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Preface Annex 1
IMPROVING UNDERSTANDING THROUGH INTERLINKAGES
INVESTMENT, AID AND DEBT
Global financial relationships have significant implications for economic, development and environmental policies. The continued imbalance makes African countries extremely vulnerable to external pressures. Various African initiatives, including NEPAD, seek to develop interlinkages between the global, regional and national levels – and to engage the global community and to promote more equitable relationships based on partnership and joint responsibility.
Africa’s debt burden continues to be a major drain on economic growth and human well-being. Sub-Saharan Africa’s external debt burden in 2003 amounted to US$185 000 million (Commission for Africa 2005). The average African country spends three times more on repaying debt than it does on providing basic services to its people (Katsouris 2004). By the end of 2004, Africa will spend about 70 per cent of its export earnings on external debt servicing (Katsouris 2004). Additionally, this debt burden has opened Africa up to externally driven economic and political reforms. Although, with globalization and the end of the Cold War, these ties have become less obvious, much development aid remains tied (World Resources Institute and others 2005) and thus aid remains a crucial driver of development patterns. Poverty Reduction Strategy Papers, for example, serve as a basis for countries to qualify for debt relief and donor assistance under the Heavily Indebted Poor Countries (HIPC) Initiative, concessional lending, and the World Bank’s Country Assistance Strategy (Bojö and Reddy 2002).
The debt burden increased from the late 1970s until the late 1990s, as many countries sought loans to service their debts to avoid bankruptcy. The debt burden forced many African countries to liberalize their economies and adopt SAPs: this had far-reaching implications for human well-being and environmental sustainability. Standard features of the SAPs included reducing or removing subsidies on basic commodities and services, and austerity measures in government spending. They also focused on export and macroeconomic stability, reduced the size of the public sector’s share in the economy, liberalized trade and froze government hiring. In most cases, these policies had detrimental environmental and social impacts, as shown in Box 9. Additionally, SAPs resulted in job cuts, forcing the unemployed to clear new land for agriculture (Katerere and Mohamed-Katerere 2005), and increased dependence on natural resources. For example, many urban poor people increased agriculture in order to supplement their incomes as discussed in Box 6. Africa’s growing debt burdens, and its repayment obligations, constrain the range of opportunities available to it by locking Africa into unsustainable production systems. Africa’s debt burden is growing despite debt relief to HIPC. Recognizing the linkage between debt and the lack of development, two of the targets for MDG 8 specifically commit the global community to address the debt problem.
Private capital is playing an increasingly important role in shaping economic development in Africa. Foreign direct investment (FDI) has become the dominant route for financial flows to developing countries (Oxfam America 2002) as shown in Figure 1. By the mid 1990s, FDI had replaced development aid as the main form of financial inflows to Africa. Although Africa has benefited from increased FDI, its share has remained relatively small and concentrated in extractive industries. Sub- Saharan Africa’s share amounts to about US$62 000 million (World Bank 2005). Capital inflows from workers’ remittances are significant investment and now exceed official development assistance (Sorensen 2004). In 2000, Africa accounted for about 15 per cent of total global remittances of US$72 000 million – that is US$10 700 million (Sorensen 2004). In the same year, Africa also received US$14 413.6 million in official development assistance (ODA) and aid (WRI 2005).