10 Financial Flows 10 Financial Flows

Contact at AFI team is Jakkie Cilliers
This entry was last updated on 30 August 2022 using IFs v7.63.

This theme deals with the most important financial flows to and from Africa. It provides an overview of the role of overseas development assistance (aid), foreign direct investment (FDI), and remittances in development, as well as an estimation of the burden of illicit financial flows. We consider the size and impact of these flows at the regional and country level, with a particular focus on the growing footprint of China in Africa, particularly with regard to FDI. We then model an ambitious scenario that includes an additional push to achieve the Sustainable Development Goals by 2030 and a follow-on campaign, increase investment to the continent, maximise remittance flows and reduce illicit financial flows. 

Summary

  • Aid, foreign direct investment (FDI) and remittances are the most important financial inflows to Africa.  
  • The United States, Europe and China are the most notable donors to Africa, with some contributions also coming from philanthropic organisations.
  • Africa is a marginal investment destination and gets about 3% of global FDI. Its stock of FDI represents less than 1% of the global total.
  • China has a growing footprint on the continent, although the conditions associated with loans and contracts for infrastructure projects have sometimes been noted as a concern. Africa’s future infrastructure prospects are tied closely to those of China..
  • Countries with large diaspora populations can tap into the funds within that community to invest locally by benefiting from a patriotic dividend, as Ethiopia and Kenya have shown.
  • Illegal capital flow from the continent poses a central challenge to development financing and African governments should endeavour to strengthen measures to curb tax evasion, money laundering, trade misinvoicing and profit shifting.
  • The Financial Flows scenario shows that interventions to increase aid, foreign direct investment and remittances, and reduce illicit outflows can have a significant impact on development through stimulating economic growth.

All charts for Theme 10

Introduction and overview

This theme provides an overview of trends in three types of financial inflows, namely aid, foreign direct investment (FDI) and remittances, and uses a proxy to emulate reductions in illicit financial outflows. The picture is complex since the role of traditional actors in these areas, such as Europe and the US, is giving way to new incumbents (China in particular). This first section provides a summary view. Chart 1 presents a summary of aid, FDI and remittance flows to Africa from 2000 to 2019, from which it is evident that remittance flows now outpace both aid inflows and FDI investments. However, the flows shown in Chart 1 reflect the total amounts into each African country, which means that they include remittance and FDI flows from one African country into another, which may skew the picture.

Prior to COVID-19, dependency on external aid to Africa was steadily declining, with countries generally receiving more FDI than aid.

Chart 2 shows net aid receipts by Africa, South America and South Asia from 1960 and includes the IFs forecast of aid to 2043. By 2019, Africa had received a total of US$2.4 trillion aid since 1960, compared with US$284 billion received by South America and US$703 billion received by South Asia. That amount includes the 2019 number during which Africa received US$72.7 billion in net foreign aid (in constant 2017 US$), equivalent to roughly 2.4% of GDP. This is significantly more, both in absolute amounts and on a per capita basis, than South America and South Asia, the two most comparable regions.

Africans living in Africa do not only receive remittances from the diaspora outside the continent but also send remittances (although less) to their families and support extended families in other African countries. These in- and outflows are presented in Chart 3 for 2019, comparing the situation in Africa with South America and South Asia.

  • The combined inflow of remittances to African countries in 2019 amounted to US$51.4 billion, much more than in South America and about half the amount in South Asia.
  • Remittance flows in Africa in 2019 amounted to less than half of aid flows, at 1.7% of GDP or US$51.4 billion.

Chart 4 presents a snapshot of FDI flows for 2019 in Africa, South America and South Asia. Although FDI flows generally have large year-on-year differences, 2019 FDI inflows were equivalent to 3.1% of GDP in Africa, 1.3% of GDP in South America and 6% of GDP in South Asia. In 2019, Africa added US$63.3 billion to its stock of FDI, then estimated at US$1.2 trillion, which represents 40% of the continent’s GDP.

Aid to Africa

Aid to Africa is a contentious matter, with proponents and detractors in unyielding positions on either side of the policy divide. The aid sector is complex and the environment in which it works is diverse, with the sweeping generalisations from the two camps shedding little light on the matter. However, aid remains important for small and fragile economies, few of which attract private capital in the form of FDI.

The levels of aid to Africa shown in Chart 2 reflect an insightful geopolitical story.

  • After an initial period of benign aid neglect following African independence, the Cold War sustained ever-higher levels of aid until the collapse of the Soviet Union in 1989, which effectively robbed Africa of its strategic relevance. The end of the Cold War eventually allowed the aid community (then largely consisting of OECD[1Organisation for Economic Co-operation and Development] countries) to pay greater attention to aid effectiveness and value for money, but corruption, poor governance and high levels of debt led to a significant degree of pessimism as to Africa’s development prospects in subsequent years.
  • Matters turned around with the United Nations Millennium Summit in New York in 2000, followed by the Report of the Commission for Africa released in 2005, and the European Consensus on Development (an EU policy declaration on aid) also issued in that year. Collectively, these efforts paved the way for the 2005 World Summit in New York, which called for increased aid transfers in order to achieve the eight Millennium Development Goals (MDGs) set in 2000.[2The push to halve poverty by 2015 was actually met five years ahead of the deadline, largely on the back of rapid economic growth and pro-poor policies in China, which had little to do with the MDGs. The number of people living in extreme poverty in China fell from 1.9 billion in 1990 to 836 million in 2015, the final year of the MDGs. However, the target to halve the portion of people suffering from hunger was narrowly missed, as were a number of other MDGs. See: H Ritchie and M Roser, Now it is possible to take stock — did the world achieve the Millennium Development Goals?, 20 September 2018.]
  • The 2005 Paris Declaration on Aid Effectiveness outlined five fundamental principles (developing country ownership, alignment to developing country objectives, harmonisation among donors, results-based aid, and mutual accountability) that established an important framework including donor and recipient countries.
  • The 2011 Busan Partnership for Effective Development Cooperation expanded the Paris agreement in that it established, for the first time, an internationally agreed framework for development cooperation, which included traditional and new donors from the South, civil society organisations and private philanthropy. Donors agreed to allow aid recipients to use the aid to procure from the cheapest suppliers rather than those prescribed by donors, an issue that aid advocates had been lobbying for for decades, as well as various other measures that harmonised aid modalities among donor countries.

These reforms precipitated more effective aid, increasingly being channelled to low- and lower middle-income countries than to upper middle-income countries, which, historically, had been economically and politically more important to many donors. Reforms saw aid to Africa’s 23 low-income countries increase to an average of more than 8% of GDP in 2019, equating to more than 45% of government revenue. In contrast, aid has dropped to below 8% as a percentage of government revenue in lower middle-income African countries, and to below 2% in upper middle-income countries, illustrating the progress that has been made in shifting aid to where the need is greatest. By contrast, if aid were distributed equally among African countries, it would equate to an average of 2.4% of GDP.

This background offers an alternative interpretation to the general narrative that aid has made little difference to Africa’s development.

Chart 5 presents aid as a percentage of GDP, from 1960 and forecast to 2043. Although the absolute amount of aid is forecast to increase (right-hand axis) between 2019 and 2043, largely because of economic growth in donor countries, the relative importance of aid (as a proportion of GDP, left-hand axis) is set to decline. Aid to Africa peaked at 6.6% of GDP at the end of the Cold War in 1990. Since North African countries have long since graduated to middle-income status, more than 90% of the aid to Africa now goes to sub-Saharan Africa (although a larger share of European aid has gone to its immediate neighbourhood in North Africa and the Sahel in recent years, in line with the concerns about migration from these regions[3SEEK Development, Donor Tracker EU.]).

Chart 6 presents aid to Africa according to income grouping (as announced by the World Bank for 2021/22) and illustrates the extent to which aid is increasingly targeted at poorer countries (low- and lower middle-income countries). It is important to acknowledge that several countries have graduated from the low-income category to lower middle-income status over the course of the period shown in the chart, resulting in an over-representation of aid to lower middle-income vs low-income countries.

Aid and development

Most aid is provided bilaterally, not through multilateral agencies, although ratios differ. The US provides approximately 89% of aid bilaterally, given its general distrust in multilateral organisations.[4Bilateral aid is provided directly from a national agency, such as the US Agency for International Development or the Swedish International Development Cooperation Agency, to the country or region concerned. Multilateral aid is provided through organisations such as the World Bank and the African Development Bank as grants and concessional loans (i.e. below market rates). See: SEEK Development, Donor Tracker United States and SEEK Development, Donor Tracker EU.] EU institutions also provide most of their funding bilaterally (78%), but the ratio is significantly lower than that of the US. The average for the 30-member OECD Development Assistance Committee (or large aid providers) is 59%.

For many years the debate about the effectiveness of aid pitted micro-analysis of the impact of aid on local communities against macro-analysis that suggested aid contributes little to poverty reduction and economic growth, stifling competition and creating unhealthy dependency. So, on the one side, were well-documented success stories, such as the eradication of river blindness in West Africa, the eradication of smallpox, improvements in contraception, declines in malaria deaths, improvements in education and the provision of basic healthcare. On the other side of these achievements is the apparent inability of sub-Saharan Africa to progress in poverty reduction, with the latter often laid at the door of ‘bad aid’ by detractors.[5See, for example: C Arndt, S Jones and F Tarp, Assessing Foreign Aid’s Long-Run Contribution to Growth and Development, World Development, 69, 2015, 6–18.] In clarifying this dichotomy, Addison et al. write that ‘many critics correlate weak or negative growth with aid flows, without much (if any) attention to the direction of causation, the overall determinants of growth (of which aid is just one) or the counterfactual to aid.’[6T Addison, O Morrissey and F Tarp, The Macroeconomics of Aid: Overview, Journal of Development Studies, 53:7, 2017, 987–97. doi: 10.1080/00220388.2017.1303669.]

The slow reduction in poverty in Africa has little to do with aid being intrinsically positive or negative. Instead of using aid strategically, many African governments view aid as an additional source of income, a tax that the rest of the world pays to compensate Africa for a global system that is skewed against it, or as a token recompense for the damage caused during colonialism.

Aid, including humanitarian support, can ameliorate the worst effects of war, hunger, poverty, poor governance and the lack of provision of services. But it cannot compensate for the lack of government policies and actions aimed at sustained and inclusive growth, the only way to sustainably raise incomes, grow employment and reduce poverty. Hence, most aid can be considered almost palliative, unless it is able to kickstart and sustain inclusive economic growth, as was the outcome of the Marshall Plan in Europe after the Second World War and the vast amounts of aid and technology transfer provided to countries such as South Korea and Japan. In these cases, recipient governments used aid as a force multiplier while working hard to regain their financial independence. Generally that has not been the case in Africa.

Poor countries often have little tax revenue and are unable to finance service provision or close the savings–investment gap that would, at least in theory, lead to more rapid growth. In the absence of significant domestic savings and private investment, aid serves as an avenue through which donors can augment government capacity or compensate for lack of capacity by relying on other methods of service delivery.

For example, without aid, total government revenues in Africa’s 23 low-income countries would be 10% of GDP (as opposed to the actual 19%). In an environment where income from domestic revenues is low (partly because of poor governance), aid boosts government revenues by nine percentage points. The potential positive effect of aid is acknowledged in the sustainable development goals (SDGs), with SDG 17 calling on states to ‘strengthen domestic resource mobilisation, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.’[7United Nations, Sustainable Development Goals, Goal 17: Revitalize the global partnership for sustainable development.] The impact of aid on government revenues for Africa’s 23 low middle-income countries is more modest at two percentage points.

However, a general problem is that aid partly relieves African governments of the burden of raising taxes. Tax rates in Africa are generally significantly lower than global averages and are undermined by various exemptions and large inefficiencies. As a result, African governments are not held accountable by their people for poor service delivery, which is core to why detractors consider aid being more harmful than helpful.

These considerations aside, aid will likely remain important for Africa’s low- and lower middle-income countries for some years to come, especially in the wake of the COVID-19 pandemic. The determining factor is how the recipient governments manage aid. With clear leadership, aid can improve development outcomes; nevertheless, it generally requires more commitment than has been evident in most recipient countries so far.

