Historical patterns of flows

The key characteristic of the global financial architecture is the hierarchy of currencies that has helped determine how countries interact with the global economy. Money has four basic functions: a store of value, a unit of account, a medium of exchange and a standard of deferred payment. The United States is at the top of the hierarchy due to its capacity to fulfil these functions well. The dollar is still overwhelmingly the main unit of account in international transactions, including the generation of international debt. At the bottom of the hierarchy are countries on the periphery, including those in Africa. There is little confidence among economic players in the global economy in the capacity of these countries’ currencies to provide stability as a store of value or unit of account. This creates monetary and economic dependency, which constrains policy space, reduces sovereignty and shapes African countries’ social, political and economic structures. Under this unequal global system, African and other developing countries must export goods to advanced economies or attract flows in order to get the hard currencies needed for crucial imports, to service external liabilities and deal with the rapid capital outflows that have become more challenging in the era of capital account liberalization.

These global financial inequities have contributed to the domination of the neoliberal development model, which has undermined African countries’ capacities to develop their economies through structural transformation, that is, the transition over time from an economy based on primary agriculture and extractive industries towards one based more on manufacturing – which pays higher wages. Since the 1980s, foreign aid, policy advice and loan conditions from the International Monetary Fund (IMF), World Bank and Western-led bilateral aid agencies have compelled African countries to reduce the role of the state in supporting the development of domestic manufacturing and economic diversification. The result has been that many African economies remain stuck as low-end primary commodity producers with low wages, high unemployment and underemployment, and low domestic tax bases that are incapable of financing adequate health and education provision. This failure to promote development has left African economies particularly susceptible to global shocks such as the COVID-19 crisis. The failure of the neoliberal development model has also left African economies locked into export commodity dependence, where the price of agricultural and mineral exports has tended to be volatile, particularly in respect of manufactured goods (UNCTAD, 2019).

Negative commodity price shocks such as the economic fallout from the pandemic force governments into balance of payments crises, which frequently means turning to outside agencies like the IMF (UNCTAD, 2019; Loscher, 2022). The IMF provides emergency financial assistance to developing economies based on loan conditions that call for fiscal austerity (reductions in public spending), lowering wages and raising interest rates – all of which are designed to make the country import less and export more so that creditworthiness is re-established. However, many critics – including the IMF’s own research department – have concluded that cutting public spending during an economic crisis can actually make the crisis deeper, longer, slow its recovery and cause damage to workforce productivity in contrast to outcomes if countries increased public spending (Ostry et al, 2016). While the IMF was quick to disburse billions in new emergency loans to developing countries in 2020 in response to the COVID crisis, most of these loan programmes called for fiscal austerity in 2021, 2022 and 2023, even as the economic fallout from COVID – now exacerbated by the war in Ukraine – is likely to continue (Ortiz and Cummins, 2021).

Consequently, many developing countries go to great lengths to avoid having to appeal to the IMF for emergency financial support during a crisis by increasing hard currency reserves. Augmenting foreign exchange reserves provides greater policy space to begin to address commodity dependence, but the pressing need for reserves pushes governments to maximize commodity exports and accumulate reserves during good times rather than spending down these reserves to diversify their economies away from commodity dependency. Hence, in the current financial order, African economies are stuck in a vicious cycle of commodity dependence.²

The impact of neoliberalism on the continent is well documented (Mhone, 1995; Stein and Nissanke, 1999; Mkandawire, 2001).³ Briefly, neoliberal policy reforms under IMF and World Bank structural adjustment programmes entailed market liberalization, privatization, macro-stabilization and charging user fees in health and education, which were supposed to lead to gains in static efficiency but instead led to exclusion for the poorest. Social expenditure cuts and the privatization of social services in healthcare and education put African countries in worse health in the 1980s and 1990s and on the wrong trajectory to combat any future pandemic. Declines in spending in an already poorly developed infrastructure, low productivity and declining standards of living attracted little FDI in areas other than raw material extraction (Stein, 2013).

Neoliberal policy reforms included capital account liberalization, which reduced restrictions on capital flows, privatization or closure of state-owned enterprises and prematurely liberalizing trade, all of which undermined local manufacturing capacity and led to greater reliance on imports of manufacturing goods, including pharmaceuticals and other health commodities. The failure of the neoliberal model is reflected in Africa’s increasing dependence on exporting unprocessed raw materials for foreign exchange. The United Nations Conference on Trade and Development (UNCTAD) defines a country as dependent on commodities when they account for more than 60 per cent of its total merchandise exports in value terms. Its State of Commodity Dependence Report 2019 finds that the number of commodity-dependent countries increased from 92 between 1998 and 2002 to 102 between 2013 and 2017, leaving more than half of the world’s countries (102 out of 189) and two thirds of developing countries dependent on commodities. Sub-Saharan African (SSA) economies are the hardest-hit, with 89 per cent of the region’s countries commodities-dependent.

