Part 2: Issues in Sustainable Development

Finance

SummaryFinance

African countries continue to face a perennial shortage of resources needed to finance public and private investment, constraining their ability to accelerate growth. The chronic resource gap arises from imbalances between exports and imports, between resource inflows and debt payments, and between domestic savings and domestic investment. Resource shortages limit the ability of governments to direct public expenditures towards the infrastructure and social services needed to boost domestic demand, encourage private sector activity, and sustain high levels of economic growth.

Main Idea

Understanding the problems and finding sustainable finance opportunities

Key Concepts

      • Capital flows
      • Foreign direct investment
      • Sustainable small and medium enterprises (SMEs)
      • Microfinance and microcredit

Outcomes

Knowledge of

      • capital inflows and outflows in the African region

Understanding of

      • problems resulting from indebtedness and structural adjustment programs
      • barriers to foreign direct investment
      • importance of SMEs to African economies
      • microfinance and microcredit

Ability to

      • describe how internal revenues can be increased
      • describe how environmental and human development sustainability measures are becoming criteria for approving loans

Core Readings

  1. Economic Report on Africa, pages 1-3
    Overview of capital inflows and outflows in the African region (3 pages)
  2. Africa Environment Outlook, Chapter 8: Interlinkages: The Environment and Policy Web, “Investment and Debt,” pages 273-274
    Problems resulting from indebtedness and structural adjustment programs
    (2 pages)
  3. Investors Start to Eye Africa
    Barriers to foreign direct investment in Africa (4 pages)
  4. Innovative Financing for Sustainable Small and Medium Enterprises in Africa
    Background on importance of SMEs to African economies and their difficulty in locating financing (1 page)
  5. Rural Finance
    Brief summary of the problems of financing in rural areas (1 page)
  6. About Microfinance and Microcredit
    Definitions of terms and frequently asked questions (3 pages)

Sustainability Strategies

  1. Raising Domestic Revenue for the MDGs
    How governments can increase internal revenues (1 page)
  2. Africa’s Banks Starting to Rise to Challenges
    African banks are including environmental and human development sustainability measures in their criteria for approving loans (2 pages)
  3. Sustainable Energy Finance Initiative
    UNEP-proposed program for financing renewable energy and energy efficient projects (6 pages)
  4. Rural Energy Enterprise Development (REED)
    Initiative providing enterprise development and seed financing for clean energy entrepreneurs in Africa (1 page)

Supplemental Readings

  1. Forest Finance
    Concern about lack of resources for forest research in developing countries and call for greater international scientific cooperation (13 pages)
  2. Agricultural Finance
    Discussion of how to get policy right regarding rural credit; includes series of case studies (71 pages)
  3. Why Is Africa Constrained from Spending ODA?
    How inflation rates can trigger restrictions on aid spending (1 page)
  4. The Sunny Continent
    Two prominent African businessmen speak about the potential of Africa
    (3 pages)
  5. World Bank Africa Regional Brief
    Summary of World Bank programs in Africa in the context of overall development assistance (5 pages)
  6. Sustainable Energy Finance Directory
    (http://www.sef-directory.net)
    An online listing of lenders and investors who provide finance to the clean energy sector worldwide

Assignment Questions

  1. Finance: A basic relationship in the economic model of a closed economy is that total investment is equal to total savings, since the money available for banks to lend to investors is equal to the amount of money set aside in savings. What is the relationship between resource flows (also referred to as capital or financial flows) and investment? How does investment lead to economic growth? Describe the trends in capital flows into and out of Africa. How are capital inflows balanced between private (also known as FDI, foreign direct investment) and public investment (also known as ODA - official development assistance)?
  2. Finance: Summarize barriers to foreign direct investment in Africa. What changes can make Africa more attractive to investment?
  3. Finance: Explain the finance challenges related to small and medium enterprises.