The experiences of three countries in East Africa, which received similar amounts of aid per person in 2019, illustrate the potential and pitfalls of aid in Africa. Ethiopia, Kenya and Tanzania received about the same amount of aid per person (US$45, US$48 and US$44, respectively) in 2019.[8OECD, Aid at a glance]

  • Before the 2020/22 civil war in Tigray wreaked havoc on Ethiopia’s development prospects, it was among the highest aid contributions in Africa. Ethiopia also has the second largest population on the continent (after Nigeria) and its large aid volumes partly reflect its population size. In 2018, donors provided US$4.9 billion in aid, of which the majority (34%) was for humanitarian initiatives. Approximately US$838 million (17%) went to health and population initiatives, accounting for up to half of the total health spend in the country.[9Aid spending from OECD DAC, Aid at a glance; Federal Democratic Republic of Ethiopia, Ministry of Health, Ethiopia Health Sector Transformation Plan, 2015.] Aid has enabled rapid reductions in maternal and infant mortality rates, which have accelerated Ethiopia’s demographic transition with a very positive impact on the nation’s long-term future development prospects (until the political choices made by Prime Minister Abiy Ahmed and the conflict with Tigray upended things). Aid has therefore made a significant contribution to basic healthcare in Ethiopia because it could tap into the relative efficiencies reflected in government practices compared with most other low-income countries in Africa.
  • In neighbouring Kenya, decades of rampant corruption and outright theft of donor money have given the country a bad name. Kenya has consistently received significant amounts of aid (US$2.5 billion in 2018, with 12.2% going to humanitarian assistance and 37.3% to health and population). However, in July 2004, the UK high commissioner in Kenya, Edward Clay, furiously remarked that the ‘gluttony’ of senior figures in the government of then president Mwai Kibaki was causing them to ‘vomit all over our shoes’.[10M Wrong, It's Our Turn to Eat: The Story of a Kenyan Whistleblower, London: Fourth Estate, 2009, 202.] Aid seems to have fallen victim to the extent to which Kenyan politics is ethnically determined, which has fuelled corruption and patronage in every aspect of society.
  • Tanzania scores significantly lower on the World Bank’s index of government effectiveness than Ethiopia and Kenya, despite Ethiopia being a low-income country where one could expect lower levels of government effectiveness than in lower middle-income countries such as Kenya and Tanzania.[11World Bank, Government effectiveness, Worldwide Governance Indicators.] Perhaps a result of ujaama (African socialism under its first independence president Julius Njerere), which appeared to create a culture of dependency, Tanzania has low levels of entrepreneurship, in marked contrast with neighbouring Kenya. For that reason it is no surprise that Tanzania scores 6.75 for economic freedom according to the Fraser Institute’s most recent index, well below Kenya’s 6.94.[12Fraser Institute, Economic freedom ranking 2019.]

Whereas Ethiopia and Tanzania are ranked 94th out of 179 countries on the 2020 Transparency Index (with a score of 38 out of 100), Kenya is ranked 124th (with a score of 31 out of 100), indicating much lower levels of transparency.[13Transparency International, Corruption Perception Index – Kenya.] The three examples illustrate the importance of the quality of governance and domestic context in dealing with aid.

Despite generally getting a bad rap, aid has brought a few victories. Examples noted in a 2020 report by Oxfam[14E Seery, 50 years of broken promises: The $5.7 trillion debt owed to the poorest people, Oxfam, 23 October 2020.] include the following:

  • Health programmes supported by the Global Fund to Fight AIDS, Tuberculosis and Malaria have saved more than 27 million lives since 2000.
  • The Global Polio Eradication Initiative has galvanised funding to vaccinate hundreds of millions of children, saving an estimated 18 million children from paralysis and eradicating the disease in many parts of the globe.
  • An aid package agreed to at the 2000 Dakar World Education Forum allowed 34 million children to go to school.
  • The Civil Society Education Fund has supported national coalitions in 60 countries to advocate for better policies and more resources for education. In Zambia, the coalition successfully lobbied for education’s share of the national budget to increase to a historic 20.2% high in 2014.
  • Entire social protection programmes are funded by aid in seven countries in sub-Saharan Africa. In Zambia, aid helped to mobilise the resources needed to increase the number of health workers from 12 000 to 17 000 between 2005 and 2010.

Rather than no impact or a solution to slow growth, aid has a modestly positive effect on growth, with an average internal rate of return of around 10%.[15C Arndt, S Jones and F Tarp, Assessing Foreign Aid’s Long-Run Contribution to Growth and Development, World Development, 69, 2015, 6–18] It improves social indicators and helps reduce poverty, but the magnitude of this relationship is modest, varies greatly across recipients and diminishes at high levels of aid.[16F Lammersen and W Hynes, Aid for trade and the sustainable development agenda: Strengthening synergies, Paris: Organisation for Economic Co-operation and Development, 2016.] Aid can therefore contribute to poverty alleviation and human development, but on its own it cannot change the development trajectory of a country.

The shifting global aid landscape: Contribution from the US

The US is the largest donor globally, providing almost a quarter of total aid. It is also Africa’s largest bilateral donor, but levels and interest are declining. In 2018, United States Agency for International Development (USAID) provided US$10.7 billion of aid to sub-Saharan Africa, equivalent to 21% of total aid disbursements, but the 2019 appropriation declined to US$7.1 billion (all in current figures). Aid to North Africa is part of its support to the Middle East.[17Congressional Research Service, U.S. Assistance to Sub-Saharan Africa: An Overview, 2020.]

Most of the aid from the US supports health programmes, particularly HIV/AIDS relief followed by efforts to combat malaria. However, spending on aid as a portion of gross national income (GNI) amounts to only 0.17%, ranking the US as 24th among the OECD Development Assistance Committee donors, well below the UN target of 0.7% of GNI and providing significantly less aid than the EU and its member states.[18Data for 2020 available at: Compare your country.]

In response to domestic and international affairs alike, the US’s primary interests in the African continent have changed and its future evolution is unclear. After 9/11, the US focus shifted to the war on terror, culminating in the disastrous Western interventions in Iraq and Libya, which destabilised the Middle East and North Africa and also spread terrorism elsewhere into Africa. In addition, the shale energy revolution (see Theme 9 ) reduced the US’s dependence on imported oil and hence its relationship with oil-producing countries such as Nigeria and Angola. As a result, US trade with Africa reduced sharply.

The US and other large donors are increasingly pushing for the private sector to have a bigger role, promoting the idea that Africa needs trade and investment, not aid. For example, after several years of inaction the Better Utilization of Investments Leading to Development (BUILD) Act (passed in the US Senate in October 2018) supports private investment in Africa.[19The BUILD Act replaces the Overseas Private Investment Corporation, which was created in 1971.] The US International Development Finance Corporation (USIDFC), which was subsequently established, is able to guarantee up to US$60 billion investment in Africa, focusing on small and medium-sized enterprises and support to local companies.[20The USIDFC will be able to take a minority equity stake or financial interests of its own in development projects. USIDFC will also provide insurance or reinsurance services and technical assistance, administer special projects, establish enterprise funds, issue obligations, and charge and collect service fees. ‘Through these market-based fees, the USIDFC will operate at no net cost to [US] taxpayers.’ See: DF Runde and R Bandura, The BUILD Act has passed: What’s next?, 2018.]

The BUILD Act was part of the ‘Prosper Africa’ initiative, aimed at supporting US investment across the continent.[21According to former US National Security Advisor John Bolton — see: J Airey, Bolton: New Africa strategy is tough on China, Russia, U.N., The Daily Wire, 14 December 2018.] Launched in December 2018, it was part of the Trump administration’s counter to China’s involvement in Africa and is meant to open markets for US businesses in Africa by leveraging mechanisms such as the President’s Advisory Commission on Doing Business in Africa (PAC-DBIA).[22DF Runde and R Bandura, U.S. economic engagement in Africa: Making Prosper Africa a reality, Washington, DC: Center for Strategic & International Studies, 2019.]

In 2019, USAID, then still under the malignant Trump administration, published its strategy on the ‘Journey to Self-Reliance’, which aims to ‘end the need for’ foreign assistance in partner countries.

Under the presidency of Donald Trump, the US strategy focused on countering China but it did not approach a coherent view on the continent. Its transactional approach was also evident in the requirement for Sudan to recognise Israel in return for being removed from the US list of State Sponsors of Terrorism. In 2020, the Trump administration held progress on a free-trade agreement with Kenya hostage to the same requirement, while recognising Morocco’s occupation of the Western Sahara in exchange for its recognition of Israel.

There has been limited change with the presidency of Joe Biden, who continues with an America First foreign policy in Africa aimed at countering China's growing influence. Policy development was also overtaken by a series of crises, particularly the need to respond to COVID-19, deal with US withdrawal in Afghanistan and, in 2022, the impact of Russia’s invasion of Ukraine. In June 2022, the US and other members of the G7 announced the Partnership for Global Infrastructure and Investment (PGII) that sought to rebrand the Build Back Better domestic bill with four pilars: healthcare, gender equality and equity, climate and environment, and digital connectivity with a special focus on Africa.[23K Cheng, The G7 is playing catch-up with China in Africa, 13 July 2022, Quartz Africa

The shifting global aid landscape: Contributions from the EU

Europe, in contrast, remains connected with Africa through shared histories, languages and physical proximity, and its foreign and development policies are increasingly shaped by concerns around migration from Africa.

  • Prior to Brexit, the various EU institutions provided about 13% of aid to Africa.
  • Additional bilateral aid is also donated by individual countries such as Germany and France.
  • At the end of 2020, before subsequent budget cuts, the UK provided about 7% of aid to Africa.[24European Union, Development aid at a glance: Statistics by region: Africa, 2019.]
  • For the 2017–2020 External Investment Plan, the EU budgeted €32.5 billion in grants to Africa and, in its 2021–2027 budget, it made provision for €40 billion.
  • The EU budgeted for a further €3.7 billion in grants for blending and guarantees. These amounts exclude bilateral aid from individual EU member states.[25European Commission, Africa-Europe Alliance, 2018.]

The EU has been diligent in nurturing a collaborative and consultative relationship with Africa. Whereas the US is cautious in engaging with regional organisations such as the African Union and Africa’s various regional economic communities, the EU often sees them as its primary point of engagement, which reflects its own supranational economic and political architecture. Decades of European investment in building the capacity of the African Union as well as the legacy of colonialism, the relationships of aid and trade have created a network of friendship and collaboration that remains important for both parties (although widespread anti-migrant sentiments across Europe are testing the strength of this relationship).

For example, without European assistance, the African Union’s much-vaunted African Peace and Security Architecture (APSA) would not have been able to establish its three (out of an envisioned five) brigade-size capabilities for conflict prevention and management in South, West and East Africa. Since 2004, the EU has spent more than €3.5 billion of its aid commitment to support APSA and various peace missions in Africa.[26European Commission, Questions and answers: Towards a comprehensive strategy with Africa, 9 March 2020.]

The EU’s intent to move beyond a donor–recipient relationship to achieve a more mature engagement was first captured in the comprehensive Joint Africa–EU Strategy (JAES) of 2007, which was adopted by heads of state of the African Union and the EU at their second EU–Africa Summit in Lisbon.

In 2017, the EU launched its External Investment Plan, which includes a new guarantee mechanism that uses aid to mobilise private capital flows through ‘blended arrangements’ and provides guarantees to mobilise additional resources for investment in Africa, generally aimed at addressing the socio-economic causes of migration.[27Its thematic objectives are (i) local private-sector development, (ii) social and economic infrastructure development, (iii) climate change mitigation, and (iv) root causes of migration and, in addition to financial support, it provides technical assistance and offers a policy dialogue. See: M Gavas and H Timmis, The EU’s financial architecture for external investment: progress, Challenges, and options, Washington, DC: Center for Global Development; European Commission, Joint Africa–EU Strategy, 2019.] Considerable attention is being given to efforts such as Aid for Trade and arrangements to mobilise additional financial support to the region in the form of loans or equity.[28The Aid for Trade Initiative was formally launched at the Sixth WTO Ministerial Conference in Hong Kong in 2005. See: World Trade Organization, Aid for Trade, 2019.] Aid for Trade uses a portion of the EU’s aid budget (US$13.3 billion of US$59.7 billion in total in 2017)[29Calculated from data in: UN Economic Commission for Africa and World Trade Organization, An inclusive African Continental Free Trade Area: Aid for Trade and the empowerment of women and young people, Addis Ababa: UNECA, 2019.] to build trade capacity in poor countries, improve trade diversification and help economically marginalised groups. That was followed, in 2018, with the announcement of a new Africa–Europe Alliance for Sustainable Investment and Jobs and the establishment of the ‘Emergency Trust Fund for Africa’ (€4.7 billion or US$5.56 billion as of 31 December 2019) in response to significant inflow of migrants and asylum seekers. Increased spending to halt migration flows has led to increases in aid from the EU and many of its members in recent years.

