.
As the 37th Southern African Development Community (SADC) summit made clear, boosting private investment in the natural resources industry is the preferred investment strategy pursued by African leaders. As the shindig drew to a close on Sunday 20th, delegates renewed their commitment to “boost the skills, enhance regional integration and create mechanisms for the involvement of the private sector” in the production and distribution of commodities. However, the timing of this announcement is cause for concern, because declining global demand for raw commodities is making this approach to development unviable. Not to mention that many SADC countries—like Angola or the DRC—are shorthand for the resource curse, which traces many of their woes (poverty, conflict, shabby democratic standards, low growth rates) to an ill-fated overreliance on commodity exports.
The conclusion of the SADC summit was motivated by an understandable intention to use Africa’s abundant natural resources, particularly newly discovered gas reserves. For instance, 600 trillion cubic feet of natural gas were recently unearthed in Southern Africa; Botswana and Zimbabwe have extensive resources of coal bed methane and sulfur-free gas, while Angola, Mozambique, Namibia and Tanzania are rich in new sources of offshore gas. The SADC is betting on the cooperation of African countries and on massive infrastructure projects such as the Mozambique-South Africa gas pipeline project to help distribute fuel to a region whose energy development has progressed slowly and unequally. All of this is part of a renewed drive to achieve economic growth, and to counter the overwhelming use of biomass fuel on the continent, one of the main causes of pollution, health problems, and deforestation.
At the same time, it is questionable whether in the current shrinking economy a focus on natural resources can provide sustainable economic growth for Africa. For the last two years, demand for natural resources has been contracting worldwide, prompting the World Bank to lower the continent’s growth forecast to 3.2 percent in April. However, it is not only growth rates that are adversely affected, but foreign direct investment (FDI) as well. Africa’s FDI inflows plummeted by a staggering 30% in 2015, while Europe and the United States benefitted from a 36% increase. As a result, the top performing African economies of Nigeria and South Africa saw slow or negative growth compared to previous years. The fact that recovery has also been sluggish was observed with concern by the United Nations Conference on Trade and Development (UNCTAD) Secretary-General Mukhisa Kituyi, who pointed to “significant uncertainties about the shape of future economic policy developments”.
Thus, as far as the traditional yardsticks of gauging economic activity are concerned, African countries are in for a rough time ahead, characterized by stagnant growth and dwindling external financing for important development projects. However, this viewpoint tends to paper over other significant trends that are highly relevant for future economic policy developments. In particular, the fact that the drop in FDI was concomitant with a rise in remittances from the African diaspora in the same time period is wholly ignored.
Looking at the numbers, the importance of these money transfers and their economic potential becomes abundantly clear. In 2015, global remittances amounted to over $600 billion, of which two-thirds headed to developing countries. Between 2015 and 2016, African economies received over $60 billion in diaspora remittances, with 19 African countries seeing inflows worth 3 percent or more of their GDP, and 6 countries inflows worth over 10 percent of their GDP. Remittances are more stable than private investment flows as they are consistently transferred even in times of crisis or natural disasters (as proven by the Nepal earthquake), therefore making them vital in shoring up populations hit hard by falling commodity prices and currency devaluation. Exceeding the amount of official development assistance in 2017, the World Bank estimates that remittances will grow by 3.3 percent this year.
Because remittances are such an important pillar of stability compared to other economic drivers, they are a significant source of income for millions of people across Africa. It is unfortunate then that their potential is stifled by the world’s highest transaction fees. Money transfer operators (MTOs) Western Union and MoneyGram, who as a duopoly are controlling the African remittances market through exclusivity agreements, are able to use their privileged position to impose average fees of 11.5 percent against a global rate of 8 percent. According to an Overseas Development Institute (ODI) report, this “super tax” is costing Africa between $1.4 billion and $2.3 billion per year.
It goes without saying that these high fees are holding back much of Africa’s development. In fact, ODI estimates that reducing these fees to a global average level of 5 percent would boost transfers by $1.8 billion, enough to finance the education of 14 million primary school age children, improve sanitation for 8 million people or provide clean water for 21 million. However, changing the remittance system is easier said than done and depends on Western states taking a stance against Western Union and MoneyGram.
Instead of pouring billions into unprofitable resource industries, African leaders should focus their energies on urging Europe to put pressure on money transfer operators to cut remittance fees and investigate exclusivity agreements. In all fairness, two years ago, Europe pledged to assist African countries to achieve a decrease in remittance fees to “less than 3 percent”, and it is high time to remind Western leaders of their promise.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
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Time for the SADC To Break Free of Commodity Exports
Schematic flag and map of the Southern African Development Community.