The neoliberal model has led to the deindustrialization of the continent and returned Africa to its colonial-style extraction economy with its problematic boom and bust commodity cycles. For example, manufacturing fell from 17 per cent of GDP from 1979 to 1981 to only 10.7 per cent from 2000 to 2009 to 9.4 per cent from 2010 to 2019 (Stein, 2013; UNCTAD, 2021). Figure 3.1 contrasts manufacturing value added as a percentage of GDP for South Korea, which followed in the steps of the advanced economies by giving the state a strong role in building domestic manufacturing over time, and SSA economies, which followed the neoliberal model to undo state support for building manufacturing.

MVA (manufacturing value added) as a percentage of GDP for South Korea and Sub-Saharan Africa, 1960–2020

Source: World Bank databank. See https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=KR-ZG

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MVA (manufacturing value added) as a percentage of GDP for South Korea and Sub-Saharan Africa, 1960–2020

Source: World Bank databank. See https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=KR-ZG

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MVA (manufacturing value added) as a percentage of GDP for South Korea and Sub-Saharan Africa, 1960–2020

Source: World Bank databank. See https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=KR-ZG

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Table 3.1 provides details on the comparative importance of three types of key financial inflows into Africa that are vitally important for Africa to sustain itself in the global financial order: official development assistance – foreign aid (ODA), remittances and FDI. The figure for 1990 was indicative of the numbers over the 1990s during the adjustment period. Remittances and FDI were tiny relative to ODA. African countries had little or no access to private finance in the 1980s and 1990s. Between 1980 and 1998, SSA debt (excluding South Africa) more than tripled from $60.6 to $205.3 billion. The growth of debt was overwhelmingly from bilateral and multilateral development agency loans. Private debt only grew from $20.8 to $27.5 billion over the same period (Stein, 2013). Therefore, African governments’ policy space was dramatically reduced as aid agencies adopted neoliberal loan conditions as the core of their structural adjustment programmes.

The growth of FDI and remittances led to a decline in the dependence of aid for foreign exchange after 2000. By 2007, the ratio of FDI and remittances to ODA reached 1.7 from only 0.13 in 1990. On the surface, SSA countries in 2015–19 had access to five to seven times the amount of foreign exchange annually from FDI compared to 2000, and it had generally risen at rates higher than imports. For example, the ratio of FDI to imports almost doubled to 13 per cent between 2000 and 2015 (UNCTAD, 2021).

Hypothetically, FDI could be a major source of investment in building health sector services and good capacities, but in practice this has not been the case. The outbreak of COVID-19 has generated renewed interest in this subject. The Organisation for Economic Co-operation and Development (OECD) published a study on the impact of FDI on the resilience of health systems for a 2020 roundtable on investment and sustainable development. In 2004, greenfield investment (foreign direct investment building operations from the ground up) in non-OECD countries in healthcare infrastructure and services, pharma, medical devices and biotechnology was only 1.5 per cent of the total, with none of it going to SSA countries (OECD, 2020). By 2019, the total had almost reached 2 per cent with only a small fraction of it going to SSA. So which countries and sectors have attracted most of the FDI?

Jomo and Von Arnim (2012) illustrate the overwhelming focus of FDI on the oil and gas sector historically using data from 1970 to 2006. In the 1970s, one country, Nigeria, Africa’s largest oil producer, received 35.4 per cent of all the FDI to SSA. Largely due to the plummeting price of oil in the 1980s, it dropped to only 3 per cent of the total before rising in the 1990s to a dominating 40.6 per cent of all SSA FDI. In the 2000–06 period, it fell to 21.7 per cent, but the sector was 47 per cent of the total when including other oil producers (Equatorial Guinea, Chad, Angola and Sudan). Little has changed. In 2016, 70 per cent of SSA FDI (excluding South Africa) went to oil- and gas-producing countries in SSA (UNCTAD, 2021). The structure of trade reflects the structural impact of FDI, with fuel exports rising from 39.8 per cent of total exports in 1995 to 71.4 per cent of total exports in 2008 before falling slightly to 62.7 per cent in 2014. This helped push countries into greater reliance on unprocessed raw materials, which went from 87.6 per cent of exports in 1987 to 92.2 per cent in 2010 and 92.3 per cent in 2014 before declining to 90 per cent in 2018 (SSA excluding South Africa) (UNCTAD, 2022).

The rise of remittances, in contrast, provides considerably more flexibility as local recipients convert foreign exchange to local currencies, potentially leading to a rise in foreign exchange reserves. The indirect structural impact is uncertain though. A good deal of research has focused on the impact on poverty, inequality and infant mortality based on evidence that remittances go towards higher consumption, house construction, healthcare and educational expenditures. Ratha et al (2012) provide data on the use of remittances for five African countries. In all cases, the majority of funds were allocated to these four categories. However, some studies illustrate increases in GDP and financial development, indicating the possibility of improvements in investment, though there is evidence imports also rise, which could counter some of the gains in reserves (Tah and McMillan, 2019; Letsoalo and Thobeka, 2020). Overall, there is little evidence that FDI and remittances have helped to structurally prepare African countries for COVID-19, though clearly transfers have helped families cope with the economic shocks arising from the pandemic (Akim et al, 2021). There are also other important new sources of finance, including Chinese lending and sovereign debt bonds.