For its 2021–2027 Multiannual Financial Framework, the EU is merging several of its development instruments under a consolidated neighbourhood, Development and International Cooperation Instrument, which will receive €70.8 billion (US$83.6 billion). At least €26.0 billion (US$30.7 billion) will go to sub-Saharan Africa.[30Additional funds could come from Germany, among others. See: SEEK Development, Donor Tracker EU.]

The 2022 EU–AU Summit (Brussels, February 2022) approved partnerships in five key areas: green transition; digital transformation; sustainable growth and jobs; peace and governance; and migration and mobility.[31European Commission, EU paves the way for a stronger, more ambitious partnership with Africa, 9 March 2020.]

The shifting global aid landscape: Contributions from China

Sources differ widely in their calculations of the amount of Chinese money that qualifies as aid as opposed to loans. The China Africa Research Initiative at Johns Hopkins[32China Africa Research Initiative, Data: Chinese global foreign aid.] estimates that China provided US$3.3 billion aid globally in 2018, up from US$2.99 billion in 2015. It is likely that the bigger portion of this amount went to Africa, but it is unclear how much of this would technically qualify as aid.[33N Kitano, A note on estimating China’s foreign aid using new data: 2015 preliminary figures, Tokyo: JICA Ogata Sadako Research Institute for Peace and Development, 2017; also see: Organisation for Economic Co-operation and Development, Development co-operation report 2017: Data for development, Paris: OECD, 2017; China Africa Research Initiative, Data: Chinese global foreign aid.] A more detailed estimate from the JICA Ogata Sadako Research Institute for Peace and Development estimates that China’s foreign aid on a net disbursement basis is estimated to have increased from US$6 billion in 2015 to US$6.8 billion in 2018. Estimates for 2019 were the same as for 2018, with a decrease to US$6.2 billion aid in 2020.[34N Kitano and Y Miyabayashi, Estimating China’s foreign aid: 2019–2020 preliminary figures, JICA Ogata Sadako Research Institute for Peace and Development, 14 December 2020.]

A recent dataset compiled by AidData elucidates China’s overseas finance programme further. Although much of its lending and grant-making is shrouded in secrecy, China has established itself as a notable financier in many low- and middle-income countries. Finance is predominantly in the form of debt provided at commercial and non-concessional rates. In fact, since 2014, the Chinese ratio of loans to grants is at 31:1 and against significant collateral. Nearly 70% of China’s overseas lending is now directed to state-owned companies, state-owned banks, special purpose vehicles, joint ventures and private sector institutions in recipient countries rather than to central government institutions, giving rise to the notion of vast amounts of so-called ‘hidden debt’ (see Theme 1 ) The data shows that, for the most part, these debts ‘do not appear on their government balance sheets. However, most of them benefit from explicit or implicit forms of host government liability protection, which has blurred the distinction between private and public debt and created major public financial management challenges for developing countries.’[35A Wooley, AidData’s new dataset of 13,427 Chinese development projects worth $843 billion reveals major increase in ‘hidden debt’ and Belt and Road Initiative implementation problems, 29 September 2021.]

The outlook for global aid in Africa

Until recently, calculations of aid flows excluded contributions from private sources such as the Open Society Foundations of billionaire George Soros and the Bill and Melinda Gates Foundation. The OECD’s survey on global private philanthropy estimates annual flows of just below US$8 billion, which is equivalent to around 5% of government aid flows. The majority comes from the Gates Foundation, most goes to stable middle-income countries (i.e. not least developed countries) and slightly less than a third of private donations goes to Africa.[36Most private money flows to Africa (and elsewhere) go to health and reproductive health in middle-income countries such as Nigeria and South Africa. See: OECD, Private philanthropy funding for development modest compared to public aid, but its potential impact is high, says OECD, 23 March 2018.]

In the Current Path forecast, Africa will receive US$89.8 billion net official aid in 2030, and US$105.2 billion in 2043 (see Chart 2) — excluding contributions from private sources. Most of the increase will (and should) go to low-income countries, which are expected to experience aid doubling between 2022 and 2043 (to US$73.2 billion). However, as a portion of GDP the contribution of aid to these countries will decrease from 8.5% to 3.8%. The decline in aid as a portion of GDP is, of course, due to the rapid economic growth that most of these countries will experience, in part because they all have young and fast-growing populations.

Chart 7 presents the average for government revenues as a percentage of GDP with and without aid in 2019 and 2043 for low-, lower middle- and upper middle-income countries in Africa. The largest difference is forecast to occur in low-income countries.

The increase in the amount of aid in the IFs forecasting platform is driven by the growth in the size of the donor economies rather than any increases in aid relative to GDP. The expected near doubling of aid in constant dollar amounts would be significantly larger if developed countries met the 0.7% of GNI target for aid contributions as set out in the SDG ambition.[37United Nations, Sustainable Development Goals, Goal 17: Revitalize the global partnership for sustainable development.]

But that is unlikely: in fact, wealthy nations spent just 0.3% of their GNI on international aid in 2019, and only five countries — Luxembourg, Norway, Sweden, Denmark and the UK — met or exceeded the 0.7% target. In 2020, UK Prime Minister Boris Johnson indicated that his government would reduce aid levels to 0.5% as COVID-19 and Brexit hammered the country.

The COVID-19 crisis is impacting aid. In the short term, resources were shifted closer to home, such as spending allocated to housing or deterring migrants, as was the case recently with the domestic use of development funding to cover costs of migrants within Germany’s borders. The longer term impact of COVID-19 in Africa will be that poverty will increase, and subsequently drive migrant flows to Europe. Inevitably, partners will then be forced to consider how best to improve the ability of African governments to constrain migration and that may, in time, modestly increase rather than decrease aid flows.

Leveraging foreign direct investment for Africa

FDI is essentially a long-term investment from one country to another in exchange for an ownership stake in domestic companies and assets. It implies an active role in management or an equity stake large enough to enable the foreign investor to influence business strategy. This definition distinguishes FDI from more volatile foreign portfolio investments[38The term ‘portfolio investments’ covers a wide range of asset classes, including stocks, government bonds, corporate bonds, real estate investment trusts, mutual funds, exchange-traded funds and bank certificates of deposit. It can also include more esoteric choices, including options and derivatives such as warrants and futures. See: J Chen, Portfolio Investment.] such as those in stocks, government bonds and mutual funds.

FDI is typically discussed as consisting of a stock of investment that has been built up (or that is depleted) through annual in- or outflows. In 2019, Africa had an FDI stock equivalent to about 39% of GDP (roughly US$285 billion in current terms) and annual inflows amounting to 1.1% of GDP.[39From the UN Conference on Trade and Development and IFs.] Chart 8 presents annual FDI for the period 1990–2019 and reflects the rapid increase in investment during the global commodities boom. FDI flows to Africa peaked at 3.8% of GDP in 2008 at the start of the global financial crisis and subsequently declined. By 2017, flows had recovered to 3% of GDP (or US$42 billion) — a fraction of the US$476 billion that went to developing Asia (although the African economy is only 14% the size of developing Asia).[40United Nations Conference on Trade and Development, Regional fact sheets, 2018.]

Historically, Africa has received less FDI as a proportion of GDP than a region such as South America. Africa gets about 3% of global FDI (more or less equivalent to the size of the total African economy as a portion of the global economy), yet its stock of FDI represents less than 1% of the global total.[41Calculated using data from the UN Conference on Trade and Development (UNCTAD).] With limited exceptions, Africa is a marginal investment destination, particularly for US investors.

FDI has many advantages, some of which are examined in the theme on free trade . Because FDI typically involves the transfer of technology, capacity and skills from a multinational (or mother) corporation to an affiliate in the host country, it is an important catalyst to stimulate economic development. For example, several generations ago Ireland was tagged the ‘poorest of the rich’, but with carefully designed government policies the country was able to use FDI to support its economic growth and significantly reduce the income gap relative to the high-income countries in the EU, to become among the richest. FDI can help recipient developing countries to enhance the development of more sophisticated industries, such as electronics (Costa Rica) and automotive manufacturing (South Africa and Morocco).

To attract investment from the large capital markets in the West, countries typically need a sovereign credit rating by an international rating agency as a measure of its creditworthiness, which is then used to determine rates. Before the COVID-19 pandemic, insurance companies, pension funds and sovereign wealth funds globally already had more than US$100 trillion in assets under management.[42A Rabah, P Bolton, S Peters, F Sanama and J Stiglitz, From Global Savings Glut to Financing Infrastructure, Economic Policy, 32, 2017, 221–61.] In mid-2020, the only African countries with a sovereign credit rating by all three dominant rating agencies (Moody’s, Standard & Poor’s and Fitch) were Angola, Egypt, South Africa, Mozambique and Morocco, and it is perhaps no surprise that the majority of FDI from the private sector goes to these countries.[43Another 13 countries were rated by two of the agencies, namely Botswana, Republic of the Congo, Cameroon, Cape Verde, Ghana, Kenya, Namibia, Nigeria, Rwanda, Senegal, Tunisia, Uganda and Zambia. See: Country economy, Sovereigns ratings list.] With all the important Western rating agencies typically viewing Africa through a jaundiced lens, African countries often end up paying punitive interest rates. In contrast, China’s decisions to invest are essentially guaranteed by the Chinese government — that is, a state-backed loan — although seldom offered at concessional rates such as with credit from the World Bank or the IMF.

FDI in Africa underlines a strange paradox. Globally, Africa has the highest rate of return on FDI but receives the lowest levels of FDI. According to the World Investment Report (2013), the rate of return on FDI in 2011 was 9.3% for Africa, 8.8% in Asia and 7.1% in Latin America and the Caribbean. Similarly, for the period 2006–2011, the global average rate of return on FDI was 7%, with developed economies accounting for 5.1% of that and Africa for 11.4%.[44UN Conference on Trade and Development, World Investment Report 2013, Geneva: UNCTAD, 2013.] Conventionally, capital is expected to flow from countries with low levels of return to countries with high returns. But this is not the case for Africa.

Odusola posits that the explanation for this paradox can be found in poor infrastructure, low levels of human capital and low institutional capital, which serve as an effective tax on returns on investment.[45A Odusola, Addressing the foreign direct investment paradox in Africa, Africa Renewal.] But most important is the continent’s bad image as an investment destination, despite the business climate in many African countries now being comparable to that in other developing regions. In addition, a recent study by the IMF found that the presence of e-government services appeared to stimulate the inflow of FDI.[46A Ak-Sadiq, How e-government services can pay dividends, 11 February 2021.] Specifically, countries that implemented and adopted strong ICT initiatives, regardless of their level of development, were found to attract more inflows than those with weaker Internet access.

Whatever the source — public or private — FDI is not a substitute for government efforts to maximise domestic revenues that will drive the development of large, basic infrastructure such as water and sanitation systems.

Domestic factors, generally discussed as the absorptive capacity of recipient countries, are often a determining factor in translating FDI inflows into growth and development. Generally, it seems that productivity spillovers of FDI can be materialised only in an environment that promotes quality education (human capital), sound and credible institutions, good infrastructure, and active local financial markets. Weakness in these areas not only undermine the ability of local firms to adopt advanced technologies but also reduce their capacity to respond to the challenges associated with FDI activities.[47K Yeboua, Foreign Direct Investment, Financial Development and Economic Growth in Africa: Evidence from Threshold Modelling, Transnational Corporations Review, 11:3, 2019, 179–89. doi: 10.1080/19186444.2019.1640014.] The expectations about the potential of FDI to unlock growth and development in poor countries is therefore often overstated.

In addition to the US being the largest aid donor to Africa, it also leads on the stock of FDI it has built up in Africa, although inflows have declined since 2014 (Chart 9). Partly because of its wealth and its large, mature economy, the US has higher FDI outflows than any other country. However, FDI to Africa only breached 1% of total US FDI between 2010 and 2014. In 2019, the US invested only 0.72% (US$43.2 billion) of its US$5.96 trillion directly in Africa.[48US Bureau of Economic Analysis, Direct Investment by Country and Industry.] At the end of 2017, the Trump administration introduced tax reforms that allowed the large-scale repatriation of accumulated foreign earnings by US multinationals. Companies rushed to shift monies back to the US, with the result that FDI, including to Africa, amounted to only US$44.4 billion in 2018, significantly below the 2014 peak of US$69 billion.