September 15, 2017
As the 37th Southern African Development Community (SADC) summit made clear, boosting private investment in the natural resources industry is the preferred investment strategy pursued by African leaders. As the shindig drew to a close on Sunday 20th, delegates renewed their commitment to “boost the skills, enhance regional integration and create mechanisms for the involvement of the private sector” in the production and distribution of commodities. However, the timing of this announcement is cause for concern, because declining global demand for raw commodities is making this approach to development unviable. Not to mention that many SADC countries—like Angola or the DRC—are shorthand for the resource curse, which traces many of their woes (poverty, conflict, shabby democratic standards, low growth rates) to an ill-fated overreliance on commodity exports.
The conclusion of the SADC summit was motivated by an understandable intention to use Africa’s abundant natural resources, particularly newly discovered gas reserves. For instance, 600 trillion cubic feet of natural gas were recently unearthed in Southern Africa; Botswana and Zimbabwe have extensive resources of coal bed methane and sulfur-free gas, while Angola, Mozambique, Namibia and Tanzania are rich in new sources of offshore gas. The SADC is betting on the cooperation of African countries and on massive infrastructure projects such as the Mozambique-South Africa gas pipeline project to help distribute fuel to a region whose energy development has progressed slowly and unequally. All of this is part of a renewed drive to achieve economic growth, and to counter the overwhelming use of biomass fuel on the continent, one of the main causes of pollution, health problems, and deforestation.
At the same time, it is questionable whether in the current shrinking economy a focus on natural resources can provide sustainable economic growth for Africa. For the last two years, demand for natural resources has been contracting worldwide, prompting the World Bank to lower the continent’s growth forecast to 3.2 percent in April. However, it is not only growth rates that are adversely affected, but foreign direct investment (FDI) as well. Africa’s FDI inflows plummeted by a staggering 30% in 2015, while Europe and the United States benefitted from a 36% increase. As a result, the top performing African economies of Nigeria and South Africa saw slow or negative growth compared to previous years. The fact that recovery has also been sluggish was observed with concern by the United Nations Conference on Trade and Development (UNCTAD) Secretary-General Mukhisa Kituyi, who pointed to “significant uncertainties about the shape of future economic policy developments”.
Thus, as far as the traditional yardsticks of gauging economic activity are concerned, African countries are in for a rough time ahead, characterized by stagnant growth and dwindling external financing for important development projects. However, this viewpoint tends to paper over other significant trends that are highly relevant for future economic policy developments. In particular, the fact that the drop in FDI was concomitant with a rise in remittances from the African diaspora in the same time period is wholly ignored.
Looking at the numbers, the importance of these money transfers and their economic potential becomes abundantly clear. In 2015, global remittances amounted to over $600 billion, of which two-thirds headed to developing countries. Between 2015 and 2016, African economies received over $60 billion in diaspora remittances, with 19 African countries seeing inflows worth 3 percent or more of their GDP, and 6 countries inflows worth over 10 percent of their GDP. Remittances are more stable than private investment flows as they are consistently transferred even in times of crisis or natural disasters (as proven by the Nepal earthquake), therefore making them vital in shoring up populations hit hard by falling commodity prices and currency devaluation. Exceeding the amount of official development assistance in 2017, the World Bank estimates that remittances will grow by 3.3 percent this year.
Because remittances are such an important pillar of stability compared to other economic drivers, they are a significant source of income for millions of people across Africa. It is unfortunate then that their potential is stifled by the world’s highest transaction fees. Money transfer operators (MTOs) Western Union and MoneyGram, who as a duopoly are controlling the African remittances market through exclusivity agreements, are able to use their privileged position to impose average fees of 11.5 percent against a global rate of 8 percent. According to an Overseas Development Institute (ODI) report, this “super tax” is costing Africa between $1.4 billion and $2.3 billion per year.
It goes without saying that these high fees are holding back much of Africa’s development. In fact, ODI estimates that reducing these fees to a global average level of 5 percent would boost transfers by $1.8 billion, enough to finance the education of 14 million primary school age children, improve sanitation for 8 million people or provide clean water for 21 million. However, changing the remittance system is easier said than done and depends on Western states taking a stance against Western Union and MoneyGram.
Instead of pouring billions into unprofitable resource industries, African leaders should focus their energies on urging Europe to put pressure on money transfer operators to cut remittance fees and investigate exclusivity agreements. In all fairness, two years ago, Europe pledged to assist African countries to achieve a decrease in remittance fees to “less than 3 percent”, and it is high time to remind Western leaders of their promise.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
