (Boussichas and Guillaumont 2015) First, sustainable financing in the continent should aim to address susceptibilities caused

devel-by social, economic and environmental factors in a manner that increases

“access” resulting in more inclusive growth and development Second,

it should aim at strengthening an enabling business environment, ing local, regional and international partnerships Finally, it should aim at showcasing the unique opportunities that Africa possesses by facilitating accurate real-time information sharing platforms and put the people of Africa first

creat-Africa has significantly more pronounced challenges that sustainable financing for development needs to pay careful attention too Adequately addressing poverty, inequality, hunger, improving healthcare and edu-cation and providing access to affordable housing, remains a huge challenge for Africa and financing for sustainable development needs

to actively address these challenges This implies generating enough finances to address these problems Although Africa has made significant strides in addressing poverty, and hunger in the last decade, poverty rates still persist with approximately 48% of the continent still living in pov-erty, as per UN definition (UNDP 2015) Estimated funds required to address extreme poverty (less than $1.25 a day) is $66 billion per annum (Chandy and Gertz 2011) However, Africa also has the necessary ingre-dients for growth It houses the world’s youngest population, a growing middle class and by 2030, 20% of the world’s population will be found in the continent (Deloitte 2017)

Financing for sustainable development also needs to ensure that tainable cultural and indigenous practices coexist with global objectives

sus-to preserve the environment An example of this it the use of indigenous seeds in sustainable farming that is currently facing competition from Genetically Modified Organisms (GMO) Preserving African agricultural

practices is key and finding financing that enables this is crucial when talking about sustainable development in the continent.

Finally, financing for sustainable development in Africa should address harnessing the business environment and establishing of mechanisms that strengthen domestic businesses, while facilitating regional and interna-tional trade This ranges from strengthening local regulation and govern-ance to ensuring well-functioning cross-border payment systems

It is important to highlight that challenges faced by countries across the continent differ Some are landlocked countries with specific and differing needs, while others are economies emerging from conflict In Africa, we also have a combination of LDC and Middle-Income econ-omies with differing needs However, the above-mentioned challenges remain cross-cutting across the continent

4 solutions for finAncing sustAinAble development

in AfricAThis section of the paper will look at existing solutions that the African governments should adopt in financing development in Africa in the next

20 years

Various scenarios have been conducting in order to determine the amount required annually to finance sustainable development No pre-cise value is currently available but the financing required is estimated

to be several trillion of dollars annually Financing for additional structure alone is estimated between 5 and 7 trillion dollars annually (UN 2014) Considered alone these are huge sums of money However, considering that global savings (both public and private) alone sum up

infra-to $22 trillion annually the picture becomes less gloomy The question that economists, development scientists and many others operating in this space need to answer is how do we solve the long existing economic challenge of resource allocation These global savings are currently being directed into a traditional profit generating investments and the need to redirect them into financing development is key in our quest of seeking sustainable financing sources Much work is already being done in trying

to reallocate the $22 trillion per annum earned from global savings into financing sustainable development

It is important that I reiterate that no single source of financing is independently sufficient to successfully tackle financing sustainable

development For example, trying to redirect the whole $22 trillion

in global savings towards financing sustainable development is almost impossible but supplemented with other funding instruments, financ-ing the existing gap in sustainable development can be achieved Below we look at some of the funding options for financing sustainable development in Africa

4.1 Sovereign Wealth Funds

There is no commonly agreed upon definition of what a Sovereign Wealth Fund (SWF) is There is neither consensus on how they work However, existing data shows that SWF evolved from funds set up by the state whose revenue stream depended on the value of a specific commodity (Giovannetti and Lanati 2015) They are aimed at preserv-ing high returns from non-renewable resources, like oil for future gen-erations (Boussichas and Guillaumont 2015) These are separate from central banks Despite the rise in recent years of a shift away from non- renewable resourced in the climate change fight, a quarter of the world’s economies still rely on the use of non-renewable resources and more than half of them have SWFs in one form or another (Fourie 2016) This form of investment has been in existence since the 1950s, but over the last decade or so SWFs have focused on longer-term investment strat-egies and have increased in both number and scope (Fourie 2016) Norway made significant gains from this type of investment in the late 1990s (Giovannetti and Lanati 2015) African countries that already have SWFs investments include Algeria, Botswana and Libya with Ghana and Nigeria having established theirs in 2011 Angola and Senegal fol-lowed suit in 2012 (Fourie 2016) Tanzania, Kenya and Mozambique are in the process of finalising their SWF policies while South Africa is still debating how SWF would be structured in the county

In 2014, $7 trillion SWF assets were managed by the SWF Institute, with 60% emanating from oil and gas related exports (Giovannetti and Lanati 2015) Rising commodity prices and discoveries of new resources

in this period played a role in the increased size of this asset class Apart from Norway, none of the eleven largest SWF come from OECD coun-tries and all newly established SWFs came from developing countries with four from Africa (Giovannetti and Lanati 2015)

SWFs play a crucial role in Africa having contributed 40% towards Botswana’s GNI, 100% towards Libya’s GNI and makes up a quarter

of Algeria’s GNI (Fourie 2016) This investment fund has the ability

to convert temporary resource revenue into a permanent investment income, which has become very seductive to countries that rely on natu-ral resources which are affected by unstable commodity prices