The large stock of FDI from the US is followed by the UK and France. Europe is by far Africa’s most important investor, accounting for 40% of FDI stocks, followed by the US at 7% and China at 5%.[49See: European Commission, Africa–Europe Alliance. The data still includes the UK as a member of the EU.] Investments by South Africa in the rest of Africa have also expanded rapidly as its private sector seeks greener pastures elsewhere.

Although stocks tell one story, flows are changing. China pumped more than US$72 billion worth of FDI into Africa between 2014 and 2018, followed by France (US$34.17 billion), the US (US$30.85 billion), the United Arab Emirates (US$25.27 billion) and the UK (US$17.68 billion). Coming off a low base, the flow of FDI from China to Africa is steadily increasing its stock of FDI in Africa. Other key investors on the continent are South Africa (with flows of US$10.18 billion between 2014 and 2018), Germany (US$6.88 billion), Switzerland (US$6.43 billion), India (US$5.4 billion) and Spain (US$4.38 billion).[50As reported by: J Anyanzwa, China injects $72b in Africa as its continental influence gathers pace, The East African, 8 October 2019.]

Evident from Charts 8 and 9, FDI flows to Africa increased significantly in 2017 but then slowed before COVID-19, largely due to the impact of the Arab Spring on stability in the region and declining oil prices, with subsequent economic stagnation in Algeria, Angola and Nigeria. The COVID-19 pandemic has dramatically accelerated this short-term trend. In its 2021 World Investment Report, the UN Conference on Trade and Development reported that the pandemic reduced FDI flows by 16%, to only US$40 billion, in 2020 — ‘a level last seen 15 years ago’.[51UN Conference on Trade and Development, World Investment Report 2021, Geneva: UNCTAD, 2021.]

To ensure that FDI benefits the recipient requires effective government regulation and oversight. For example, a recent analysis of control rights for gold, copper and diamond production in African states south of the Sahara, showed that ‘domestic mineral production stimulates local income more than internationally controlled extraction since national mining companies promote more backward economic linkages and have higher incentives to engage in local capacity building.’[52T Wegenast, AA Khanna, G Schneider, The Micro-Foundations of the Resource Curse: Mineral Ownership and Local Economic Well-Being in Sub-Saharan Africa, International Studies Quarterly, 64:3, 2020, 530–43.] Domestic mining companies are therefore associated with growing local wealth, whereas multinational firms are linked to increased regional unemployment.[53T Wegenast, AA Khanna, G Schneider, The Micro-Foundations of the Resource Curse: Mineral Ownership and Local Economic Well-Being in Sub-Saharan Africa, International Studies Quarterly, 64:3, 2020, 530–43.] This generally happens when FDI has a crowding-out effect on domestic investment. Normally, FDI flows to manufacturing and services sectors create direct employment in multinational enterprises and indirect employment through backward and forward linkages in host countries.

Charts 10 and 11 present the stock of FDI in 2019 and the IFs Current Path forecast for 2043 according to Africa’s income country groups, as a percentage of GDP and in constant 2017 US$, respectively.

Most FDI in Africa is in the extractive sector (known as resources-seeking FDI). Historically, investment from the West required a return on investment high enough to attract interest from the private sector, the primary source of FDI. That typically only happened in the case of oil, gas or other commodities. For example, in June 2019, a US energy firm, Anadarko Petroleum Corporation,[54S Zawadzki, Anadarko approves $20 billion LNG export project in Mozambique, Reuters, 18 June 2019.] agreed to the construction of a US$20 billion gas liquefaction and export terminal in Mozambique — the single largest liquid natural gas project in Africa and an amount equivalent to almost half of total FDI to Africa in 2018. By the end of 2019, total investments in Mozambique for the next decade were estimated at US$128 billion — more than the entire amount of aid and FDI to all of Africa in 2018.[55S Planting, Gas in Mozambique – a $128billion opportunity, Daily Maverick, 24 September 2019.] But in 2020, an Islamic insurgency in the Cabo Delgado province brought the investments to a shuddering halt. After first opting to use mercenary companies to respond to the threat, the government of Mozambique eventually turned to Rwanda and the Southern African Development Community to provide military support.[56By the end of 2021 more than 20 countries were helping Mozambique fight the insurgency. See: Institute for Security Studies, Will foreign intervention save Cabo Delgado?, 8 November 2021.]

A decision to divest from a country where a foreign firm has invested, has multiple negative effects. For example, a recent OECD study[57M Borga, P Ibarlucea-Flores and M Sztajerowska, Divestments by multinational enterprises, Paris: Organisation for Economic Co-operation and Development, January 2020.] revealed that divested foreign affiliates experience, on average, 28% lower sales, 24% lower value added and 13% lower employment compared with firms that remain under foreign ownership. In brief, African governments should work hard to keep foreign companies invested in the continent, despite incentivising local partners, encouraging technology transfer and ensuring local ownership.

The IFs Current Path forecast in Charts 10 and 11 suggest that annual FDI inflows to Africa will increase from 2.8% of GDP in 2019 to around 3.8% by 2043 — below the increase in the size of the African economy as a portion of the global economy (which is expected to increase from 3% to 5%), possibly indicating that the forecasts are conservative. This will be a continuation of a trend that has seen FDI flows overwhelmingly go to Asia.

However, African governments should be aware that not all FDI is good for the continent. For example, the large share of food FDI in Africa is directed towards agricultural land acquisition. Studies indicate that the bulk of 115 million acres of agricultural land leased by foreign investors worldwide is in Africa. The food production by multinational companies in Africa that is leasing this land is mainly tailored towards exports, cultivating crops that are not the staple food of African people.[58R Arezki, C Bogmans and H Selod, The Globalization of Farmland: Theory and Empirical Evidence, Policy Research Working Paper WPS 8456, May 2018, Washington, DC: World Bank Group.]

Much more needs to be done to increase investment flows to Africa, although the increasing tension between the US and China may reward Africa as it exposes the vulnerabilities of concentrating supply chains in a single location. The rise of India will eventually also increase the expected growing demand for natural resources to support infrastructure.

China’s growing footprint in Africa

China’s foreign policy was inevitably shaped by its efforts to deter and eject French colonial and US military forces from the region after 1949, and to oppose and weaken its opponents where possible. This has also been felt in Africa, from as early as 1964.[59C Cheng, The logic behind China’s foreign aid agency, Carnegie Endowment for International Peace, 21 May 2019.]

In addition to the political and military support that China provided to various liberation parties in Africa during their struggles for independence, its best known early infrastructure project is probably the Tazara Railway line, built to reduce landlocked Zambia’s economic dependence on export infrastructure linkages through Rhodesia (now Zimbabwe) and South Africa. The single-track line of approximately 1 860 km connected Zambia to the port of Dar es Salaam in Tanzania and was completed in 1975 at a cost of about US$406 million (US$2.67 billion today) — provided as an interest-free loan to Zambia and Tanzania.[60Staff writer, Tanzania–Zambia Railway: A bridge to China?, The New York Times, 29 January 1971.] The expenditures of Tazara and other solidarity projects placed a huge burden on the Chinese economy, with foreign aid amounting to 5.9% of total government spending from 1971 to 1975, peaking at 6.9% in 1973.[61Staff writer, Tanzania–Zambia Railway: A bridge to China?, The New York Times, 29 January 1971.]

The intervening years saw China transform from a poverty-stricken developing country to a global power, challenging the influence and dominance of the US. Reform of the institutions involved in FDI and aid followed. The process commenced in 1994, with China reforming the institutions tasked with administering its outward investment and aid by establishing two new policy banks, the Export–Import Bank of China and the China Development Bank, which provide the majority of China’s overseas development loans. Some years later, in 2018, China established the China International Development Cooperation Agency (CIDCA) to coordinate aid and, early in 2021, published a white paper on development cooperation that sets out its belief in support to endogenous growth. However, different from most Western countries, Chinese development assistance is managed from within various government departments, with the bulk handled by the Ministry of Commerce.

Since 1995, China has run a year-on-year positive trade balance that, from 2004 to 2009, increased ten-fold. Between 2008 and 2019, the Export–Import Bank of China and the China Development Bank lent US$462 billion, just short of the US$467 billion extended by the World Bank, according to data from Boston University, although only a modest portion of this went to Africa.[62I Neuweg, What types of energy does China finance with its development aid?, 2018.]

But data on the extent of FDI and aid from China is opaque (not unlike those of Western institutions in the case of the former category), although there are signs of recent improvement in the quality of data. China is not a member of the Paris Club (an informal group of creditor nations) or the OECD, which collects data on lending by official creditors, although its lending practices and collaboration with these institutions have steadily intensified. For example, half of China’s loans to developing countries are apparently unreported.[63S Horn, CM Reinhart and C Trebesch, How much money does the world owe China?, Harvard Business Review, 26 February 2020.] Recent research shows that the Chinese state and its subsidiaries have provided about US$1.5 trillion in loans and trade credits to 150 countries, making China the world’s largest official creditor.[64S Morris, B Parks and A Gardner, Chinese and World Bank lending terms: A systematic comparison across 157 countries and 15 years, Washington, DC: Center for Global Development, 2 April 2020.] Africa is the third largest destination for Chinese investment after Asia and Europe, although investment in sub-Saharan Africa slightly declined in 2017 following a drop in aggregate Chinese investment.[65American Enterprise Institute, China Global Investment Tracker, 2019; K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey, 2017.]

The partnership between China and Africa has progressively deepened since the establishment of the Forum on China–Africa Cooperation in 2000. Today, the forum serves as a vehicle for strategic collaboration in trade, investment and finance, as well as being a basis for diplomatic and political collaboration. With the ongoing privatisation of the Chinese economy, the number of Chinese firms active on the continent increases every year. In 2017, McKinsey estimated that more than 10 000 privately owned small Chinese companies operate in Africa. The official data from China’s Ministry of Commerce is about a third of that.

A recent comprehensive study on China in Africa showed that ‘the Africa–China opportunity is larger than that presented by any other foreign partner — including Brazil, the European Union, India, the United Kingdom, and the United States.’[66K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey, 2017.] The report concludes that China’s engagement in Africa is ‘unparalleled’ and that the true picture is understated, with total financial flows likely being around 15% higher than official figures convey.[9] Chart 12 presents the divergent trends in investment flows to Africa from China and the US.

China’s demand for commodities, its positive balance of payments and ability to extend credit, and its coordinated effort to export its surplus construction capacity (and which eventually culminated in the Belt and Road Initiative) have benefited Africa greatly — despite the continent not originally being included in the scheme:

  • China has since become the biggest single-country financer and builder of infrastructure projects in Africa, having spent about US$11.5 billion per year from 2012 to 2018.[67K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey, 2017.] The country is therefore fulfilling an important role in helping to close Africa’s gap in infrastructure, which the African Development Bank estimates at between US$130 billion and US$170 billion annually.[68R Partington, Fears grow in Africa that the flood of funds from China will start to ebb, The Guardian, 5 January 2019.]
  • Chinese firms have also contributed to establishing complete industrial chains in some African countries.
  • It is further estimated that every US$1 billion investment in infrastructure made by Chinese firms has created roughly 110 000 jobs in Egypt, Morocco, and Tunisia.[69UN Habitat, The State of African Cities 2018 – The geography of African investment, 2018.]
  • In 2020, the Chinese ambassador to South Africa estimated the stock of Chinese FDI in Africa at US$110 billion, much larger than most other estimates.
  • According to the China–Africa Business Council,[70E Olander, Even amid a pandemic, Chinese FDI in Africa jumped almost 10% last year, China Africa Project, 31 August 2021.] the total investment flows in Africa peaked at US$53.9 billion in 2018 and stood at US$29.6 billion in 2020.

Potential drawbacks of Africa relying on Chinese investment

There are clear signs that the pace of loans has started to decline. According to the China Africa Research Initiative at Johns Hopkins University, Chinese lending to Africa has slowed to about US$9 billion in 2018 and is estimated to have been at US$5–8 billion in 2019, the lowest Chinese loan commitments to Africa since 2011.[71P Fabricius, Is the ‘Silk Road’ unravelling?, Institute for Security Studies, 8 January 2021.]