Although bonds denominated in local currencies are issued routinely by most SSA countries, no SSA country except South Africa had issued a Eurobond for many years until the Seychelles sold a $200 million Eurodollar bond in September 2006. The following year, Ghana became the first heavily indebted poor country to issue sovereign bonds on international markets. As indicated in Table 3.2, by the end of 2021, 17 different SSA countries had participated in the Eurobond markets with a gross value of $73 billion (not including South Africa). The funds have been used for a variety of different purposes, including increasing the bargaining power of countries with the IMF.

Governments have used funds from bond issues to expand their reserves or engage in fiscal expansion. Seychelles used its 2006 Eurobond issue to increase its foreign currency reserves. In Namibia, a 2011 bond issue successfully financed a stimulus programme aimed at reducing the unemployment rate. In most cases, funds have been used for infrastructural projects, which are, by their very nature, expansionary and implicitly countercyclical when undertaken during a period of slow economic growth. Therefore, they have bought African countries flexibility to avoid the procyclical policies of the IMF during economic downturns (Stein, 2015). COVID-19 and Zambia’s default on payments in October 2020 curtailed the ability to tap these markets. There were only three offerings in 2020, though there had been recovery to pre-COVID-19 levels in late 2021.

Table 3.3 presents data on the Chinese loans to SSA, which has provided another important source of lending. Between 2000 and 2020, the total was $159.9 billion. The overwhelming focus is on infrastructure, with $108.2 billion or just under 68 per cent of the total going to transportation ($46.8), power ($40.5), information and communications ($13.5) and water ($7.4). The largest area that is non-infrastructural focus is mining ($18) (SAIS, 2021).

Brautigam (2019) points to the importance of infrastructure in paving the way for structural transformation. However, lending to expand the important area of manufacturing capacity has been much more limited in part due to the movement away from state-owned manufacturing in the adjustment period and after, which has instead emphasized privatization. There have been a few exceptions since 1995, including the building of refineries in Sudan, Chad and Niger; cement factories in Chad, Ethiopia, Eritrea and Republic of the Congo; sugar factories in Ethiopia and Sudan; and agro-industrial milling projects in Zambia and Mozambique. Angola borrowed funds for the expansion of state farms to produce grains.

Loans from China have also buttressed existing structures. In some cases, they have been secured and are paid off from resource revenue. For example, the Chinese loan to Ghana for the Bui Dam was secured with revenue from the export of cocoa to a Chinese company. There were also income streams tied to resources in the Democratic Republic of the Congo, Angola, Equatorial Guinea, Sudan and Congo. Ethiopia used sesame seed sales to China to pay for loans. Chinese loans have also taken the form of sales of manufacturing goods from China to raise local funds for Chinese-financed projects (Brautigam, 2019). Even with all these loans, however, the structure of trade between China and Africa has not changed and looks little different from the broader trade structure. Between 2014 and 2019, 96 per cent of exports from SSA to China were in primary commodities, with 60 per cent in fuels. Imports were also overwhelmingly in manufacturing goods (77 per cent of the total). The trade deficit average with China is $12 billion per year (UNCTAD, 2021).

Despite the importance of these inflows, a broader view of global trends shows that African economies are increasingly excluded from the global economy. In 2019, while the value of Africa’s total trade was 106 times higher than in 1950, the continent’s share in world trade had declined over the period from 6 per cent to a meagre 2 per cent. And while FDI inflows into Africa grew 35 times between 1970 and 2019, Africa’s share of world FDI dropped from 10 per cent to 3 per cent (UNCTAD, 2021). Therefore, while the increasing inflows in absolute terms may suggest that Africa is increasing its integration with the global economy, the continent today actually comprises a smaller role than before independence.

African economies remain subject to a host of other structural inequalities in the global financial architecture. Among these are the failure of an international system to effectively supply liquidity to African economies in moments of global financial crises; the inability to stop the flow of illicit finances and capital flight out of African economies (Ndikumana and Boyce, 2022); the inability to stop tax evasion and tax avoidance schemes that deprive African economies of their due taxes (Sight News, 2021); and the inability to provide an international system for an orderly workout of sovereign debt restructuring following debt crises. All these aspects of the current global system – from the neoliberal development model that undermines structural transformation and development, to the aid, trade and global financial systems – leave African economies at a major disadvantage. The systems collectively undermine the ability of African economies to build domestic tax bases that are capable of financing the necessary increases in long-term public investments in health and education infrastructure. As we have witnessed during the COVID-19 crisis and its economic fallout, such a context has left African economies unable to effectively address health crises, with significant consequences for human health and the sustainability of development.