This investment fund is not without its complexities For example, some argue that these funds are best utilised when invested abroad so

as to avoid domestic inflation, real exchange rate appreciation and tractions from other traded sectors commonly referred to as the Dutch Disease (Fourie 2016) Another argument given for investing these funds abroad is that most profitable investment domestically are financed already at world interest rate, assuming an open capital account (Fourie

con-2016) Other scholars argue that a lot of African countries do not have

an open capital account and should, therefore, invest these funds locally and more specifically into infrastructure development projects (Sy 2015) Other questions arise when thinking about setting up a SWF, like who will have an autonomous decision over how these funds will be spent?There is no simple answer to these questions African countries think-ing of setting up an SWF will have to consult those that have already done so, with Nigeria being the best-cited example (Fourie 2016) This

is also where ODA has a role to play, by giving technical assistance to LDCs in Africa which can assist them with setting up governance struc-tures for SWFs Also, governments need to remember part and par-cel of going through the lengths of setting up an SWF is to minimise rent-seeking behaviour by politicians

In 2011 Nigeria, the largest oil producer in sub-Saharan Africa, set

up its SWF managed by the Nigeria Sovereign Investment Authority (NSIA) (Sy 2015) The fund was given an endowment of $1 billion by the government and acts as a substitute to the Excess Crude Account (Boussichas and Guillaumont 2015) The savings gained from the dif-ference between budgeted and actual market prices for oil are invested

to generate earnings for future generations (Divakaran and Colford

2014) The fund is divided into three investment pools, each with a cific objective The first pool is a Stabilisation Fund aimed at absorbing shocks, the second pool is a Future Generations Fund geared at long-term investments and the final pool is a Nigerian Infrastructure Fund aimed at securing investments into the economy’s key sectors like agri-culture, power, transport or healthcare (Divakaran and Colford 2014).What the Nigerian SWF framework highlights are that you do not need to deploy an either-or investment strategy, i.e either investing all your SWF abroad or locally but can actually structure it in a way that

spe-enables both, thereby diversifying and maximising returns from your SWF For example, the pool Future Generations Fund can be invested abroad while the pool for Infrastructure can be reinvested locally.

Under proper management and governance SWF are expected to play

a key role in the coming years They provide development finance for countries still at the margins of international markets (Divakaran and Colford 2014) Recent global events such as the financial crisis of 2008, stagnation in developed economies, overall fall in global GNI and the continued rise in emerging market’s GNI, has led to SWFs seeking diver-sification by investing in emerging markets Currently, 80% of SWFs are invested in Asia, Africa and the Middle East while only 20% is invested

in Europe and the Americas (Giovannetti and Lanati 2015) This shift simplifies even further the question of whether African countries are better off investing SWFs abroad or locally However, weak financial systems, risky investment environments marked by high levels of bureau-cracy plagued by corruption and poor governance are preventing an even greater number of SWFs from reaching developing countries

In conclusion, I assert that SWFs are a financing option for able development that African governments should pursue In line with the Nigerian structure, the fund should be administered by an independ-ent financial body to minimise rent-seeking politicians from accessing the funds Structuring the funds to ensure some funds are invested locally for infrastructure or any other development areas in the social, sociopolitical

sustain-or environmental realm is key With the global shift in investing SWFs

in emerging markets, African governments need to seize this window of opportunity by creating environments where business can be conducted with ease by lowering bureaucracy and strengthening financial systems ODA has an important role to play in assisting emerging markets, espe-cially resource-rich LDCs in Africa, in attracting SWF investment up from the 80 to 90% and even 100% in the next decade

African governments cannot do this alone, in countries where there

is a well-functioning financial system governments need to partner with local banks, fund managers and development banks in structuring and managing SWFs

4.2 Private Financing

The private financing space in Africa has witnessed a rise in new entrants in the last decade, with global players seeking new markets, and South African players seeking to expand their mandate outside their boarders The

continent is overall experiencing the longest and most robust economic growth since the 1960s with a fourfold increase in output since 2000.Before I embark any further on this topic it’s important to elaborate

on what I mean by private financing In this paper, private financing is understood as investment from a range of actors operating in the private sector including individual households (both domestic and international) multinational corporations, direct investors (both domestic and interna-tional) financial intermediaries such as banks and pension funds

Private resource has over the years been pivotal in driving growth and the creation of jobs within a nation However, there continues to be a dearth in mobilisation of long-term financing for sustainable develop-ment coming from private financiers despite growing understanding that commercial interests and public policy goals are not mutually exclusive but can be realised simultaneously

African governments, have a crucial role to play in constructing cies that incentivises longer-term investment in sustainable development

poli-by private actors An enabling business environment reduces the risk of doing business enormously Governments can also use private financ-ing to establish and develop local capital markets and financial systems that harness long-term investments within a well-functioning regulatory framework

When looking at private financing in Africa, special mention must be made of the financial sector More than 50% of the working-age adult population in the world in classified as unbanked (Chaia et al 2010) Nearly 2.2 billion of unbanked people live in Africa (Chaia et al 2010)

In South Africa, one of Africa’s economies with a well-functioning cial system, 12 million people (23 5% of the population) are financially excluded (Finscope 2012) Over $900 million (R12 billion) is estimated

finan-to be kept off the financial system in South Africa and instead kept at home (Finscope 2012)

Financial exclusion has the effect of diverting domestic private funds from households away from a country’s financial system and thus inhibits them from being invested towards sustainable development objectives

It causes a leakage in the system Their numbers get scary as you look into other African countries However, alternatives to formal banking, such as micro-financing, postal banking, cooperative banks and savings banks, have made tremendous gains in the continent Therefore ways

to access these funds for investment purposes into development projects needs to be devised Thus, governments need to form partnerships with