Chinese overseas lending is different from capital outflows from the US and Europe in three important respects:

  • The majority comes from the government and various state-owned entities.
  • Its lending generally occurs at market rates and the conditions are opaque, whereas the World Bank typically lends to Africa at concessional (i.e. below-market interest rates) and provides longer maturities.
  • Chinese loans are often backed by collateral and barter-trade type of arrangements, meaning that debt repayments are secured by revenues, such as that coming from commodity exports and by providing in-kind services of Chinese companies instead of payment.[72Examples are Angola and South Sudan. In 2020, Angola had a debt-to-GDP ratio of 91%, half of which is owed to China and much of that is provided by way of oil exports. See: Staff writer, The challenges of reform in Angola, Africa Center for Strategic Studies, 21 January 2020; Staff writer, Angola negotiates the end of oil-backed debt with China, Macauhub, 23 January 2020.]

Chinese flexibility in accepting unconventional collateral, airports, harbours and mines as security has raised alarm bells in conservative circles in the US, who see this as a ploy through which China can lay its hands on strategic infrastructure with potential security implications. But this is seldom a concern in Africa and not borne out by deeper analysis. However, there have been a number of cases in which African governments have entered into expensive prestige projects (such as the airport in Lusaka) and overpriced projects (such as the 472 km Mombasa–Nairobi standard gauge line), with subsequent negative consequences.

In 2020, China announced a five-year plan to establish a dual circulation economy, which includes a goal to advance Chinese self-sufficiency and subsequently may reduce investment flows to Africa. There is also evidence of rising concerns in Beijing about the ability of key African governments to service their loans from China and the debate within that country is steadily becoming more critical of Africa’s mounting debt burden.[73Pangea Risk, Africa lobbies for debt swap to avoid wave of sovereign defaults, Exx Africa Insight, 4 May 2020.] The impact of the COVID-19 crisis has accentuated Africa’s debt burden, as discussed in the Current Path .

A concern that has often been repeated in mainstream media is that many of the large Chinese construction (and other) projects provide little work for locals. That may have been the situation several years ago, but field research in Ethiopia and Angola indicates that: national labour participation is substantially higher than generally assumed in Western media; wages in Chinese firms abroad are largely similar to other firms in the same sector; and Chinese firms contribute as much to training and skills development as other companies in the same sector.[74C Oya and F Wanda, Working conditions in Angola. Infrastructure construction and building materials factories, London: SOAS University of London, 2019; F Schaefer and C Oya, Employment patterns and conditions in construction and manufacturing in Ethiopia: A comparative analysis of the road building and light manufacturing sectors, London: SOAS University of London, 2019.]

Then there is the issue of the quality of infrastructure, which is often quite poor, and the extent to which China is ‘exporting corruption’ in the manner in which it uses development assistance to buy influence (and contracts) from African leaders. The obvious challenge here, compared to the situation in the US and Europe, is that Chinese public-sector companies and financial institutions cannot be held to account domestically in China through shareholder activism or public disclosure.

These concerns are accentuated by Chinese contracts typically containing stringent confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. The cancellation, acceleration, and stabilisation clauses potentially allow China to influence the debtors’ domestic and foreign policies, including commentary from government officials and in government-controlled media, particularly in relation to mentions or dealings with Taiwan and Tibet and human rights issues such as voting in the Human Rights Committee in Geneva.[75A Gelpern, S Horn, S Morris, B Parks and C Trebesch, How China lends: A rare look into 100 debt contracts with foreign governments, Washington, DC: Center for Global Development, 31 March 2021.]

Large Chinese loans do not come with a requirement to discuss matters around the rule of law, good governance or human rights, as expected by the IMF and the World Bank. China simply does not share the views and approaches of the West in terms of rule of law and transparency, or of competitive tendering as an antidote to corruption and what has generally become known as ‘standards of good governance’. It therefore has little qualms about offering inducements to ensure favourable consideration of contracts.[76Staff writer, African Union refutes report that China is spying on its headquarters, Xinhua, 15 November 2019.] The decision by Uganda’s President Yoweri Museveni to intervene in a bidding process for a contract to surface the highway linking Kampala to Jinja in favour of his preferred Chinese contractor, as one example, therefore came as no surprise.[77R Muhumuza, As China builds up Africa, some in Uganda warn of trouble, AP News, 24 October 2019.]

A study of 100 debt contracts with foreign governments thus finds that China uses ‘creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially savvy lender to the developing world.’[78A Gelpern, S Horn, S Morris, B Parks and C Trebesch, How China lends: A rare look into 100 debt contracts with foreign governments, Washington, DC: Center for Global Development, 31 March 2021.]

Infrastructure is not the only Chinese bargaining chip. To ease the long-running pressure on the naira after it steadily lost value against the US dollar since global oil prices dropped in 2015, Nigeria began selling Chinese renminbi (yuan) to local traders and businesses. The move has made it easier for local businesses in Nigeria to trade and engage with their Chinese counterparts, without the need of first converting their local currency to dollars, and for the country to handle dwindling foreign reserves.[79Y Kazeem, Nigeria has taken its first steps in adopting China’s yuan as a reserve currency, Quartz Africa, 2 August 2018, https://qz.com/africa/1346766/chinas-yuan-trades-in-nigeria-africa-top-economy/.] A number of other African countries have subsequently followed suit, allowing the renminbi as a trading currency.

To safeguard its growing investments in Africa, China has also expanded its direct and indirect role in peace and security in Africa, particularly after 35 000 Chinese citizens and some 30 firms were caught in the crossfire of NATO’s intervention in Libya in 2011.

China first fielded non-combatant peace operations in 1998 and became involved in the international anti-piracy campaigns in the Gulf of Aden in 2009 and then the Gulf of Guinea in 2014. The former evolved into the establishment of a permanent military base in Djibouti in 2015, one of a number of indications that China’s views on non-interference and its hands-off approach was evolving. In Mali, for example, the Chinese position on French military involvement has shifted from outright condemnation to active support. In 2012, China deployed its first combat-ready peacekeepers in Africa and now participates fully in UN peacekeeping missions.

Collaboration on peace and security was institutionalised with the inaugural China–Africa Defence and Security Forum, held in June/July 2018. In February 2019, China announced that it had provided US$180 million to fund peace and security efforts in Africa (through the African Union). It is already the largest supplier of weapons to sub-Saharan Africa. Its role in support of the African Union and numerous African armed forces is also steadily increasing, as does its efforts at mediation (e.g. in South Sudan, where the ongoing conflict is threatening its investments).[80P Nantulya, Chinese hard power supports its growing strategic interests in Africa, Washington, DC: Africa Center for Strategic Studies, 17 January 2019.]

The future trajectory is less certain. Chinese attention may be shifting closer to home, particularly regarding the implementation of the Belt and Road Initiative in Asia, in tandem with its growing concerns about the ability of African governments to service debt. Yet as Chinese relationships elsewhere become more negative, such as with the US, Europe, and in its immediate neighbourhood, Africa’s political value to China is increasing, particularly in multilateral forums on issues such as with the technology company Huawei and on matters such as Taiwan, Tibet, Hong Kong and Xinjiang.

China’s emphasis on the impact of development on security, its insistence on dealing only with fellow sovereigns and its principle of non-interference in the internal affairs of other countries may appear to complicate its external relations.[81P Fabricius, Mali gives China a reality check, Institute for Security Studies, 16 October 2020.] At the root of all of this is the belief that economic, developmental and group rights are more important than individual, political, civil or human rights, and that sovereignty is supreme — that each country should determine its own developmental pathway — free from the external interference from the West which China and Africa have both experienced.

Today, Africa’s dependence on China is such that its future prospects are closely tied with that country’s prospects. If China stumbles, it will have a massive impact on Africa. This dependence on China makes many African governments essentially powerless when it comes to issues such as responding to Chinese involvement in illegal mining and fishing in Africa. For example, the Ghanaian government has been the subject of much criticism by the population and opposition leaders for its inability to end illegal Chinese gold mining in the country.

Nicholas Lardy argues that China’s growth prospects are now being shadowed by the spectre of resurgent state domination.[82NR Lardy, The State Strikes Back: The End of Economic Reform in China?, Washington, DC: Peterson Institute for International Economics, 2019.] Whereas China’s private sector is responsible for much of its economic growth, President Xi Jinping has placed more trust in its ailing, underperforming and indebted state-owned companies. Inefficiencies are therefore mounting. In addition, the country has a debt problem, which has been accelerated by the large stimulus project that Beijing launched in response to the global financial crisis in 2008. Chinese debt may already be responsible for a loss of up to two percentage points of economic growth[83NR Lardy, The State Strikes Back: The End of Economic Reform in China?, Washington, DC: Peterson Institute for International Economics, 2019.] and despite China’s credit boom having been ‘the largest factor driving global growth’ in the decade since 2010, its debt is rising fast, particularly in its property sector.[84T Orlik, F Chen, Q Wan and J Jimenez, Sizing up China’s debt bubble: Bloomberg Economics, Bloomberg, 2018.] Over the same period, China’s debt-to-GDP ratio has risen from about 140% to more than 250%.

Remittance flows to Africa

The largest flow of external funds to Africa is through remittance from Africans in the diaspora, which is growing at around 5% annually.

Whereas aid is typically a transfer of public and private philanthropic money between countries, remittances consist of private money or goods that migrants send to families and friends in origin countries. Capturing data on remittance flows is challenging,[85The International Monetary Fund and the World Bank, the main providers of international remittance statistics, base their estimates on broad definitions, such as the sum of income earned by migrants and the income of workers who are employed by embassies, international organisations and foreign companies, plus all transfers in cash of kind made or received by residents and non-resident individuals, meaning it includes payments to UN officials and various financial transactions. Migration Data Portal.] as flows mostly occur through informal channels and are driven by the size of the migrant population, for which data is often also unreliable. Unlike aid and FDI, remittance flows also do not directly affect government revenues as they generally consist of money sent home by migrants and serve to support the livelihoods of families in recipient countries, often serving as an additional source of sustenance and cushioning the impetus towards social unrest.

Recent estimates suggest that African migrants (including refugees, regular and illegal migrants, short- and long-term migrants, etc.) represent about 14% (or 36.3 million) of the global migrant population.[86Most migrants in Africa are in Côte d’Ivoire, Uganda, South Africa, South Sudan and Burkina Faso. See: Mo Ibrahim Foundation, Africa's Youth: Jobs or Migration?, London: Mo Ibrahim Foundation, 2019, 13–15.] Nine out of ten African migrants stay within the continent, moving to neighbouring countries or elsewhere within their region. The EU hosts nine million African migrants, consisting of an estimated five million from North Africa (most from Algeria and Morocco) in France and Spain, and four million from sub-Saharan Africa. Most migrants from Egypt, the largest recipient of remittances in North Africa, can be found in Saudi Arabia and the United Arab Emirates. Nigeria is the largest recipient of remittances in sub-Saharan Africa (Chart 13). Countries for which there is no data are excluded.

Viewed as a portion of GDP (Chart 14), the countries that receive the largest portion of remittances — all more than 10% of GDP– are Lesotho, The Gambia, Cape Verde, Comoros and Senegal. (Countries for which there is no data are excluded.)

Countries with large diaspora populations can tap into the funds within that community to invest locally by benefiting from a patriotic dividend but then need to maintain a strong and positive relationship with the diaspora community — with Israel often held as the global success story. Ethiopia crossed an important hurdle when, in 2011, it floated a diaspora bond to help fund the Grand Ethiopian Renaissance Dam.[87M Famoroti, Debt by diaspora: Ties that bond, Brookings, 24 January 2018.] In 2020, Kenya introduced its first licensed investment fund for citizens living overseas to invest in development projects. The Kenyan diaspora sent an estimated US$3 billion in remittances back home in 2019.[88P Madden, Africa in the news: Zambia’s debt, Kenya’s parliament and trade, and politics in the Horn of Africa, Brookings, 26 September 2020.]

Generally migrants have a positive economic impact in host countries and are often less likely to be involved in crime. According to the IMF, for every 1% increase in the share of migrants in the adult population of advanced economies, GDP per capita can increase by up to 2% in the long term. But anti-migrant sentiments have become an important domestic policy issue, not only in many Western countries but also in some African countries, such as South Africa.[89World Bank Group, Migrations and remittances: Recent developments and outlook, in Migration and Development Brief 28, 1 December 2011, 10.]

Chart 15 shows that the IFs Current Path forecast is that absolute levels of remittance flows to Africa will increase from around US$51.4 billion in 2019 to about US$131.3 billion in 2043, even as the remittances as a portion of GDP declines from 1.7% to 1.4%.

Remittance flows benefit from new technologies, which have lowered the costs of sending small amounts of money privately from one country to another, but the impact of the war on terror and concerns about money flows to groups and individuals associated with terrorists have created numerous obstacles for Africans to send money home. It still costs more to remit money to sub-Saharan Africa than any other region globally. Moving money legally between neighbouring African countries is even more expensive.[90World Bank, COVID-19: Remittance flows to shrink 14% by 2021, 29 October 2020.]

Illicit financial flows

Illicit financial flows have attracted considerable attention in recent years.[91Illicit financial flows are described as ‘cross-border exchanges of value, monetary or otherwise, which are illegally earned, transferred or used.’ See: UN Conference on Trade and Development, Economic Development in Africa Report 2020: Tackling illicit financial flows for sustainable development in Africa, Geneva: UNCTAD, 2020.] The 2015 Report of the High Level Panel on Illicit Financial Flows from Africa estimated that 65% of illicit flows from the continent originate from commercial activities of multinational companies through transfer mispricing, trade misinvoicing, misinvoicing of services and intangibles, tax treaty shopping and unequal contracts; the remaining 35% is linked to criminals and funds stolen by government officials.[92UN Economic Commission for Africa, Illicit financial flows: Report of the High Level Panel on illicit financial flows from Africa, Addis Ababa: UNECA, 2015.] Recent work by the Brookings Institute estimates that US$1.3 trillion left sub-Saharan Africa in the form of illicit money flows between 1980 and 2018, but that the relative share as a percentage of GDP appears to be declining.[93L Signé, M Sow and P Madden, Illicit financial flows in Africa: Drivers, destinations, and policy options, Brookings, 2 March 2020.] The outflows are concentrated in a few countries (South Africa, DR Congo, Ethiopia and Nigeria) and in a few sectors, notably the extractive and mining industries (oil in particular), which present lucrative opportunities for misinvoicing.

According to the 2020 UNCTAD Africa Report, an estimated US$88.6 billion leaves the continent as illicit capital flight every year, equivalent to 3.7% of Africa’s GDP and nearly as much as the combined annual inflows of aid and FDI. [94UN Conference on Trade and Development, Economic Development in Africa Report 2020: Tackling illicit financial flows for sustainable development in Africa, Geneva: UNCTAD, 2020, 182.] Most of the money goes to China and the US.

In the case of China, the increase in illicit financial flows has followed rapid increases in trade between most African countries and China. In response, Chinese President Xi Jinping launched an anti-corruption campaign in 2012, which appears to have contributed to a decline in illegal outflows from the peak in 2014.[95L Signé, M Sow and P Madden, Illicit financial flows in Africa: Drivers, destinations, and policy options, Brookings, 2 March 2020.]

In the case of the US, the problem is its status as a ‘secrecy jurisdiction’, which facilitates private offshore tax evasion. The US Foreign Account Tax Compliance Act requires foreign financial institutions and signatory governments to disclose information about US citizens’ assets in their jurisdiction to the US government. But the US government is not providing reciprocal information to the 113 participating governments on the assets that are held in the US and has resisted joining the OECD Common Reporting Standard for the automatic exchange of information on foreigners’ financial accounts with their home country governments. It is not surprising that, in 2020, the US ranked second only to the Cayman Islands on the Tax Justice Network’s Financial Secrecy Index, surpassing Switzerland, Hong Kong and Singapore.[96A Donker, U.S. tax policy can help Africa’s fight against illicit financial flows, Foreign Policy, 17 May 2021; The 2020 Financial Secrecy Index results are available at: Tax Justice Network, Financial secrecy index.]

Goal 16 of the SDGs specifically includes a target to reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime by 2030. Illegal capital flow from the continent therefore poses a central challenge to development financing and efforts to detect and deter cross-border tax evasion, clamp down on anonymous shell companies, strengthen anti-money laundering laws and practices, curtail trade misinvoicing and improve the transparency of multinational corporations and lending practices can go a long way to reduce illicit flows.[97For example, see: Global Financial Integrity.]

The problem of tax evasion specifically can be addressed through collaboration with developed countries to help strengthen the capacity of local tax authorities through improving the sharing of tax information across countries, countering money laundering, creating international standards for tax transparency, and countering base erosion and profit shifting.

Profit shifting takes advantage of differences and gaps in tax legislation to shift profits from one tax jurisdiction to another and avoid paying taxes in certain jurisdictions. For example, African countries are estimated to lose about US$450 million to US$730 million in corporate income tax revenue a year from multinational mining enterprise tax avoidance,[98G Albertin et al, Tax avoidance in Sub-Saharan Africa’s mining sector, International Monetary Fund, 28 September 2021.] with total tax losses, not just from mining, being estimated at US$17 118 million.[99Tax Justice Network, The State of Tax Justice 2021, 16 November 2021.]

Although a number of important agreements already underpin efforts to curb tax losses,[100Examples include the Financial action task force, the Global Forum on Transparency and Exchange of Information for Tax Purposes, and the Inclusive Framework on Base Erosion and Profit Shifting including the Multilateral Convention to implement Tax Treaty related measures to Prevent Base Erosion and Profit Shifting. See: L Signé, M Sow and P Madden, Illicit financial flows in Africa: Drivers, destinations, and policy options, Brookings, 2 March 2020.] more is required. Support from the Biden administration for a global minimum tax on large multinational companies, based on sales regardless of the physical presence in a country, was an important step in this regard. Eventually, in October 2021, the G20 formally endorsed a global deal to impose a minimum corporate tax rate of 15% for companies with annual revenue over €750 million (US$865 million). It requires those with an annual turnover of €20 billion (US$23 billion) and profit margins above 10% to pay taxes in countries where they sell their products or services. The rules are to be implemented in 2023.[101L Kim, G-20 leaders back 15% minimum corporate tax deal, Forbes, 30 October 2021.] A more stable and equitable international tax system will contribute to national digital taxes and constrain tax avoidance and profit shifting.

Modelling the Financial Flows scenario

In this section, we model the impact of a Financial Flows scenario on the continent’s long-term development trajectory. It includes ambitious but reasonable increases in aid, FDI and remittances, and a reduction in FDI stocks of outward investment as a proxy for reduced illicit financial flows from Africa.

IFs does not model illicit financial flows, as there is no global dataset or substantive methodology to estimate its extent although UNCTAD and the UN Office on Drugs and Crime (UNODC) recently finalised a conceptual framework to measure illicit financial flows that will eventually contribute to producing global data estimates.[102The framework identifies four main activities that can generate illegal outflows, namely: illicit tax and commercial activities; illegal markets; corruption; and exploitation-type activities and financing of crime and terrorism. Strangely it does not include a high tax burden, rampant inflation and political instability as drivers, although it does include aggressive tax avoidance (since it is empirically challenging to separate some of these from illicit activities), illegal tax and commercial practices, trade misinvoicing and abusive transfer pricing; criminal activities including the drug trade, human trafficking, illegal arms dealing and smuggling of contraband; and bribery and theft by corrupt government officials and their collaborators. Pilot projects using the new framework are underway in Afghanistan, Colombia, Ecuador, Mexico, Nigeria, Panama and Peru, and will contribute to producing global data estimates. UN Conference on Trade and Development, UN agencies finalize a framework to measure illicit financial flows, UNCTAD, 21 December 2020.] For the purpose of the Financial Flows scenario, we therefore reduce outward FDI as a proxy for illicit financial flows. In 2019, outward FDI flows from Africa amounted to US$20.8 billion (see Chart 16), with outflows from Libya being the largest (US$6.9 billion). In the Current Path forecast, total outward FDI from Africa is expected to reach US$93.8 billion by 2043, ranging from US$25.6 billion from Nigeria to US$12.1 billion from Egypt and US$9.9 billion from South Africa.

Chart 17: Modelling the Financial Flows scenario
Chart

Chart 18 shows the extent to which remittances, aid and FDI increase and FDI outflows (as a proxy for illicit flows) decrease in the Financial Flows scenario compared with the Current Path forecast for 2033 and 2043. The bulk of the impact comes from larger FDI inflows: US$57.7 billion in 2033 and US$69.2 billion in 2043. This significantly impacts on the contribution of capital to economic growth (as opposed to labour and technology).

Against the backdrop of a global focus on the achievement of the SDGs and the impact of the COVID-19 pandemic, the aid component of the Financial Flows scenario envisions an increase in the amount of development aid to Africa to 2030, which is subsequently maintained on the assumption that the international community will design and commit to follow-on goals. The Financial Flows scenario sees Africa receiving US$5.1 billion more aid in 2030 than in the Current Path forecast, and US$8.5 billion more in 2043 — equivalent to an increase of 8%. Instead of US$89.8 billion aid in 2030, the final year of the SDGs, Africa is forecast to get US$94.86 billion. Most of the additional funds would go to low-income countries, with Mozambique, DR Congo and Malawi receiving most.

In 2019, FDI inflow in Africa was equivalent to 2.8% of GDP and set to increase to 3.7% of GDP by 2043 on the Current Path forecast. In the Financial Flows scenario, inward FDI is forecast to increase to 4.2% of GDP, equivalent to an additional US$53.6 billion inflow in 2043. The result is that the stock of FDI increases from US$3.58 trillion to US$4.12 trillion, an increase of 15%. The increase is large, yet Africa would still only have 4.5% of the global stock of FDI but by 2043. The increase in such inflows would require improved levels of stability and policy certainty, but would still constitute a relatively small portion of global FDI flows

The dam of money from which FDI is able to draw is so large that it necessarily needs to be prioritised as a source of growth and development for Africa. Hence the importance of measures such as trade facilitation (through Aid for Trade and other measures), ease of doing business, and efforts to establish special economic zones as vehicles to attract FDI, all of which were discussed in the theme on free trade . As expected, Nigeria, Africa’s largest economy, attracts most of the additional FDI (an additional US$7.6 billion in 2043), followed by Egypt, South Africa and Angola.

Remittances increase by 17% (to US$153.1 billion) by 2043 in the Financial Flows scenario, compared with US$131.3 billion in the Current Path forecast. In addition to the impact of better financial governance, increased remittance flows could be facilitated by reduced fees paid by senders and recipients, removing taxes on remittances, increased market competition in the remittance industry, the use of digital technologies and risk-based requirements, innovation and credit enhancement.[103M Mohieldin and D Ratha, How to keep remittances flowing, Brookings, 11 June 2020.]

The reduction in outward investment flows from Africa (US$14.8 billion), as a proxy for the reduction in illicit flows, has the largest impact in Angola, Libya, South Africa, Egypt and Nigeria — not unexpectedly so as these are Africa’s larger economies. Outward investment flows from these five countries all reduce by more than US$1 billion by 2043.

The combined impact of the Financial Flows scenario is to increase total government revenues in Africa by US$33.8 billion by 2033 and by US$81.15 billion by 2043. The cumulative increase in government revenues from 2020 to 2033 is US$141.8 billion and US$762.5 billion by 2043. Although the interventions in all three areas are aggressive, the impact of FDI is significantly larger than that from aid and remittances, as its contribution grows much more rapidly than that of the others, as is reflected in Chart 18. Additional revenues mean that governments can spend more on education, health and security. As a result, rates of infant mortality decline by an average of 0.5 deaths per 1 000 live births  by 2043 in Africa and average life expectancy increases by almost 10 months.

Increased flows to Africa means that the total Africa economy will be US$84.38 billion larger in 2033 than it would have been otherwise, and US$255.4 billion larger in 2043. As expected, countries with large economies, such as Nigeria, Egypt, South Africa and Angola, benefit the most. Average GDP per capita for Africa increases by US$67 in 2033 and US$140 in 2043, which is a notable increase especially as the continent’s total population will, by 2043, exceed 2.2 billion people.

The improvement in GDP per capita for each African country is presented in Chart 19. Seychelles, Mauritius and Namibia do particularly well in the Financial Flows scenario. 

The Financial Flows scenario reduces the number of Africans living in extreme poverty (using US$1.90) by 2033 by 12.5 million people. By 2043, the number increases to 20 million (or 0.9 percentage points), of which two-thirds are in low-income countries. As a portion of population, the largest reduction in poverty is in Liberia (6.8 percentage point difference, but only 561 000 fewer extremely poor people), followed by Sierra Leone, Madagascar, South Sudan and Malawi. Because of its large and poor population, Nigeria sees the biggest impact in poverty reduction (4.4 million fewer people), followed by DR Congo, Madagascar and Tanzania.

However, the scenario does highlight that the impact of more FDI will not necessarily benefit the poor without additional policy efforts. Botswana, an upper middle-income country with especially high levels of inequality, actually experiences a slightly increase in extreme poverty, although only from 2042. The reason is that additional FDI modestly increases inequality. Given its positive developmental status, Botswana does not receive aid and, on a net basis, sends more remittances than it receives. By 2043, 27 000 more Batswana (in a population of 3.2 million people) will live below US$1.90 than in the Current Path forecast.

Conclusion: Accessing financial flows

This theme provided an overview of trends in financial inflows (aid, FDI and remittances) and outflows (illicit financial flows) in Africa. Although China has come to play a big part on the continent, the proportional distribution of global aid and FDI to Africa is stagnating. Most concerning is the persistent low levels of FDI, at an average of 1%–4% of the global total.

Aid is not a solution for Africa although it helps to offset suffering and can, if used wisely, improve outcomes in specific sectors (e.g. primary healthcare). It is often best used to complement government funding, implement strategic initiatives (e.g. improving the efficiency of revenue collection) or, at worst, offset the suffering caused by poor governance.

The growth of private capital flows from outside Africa has benefited only a few countries although it will grow in importance, particularly once nervous investors stop penalising African countries with excessive additional risk-adjusted payments. African countries will have to learn to manage the associated volatility. Generally, FDI is conservative and follows rather than leads other sources of investment as it generally tracks investment decisions by locals and requires policy stability.

Remittances have become significantly more important for some countries but their impact is limited. Eventually, infrastructure development in Africa will largely depend on investment decisions from countries’ governments, which need to focus on sectors and segments for which other financiers have little appetite (such as water and sanitation infrastructure).

That said, the continent needs to work much harder to unlock investment from the pent-up dam of money searching for returns in Europe, North America, China and eventually India. More FDI boosts economic growth and is key in contributing to knowledge transfer and hence to Africa’s economic transformation. The inadequate technical, governance and implementation capacity in African countries requires a dedicated effort to strengthen domestic legislation, institutions and policies governing investment as well as its ability to negotiate and oversee the associated agreements.

If the international community wants to help Africa, it needs to incentivise private investment in Africa through tax benefits, de-risking foreign investment and building African capacity to negotiate, manage and evaluate projects. The world also desperately needs an international Public Credit Rating Agency to provide objective, expert-based ratings of the creditworthiness of sovereigns and companies instead of relying on a handful of Western companies. UNCTAD calls for exactly this in its 2020 Trade and Development Report, arguing that it would promote global public goods and help to promote competition in a highly concentrated private market.[104UN Conference on Trade and Development, Bold public spending only way to recover better from COVID-19, 21 September 2020.] The implementation of a more equitable global taxation structure that grants African countries access to a fair share of profits and places limits on base erosion and profit shifting by international companies will also contribute to improving government revenues.

Although Europe remains Africa’s most important partner in trade, FDI stock and aid, China’s footprint in Africa has grown enormously in recent years. The Belt and Road Initiative will connect China with the resources for growth and development, with a large potential future market, while Chinese peacekeepers and arms help to secure its investments. At the same time, the focus of the Belt and Road Initiative is largely on connecting China to its immediate neighbourhood in Asia and its impact in Africa is likely to be limited. In fact, Africa may already have experienced peak Chinese infrastructure interest and may increasingly have to look elsewhere for future investment and growth, most likely to emerging India.

The rise of China is certainly the most noteworthy feature of the 21st century and its demand for natural resources played a big part in the story of Africa’s growth for several decades from the mid-1990s. This is also evident from the extent to which commodity exports from Africa increased more rapidly than the global average. As a result, Africa’s broad pattern of increased dependence on commodity exports to earn foreign exchange and continued deindustrialisation from already low levels have continued unabated. In the meanwhile, the Chinese economy is rebalancing to rely more on domestic consumption for future growth and its once-insatiable appetite for commodities has tempered. As the hubris around the Belt and Road Initiative tapers down, China will not maintain the breakneck speed of investment growth in Africa seen during the last two decades and the impact of Russia’s invasion of Ukraine has added additional volatility to global markets.

Africa should therefore not rely only on China’s hunger for raw materials, its loans and future investment in infrastructure projects. In fact, China is itself concerned about the viability of African governments to service loans and, already in 2018, scaled back its forecast of future partnership with Africa, expressed its concern about rising debt levels, noted that projects need to be subject to cost–benefit analysis and warned that it intends to pull back on vanity projects.[105C Shepherd and B Blanchard, China's Xi offers another $60 billion to Africa, but says no to 'vanity' projects, Reuters, 3 September 2018, www.reuters.com/article/us-china-africa/chinas-xi-offers-another-60-billion-to-africa-but-says-no-to-vanity-projects-idUSKCN1LJ0C4.] It is evident that the most developed countries have, in the meanwhile, crafted a new narrative on aid that is more strongly linked to climate change, humanitarian crises and national interests such as countering migration. This new conditionality hides the fact that the claim of the demise of aid is premature. Together with remittances, aid will remain important for many poor African countries into the future, particularly in the wake of the COVID-19 pandemic.

Looking to the future, Africa has significant scope to improve matters by investing in the capacity of its institutions to oversee and manage trade, FDI and aid and develop formal remittance processes. The source of aid and investment support is eventually less important, except to ensure that African countries are not forced to choose particular alliances as happened during the Cold War; instead collaboration and a mix-and-match approach should be encouraged. In this vein, the recent trend in funding large projects is positive, namely that the basket of funding includes multiple sources (e.g. the World Bank, the African Development Bank, the European Investment Bank and the Bank of China) and project implementation consisting of a collaborative approach (such as a German engineering company overseeing technical compliance, American project management and Chinese construction capacity that does the heavy lifting).

Eventually, there is little difference between Africa’s old and new partners. Each inevitably puts their own interests first, as should Africa. But Africans should work more diligently in setting the terms for how best it can benefit from aid, FDI and the flow of remittances. Africa needs to become a rule-maker and assume a larger role in its own destiny, particularly in the mode of development it pursues.

To reach sustainable growth and eradicate the current high level of poverty, substantial inflows of resources are needed to fill the savings and foreign exchange gaps in Africa. External resources, especially FDI, are a key element to materialise the vision of Agenda 2063. African countries should therefore improve domestic conditions such as political stability and providing a well-educated workforce, good infrastructure and efficient legal system, which will enable them to set up conditions with regard to FDI and push foreign investors into sectors that are aligned with their developmental goals. With better domestic conditions and a targeted approach, countries such as China and South Korea were able to maximise the economic gains from FDI.

Endnotes

  1. Organisation for Economic Co-operation and Development

  2. The push to halve poverty by 2015 was actually met five years ahead of the deadline, largely on the back of rapid economic growth and pro-poor policies in China, which had little to do with the MDGs. The number of people living in extreme poverty in China fell from 1.9 billion in 1990 to 836 million in 2015, the final year of the MDGs. However, the target to halve the portion of people suffering from hunger was narrowly missed, as were a number of other MDGs. See: H Ritchie and M Roser, Now it is possible to take stock — did the world achieve the Millennium Development Goals?, 20 September 2018.

  3. SEEK Development, Donor Tracker EU.

  4. Bilateral aid is provided directly from a national agency, such as the US Agency for International Development or the Swedish International Development Cooperation Agency, to the country or region concerned. Multilateral aid is provided through organisations such as the World Bank and the African Development Bank as grants and concessional loans (i.e. below market rates). See: SEEK Development, Donor Tracker United States and SEEK Development, Donor Tracker EU.

  5. See, for example: C Arndt, S Jones and F Tarp, Assessing Foreign Aid’s Long-Run Contribution to Growth and Development, World Development, 69, 2015, 6–18.

  6. T Addison, O Morrissey and F Tarp, The Macroeconomics of Aid: Overview, Journal of Development Studies, 53:7, 2017, 987–97. doi: 10.1080/00220388.2017.1303669.

  7. United Nations, Sustainable Development Goals, Goal 17: Revitalize the global partnership for sustainable development.

  8. OECD, Aid at a glance

  9. Aid spending from OECD DAC, Aid at a glance; Federal Democratic Republic of Ethiopia, Ministry of Health, Ethiopia Health Sector Transformation Plan, 2015.

  10. M Wrong, It's Our Turn to Eat: The Story of a Kenyan Whistleblower, London: Fourth Estate, 2009, 202.

  11. World Bank, Government effectiveness, Worldwide Governance Indicators.

  12. Fraser Institute, Economic freedom ranking 2019.

  13. Transparency International, Corruption Perception Index – Kenya.

  14. E Seery, 50 years of broken promises: The $5.7 trillion debt owed to the poorest people, Oxfam, 23 October 2020.

  15. C Arndt, S Jones and F Tarp, Assessing Foreign Aid’s Long-Run Contribution to Growth and Development, World Development, 69, 2015, 6–18

  16. F Lammersen and W Hynes, Aid for trade and the sustainable development agenda: Strengthening synergies, Paris: Organisation for Economic Co-operation and Development, 2016.

  17. Congressional Research Service, U.S. Assistance to Sub-Saharan Africa: An Overview, 2020.

  18. Data for 2020 available at: Compare your country.

  19. The BUILD Act replaces the Overseas Private Investment Corporation, which was created in 1971.

  20. The USIDFC will be able to take a minority equity stake or financial interests of its own in development projects. USIDFC will also provide insurance or reinsurance services and technical assistance, administer special projects, establish enterprise funds, issue obligations, and charge and collect service fees. ‘Through these market-based fees, the USIDFC will operate at no net cost to [US] taxpayers.’ See: DF Runde and R Bandura, The BUILD Act has passed: What’s next?, 2018.

  21. According to former US National Security Advisor John Bolton — see: J Airey, Bolton: New Africa strategy is tough on China, Russia, U.N., The Daily Wire, 14 December 2018.

  22. DF Runde and R Bandura, U.S. economic engagement in Africa: Making Prosper Africa a reality, Washington, DC: Center for Strategic & International Studies, 2019.

  23. K Cheng, The G7 is playing catch-up with China in Africa, 13 July 2022, Quartz Africa

  24. European Union, Development aid at a glance: Statistics by region: Africa, 2019.

  25. European Commission, Africa-Europe Alliance, 2018.

  26. European Commission, Questions and answers: Towards a comprehensive strategy with Africa, 9 March 2020.

  27. Its thematic objectives are (i) local private-sector development, (ii) social and economic infrastructure development, (iii) climate change mitigation, and (iv) root causes of migration and, in addition to financial support, it provides technical assistance and offers a policy dialogue. See: M Gavas and H Timmis, The EU’s financial architecture for external investment: progress, Challenges, and options, Washington, DC: Center for Global Development; European Commission, Joint Africa–EU Strategy, 2019.

  28. The Aid for Trade Initiative was formally launched at the Sixth WTO Ministerial Conference in Hong Kong in 2005. See: World Trade Organization, Aid for Trade, 2019.

  29. Calculated from data in: UN Economic Commission for Africa and World Trade Organization, An inclusive African Continental Free Trade Area: Aid for Trade and the empowerment of women and young people, Addis Ababa: UNECA, 2019.

  30. Additional funds could come from Germany, among others. See: SEEK Development, Donor Tracker EU.

  31. European Commission, EU paves the way for a stronger, more ambitious partnership with Africa, 9 March 2020.

  32. China Africa Research Initiative, Data: Chinese global foreign aid.

  33. N Kitano, A note on estimating China’s foreign aid using new data: 2015 preliminary figures, Tokyo: JICA Ogata Sadako Research Institute for Peace and Development, 2017; also see: Organisation for Economic Co-operation and Development, Development co-operation report 2017: Data for development, Paris: OECD, 2017; China Africa Research Initiative, Data: Chinese global foreign aid.

  34. N Kitano and Y Miyabayashi, Estimating China’s foreign aid: 2019–2020 preliminary figures, JICA Ogata Sadako Research Institute for Peace and Development, 14 December 2020.

  35. A Wooley, AidData’s new dataset of 13,427 Chinese development projects worth $843 billion reveals major increase in ‘hidden debt’ and Belt and Road Initiative implementation problems, 29 September 2021.

  36. Most private money flows to Africa (and elsewhere) go to health and reproductive health in middle-income countries such as Nigeria and South Africa. See: OECD, Private philanthropy funding for development modest compared to public aid, but its potential impact is high, says OECD, 23 March 2018.

  37. United Nations, Sustainable Development Goals, Goal 17: Revitalize the global partnership for sustainable development.

  38. The term ‘portfolio investments’ covers a wide range of asset classes, including stocks, government bonds, corporate bonds, real estate investment trusts, mutual funds, exchange-traded funds and bank certificates of deposit. It can also include more esoteric choices, including options and derivatives such as warrants and futures. See: J Chen, Portfolio Investment.

  39. From the UN Conference on Trade and Development and IFs.

  40. United Nations Conference on Trade and Development, Regional fact sheets, 2018.

  41. Calculated using data from the UN Conference on Trade and Development (UNCTAD).

  42. A Rabah, P Bolton, S Peters, F Sanama and J Stiglitz, From Global Savings Glut to Financing Infrastructure, Economic Policy, 32, 2017, 221–61.

  43. Another 13 countries were rated by two of the agencies, namely Botswana, Republic of the Congo, Cameroon, Cape Verde, Ghana, Kenya, Namibia, Nigeria, Rwanda, Senegal, Tunisia, Uganda and Zambia. See: Country economy, Sovereigns ratings list.

  44. UN Conference on Trade and Development, World Investment Report 2013, Geneva: UNCTAD, 2013.

  45. A Odusola, Addressing the foreign direct investment paradox in Africa, Africa Renewal.

  46. A Ak-Sadiq, How e-government services can pay dividends, 11 February 2021.

  47. K Yeboua, Foreign Direct Investment, Financial Development and Economic Growth in Africa: Evidence from Threshold Modelling, Transnational Corporations Review, 11:3, 2019, 179–89. doi: 10.1080/19186444.2019.1640014.

  48. US Bureau of Economic Analysis, Direct Investment by Country and Industry.

  49. See: European Commission, Africa–Europe Alliance. The data still includes the UK as a member of the EU.

  50. As reported by: J Anyanzwa, China injects $72b in Africa as its continental influence gathers pace, The East African, 8 October 2019.

  51. UN Conference on Trade and Development, World Investment Report 2021, Geneva: UNCTAD, 2021.

  52. T Wegenast, AA Khanna, G Schneider, The Micro-Foundations of the Resource Curse: Mineral Ownership and Local Economic Well-Being in Sub-Saharan Africa, International Studies Quarterly, 64:3, 2020, 530–43.

  53. T Wegenast, AA Khanna, G Schneider, The Micro-Foundations of the Resource Curse: Mineral Ownership and Local Economic Well-Being in Sub-Saharan Africa, International Studies Quarterly, 64:3, 2020, 530–43.

  54. S Zawadzki, Anadarko approves $20 billion LNG export project in Mozambique, Reuters, 18 June 2019.

  55. S Planting, Gas in Mozambique – a $128billion opportunity, Daily Maverick, 24 September 2019.

  56. By the end of 2021 more than 20 countries were helping Mozambique fight the insurgency. See: Institute for Security Studies, Will foreign intervention save Cabo Delgado?, 8 November 2021.

  57. M Borga, P Ibarlucea-Flores and M Sztajerowska, Divestments by multinational enterprises, Paris: Organisation for Economic Co-operation and Development, January 2020.

  58. R Arezki, C Bogmans and H Selod, The Globalization of Farmland: Theory and Empirical Evidence, Policy Research Working Paper WPS 8456, May 2018, Washington, DC: World Bank Group.

  59. C Cheng, The logic behind China’s foreign aid agency, Carnegie Endowment for International Peace, 21 May 2019.

  60. Staff writer, Tanzania–Zambia Railway: A bridge to China?, The New York Times, 29 January 1971.

  61. Staff writer, Tanzania–Zambia Railway: A bridge to China?, The New York Times, 29 January 1971.

  62. I Neuweg, What types of energy does China finance with its development aid?, 2018.

  63. S Horn, CM Reinhart and C Trebesch, How much money does the world owe China?, Harvard Business Review, 26 February 2020.

  64. S Morris, B Parks and A Gardner, Chinese and World Bank lending terms: A systematic comparison across 157 countries and 15 years, Washington, DC: Center for Global Development, 2 April 2020.

  65. American Enterprise Institute, China Global Investment Tracker, 2019; K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey, 2017.

  66. K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey, 2017.

  67. K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey, 2017.

  68. R Partington, Fears grow in Africa that the flood of funds from China will start to ebb, The Guardian, 5 January 2019.

  69. UN Habitat, The State of African Cities 2018 – The geography of African investment, 2018.

  70. E Olander, Even amid a pandemic, Chinese FDI in Africa jumped almost 10% last year, China Africa Project, 31 August 2021.

  71. P Fabricius, Is the ‘Silk Road’ unravelling?, Institute for Security Studies, 8 January 2021.

  72. Examples are Angola and South Sudan. In 2020, Angola had a debt-to-GDP ratio of 91%, half of which is owed to China and much of that is provided by way of oil exports. See: Staff writer, The challenges of reform in Angola, Africa Center for Strategic Studies, 21 January 2020; Staff writer, Angola negotiates the end of oil-backed debt with China, Macauhub, 23 January 2020.

  73. Pangea Risk, Africa lobbies for debt swap to avoid wave of sovereign defaults, Exx Africa Insight, 4 May 2020.

  74. C Oya and F Wanda, Working conditions in Angola. Infrastructure construction and building materials factories, London: SOAS University of London, 2019; F Schaefer and C Oya, Employment patterns and conditions in construction and manufacturing in Ethiopia: A comparative analysis of the road building and light manufacturing sectors, London: SOAS University of London, 2019.

  75. A Gelpern, S Horn, S Morris, B Parks and C Trebesch, How China lends: A rare look into 100 debt contracts with foreign governments, Washington, DC: Center for Global Development, 31 March 2021.

  76. Staff writer, African Union refutes report that China is spying on its headquarters, Xinhua, 15 November 2019.

  77. R Muhumuza, As China builds up Africa, some in Uganda warn of trouble, AP News, 24 October 2019.

  78. A Gelpern, S Horn, S Morris, B Parks and C Trebesch, How China lends: A rare look into 100 debt contracts with foreign governments, Washington, DC: Center for Global Development, 31 March 2021.

  79. Y Kazeem, Nigeria has taken its first steps in adopting China’s yuan as a reserve currency, Quartz Africa, 2 August 2018, https://qz.com/africa/1346766/chinas-yuan-trades-in-nigeria-africa-top-economy/.

  80. P Nantulya, Chinese hard power supports its growing strategic interests in Africa, Washington, DC: Africa Center for Strategic Studies, 17 January 2019.

  81. P Fabricius, Mali gives China a reality check, Institute for Security Studies, 16 October 2020.

  82. NR Lardy, The State Strikes Back: The End of Economic Reform in China?, Washington, DC: Peterson Institute for International Economics, 2019.

  83. NR Lardy, The State Strikes Back: The End of Economic Reform in China?, Washington, DC: Peterson Institute for International Economics, 2019.

  84. T Orlik, F Chen, Q Wan and J Jimenez, Sizing up China’s debt bubble: Bloomberg Economics, Bloomberg, 2018.

  85. The International Monetary Fund and the World Bank, the main providers of international remittance statistics, base their estimates on broad definitions, such as the sum of income earned by migrants and the income of workers who are employed by embassies, international organisations and foreign companies, plus all transfers in cash of kind made or received by residents and non-resident individuals, meaning it includes payments to UN officials and various financial transactions. Migration Data Portal.

  86. Most migrants in Africa are in Côte d’Ivoire, Uganda, South Africa, South Sudan and Burkina Faso. See: Mo Ibrahim Foundation, Africa's Youth: Jobs or Migration?, London: Mo Ibrahim Foundation, 2019, 13–15.

  87. M Famoroti, Debt by diaspora: Ties that bond, Brookings, 24 January 2018.

  88. P Madden, Africa in the news: Zambia’s debt, Kenya’s parliament and trade, and politics in the Horn of Africa, Brookings, 26 September 2020.

  89. World Bank Group, Migrations and remittances: Recent developments and outlook, in Migration and Development Brief 28, 1 December 2011, 10.

  90. World Bank, COVID-19: Remittance flows to shrink 14% by 2021, 29 October 2020.

  91. Illicit financial flows are described as ‘cross-border exchanges of value, monetary or otherwise, which are illegally earned, transferred or used.’ See: UN Conference on Trade and Development, Economic Development in Africa Report 2020: Tackling illicit financial flows for sustainable development in Africa, Geneva: UNCTAD, 2020.

  92. UN Economic Commission for Africa, Illicit financial flows: Report of the High Level Panel on illicit financial flows from Africa, Addis Ababa: UNECA, 2015.

  93. L Signé, M Sow and P Madden, Illicit financial flows in Africa: Drivers, destinations, and policy options, Brookings, 2 March 2020.

  94. UN Conference on Trade and Development, Economic Development in Africa Report 2020: Tackling illicit financial flows for sustainable development in Africa, Geneva: UNCTAD, 2020, 182.

  95. L Signé, M Sow and P Madden, Illicit financial flows in Africa: Drivers, destinations, and policy options, Brookings, 2 March 2020.

  96. A Donker, U.S. tax policy can help Africa’s fight against illicit financial flows, Foreign Policy, 17 May 2021; The 2020 Financial Secrecy Index results are available at: Tax Justice Network, Financial secrecy index.

  97. For example, see: Global Financial Integrity.

  98. G Albertin et al, Tax avoidance in Sub-Saharan Africa’s mining sector, International Monetary Fund, 28 September 2021.

  99. Tax Justice Network, The State of Tax Justice 2021, 16 November 2021.

  100. Examples include the Financial action task force, the Global Forum on Transparency and Exchange of Information for Tax Purposes, and the Inclusive Framework on Base Erosion and Profit Shifting including the Multilateral Convention to implement Tax Treaty related measures to Prevent Base Erosion and Profit Shifting. See: L Signé, M Sow and P Madden, Illicit financial flows in Africa: Drivers, destinations, and policy options, Brookings, 2 March 2020.

  101. L Kim, G-20 leaders back 15% minimum corporate tax deal, Forbes, 30 October 2021.

  102. The framework identifies four main activities that can generate illegal outflows, namely: illicit tax and commercial activities; illegal markets; corruption; and exploitation-type activities and financing of crime and terrorism. Strangely it does not include a high tax burden, rampant inflation and political instability as drivers, although it does include aggressive tax avoidance (since it is empirically challenging to separate some of these from illicit activities), illegal tax and commercial practices, trade misinvoicing and abusive transfer pricing; criminal activities including the drug trade, human trafficking, illegal arms dealing and smuggling of contraband; and bribery and theft by corrupt government officials and their collaborators. Pilot projects using the new framework are underway in Afghanistan, Colombia, Ecuador, Mexico, Nigeria, Panama and Peru, and will contribute to producing global data estimates. UN Conference on Trade and Development, UN agencies finalize a framework to measure illicit financial flows, UNCTAD, 21 December 2020.

  103. M Mohieldin and D Ratha, How to keep remittances flowing, Brookings, 11 June 2020.

  104. UN Conference on Trade and Development, Bold public spending only way to recover better from COVID-19, 21 September 2020.

  105. C Shepherd and B Blanchard, China's Xi offers another $60 billion to Africa, but says no to 'vanity' projects, Reuters, 3 September 2018, www.reuters.com/article/us-china-africa/chinas-xi-offers-another-60-billion-to-africa-but-says-no-to-vanity-projects-idUSKCN1LJ0C4.

Donors and sponsors

Reuse our work

  • All visualizations, data, and text produced by African Futures are completely open access under the Creative Commons BY license. You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited.
  • The data produced by third parties and made available by African Futures is subject to the license terms from the original third-party authors. We will always indicate the original source of the data in our documentation, so you should always check the license of any such third-party data before use and redistribution.
  • All of our charts can be embedded in any site.

Cite this research

Jakkie Cilliers (2022) Financial Flows. Published online at futures.issafrica.org. Retrieved from https://futures.issafrica.org/thematic/10-financial-flows/ [Online Resource] Updated 30 August 2022.