Shifting Tides: Global Development Amid Geopolitical Upheaval

Dr Vera Songwe is Chair and Founder, Liquidity and Sustainability Facility, and Non-Resident Senior Fellow, Global Economy and Development, Brookings Institution. She has championed the need to focus both on solvency and liquidity issues in Emerging Market economies emphasizing the importance of different instruments needed. She co-chaired the G20 Expert Group on climate, finance and debt, and as global climate champion she co-chairs the Independent High Level Expert Panel on Climate Finance alongside Lord Stern. Under the last three COP presidencies they have worked to build the climate investment narrative as the growth story of the 21st century.

As the former United Nations Under-Secretary General and Executive Secretary of the Economic Commission for Africa (ECA), she was the first woman to lead the ECA since its foundation 60 years ago. Prior to the ECA, she was Regional Director at the International Finance Corporation (IFC) and a Country Director at the World Bank.

At this time of disruption and change, we’d be keen to get your thoughts on how you see the global development system evolving under current geo-political stresses, and how best to respond. Are we entering a new world in which many of the assumptions we held about Official Development Assistance are no longer valid, and are there some real advances we can gain from this shake-up to global structures?

The fall in development assistance has been happening for a long time. In 2023, I wrote a piece for the Center for Global Development and for India’s Presidency of the G20, noting that the International Development Association (IDA) in 2022 was half the size of IDA 2012. IDA provides grants and low interest loans to the world’s 78 poorest countries. It doesn’t matter which slice you take, the funding has been going down. What is happening now is maybe a more overt, less elegant way of doing what has been going on for years. Essentially, since 2012 aid has been falling, but it has been gradual, so people didn’t notice. More recently, France, UK, Austria, Sweden and Germany have all announced aid cuts. So the US and Europe are going in the same direction. While still the biggest recipient, Africa’s share of global ODA has dropped from 37.6% in 2013 to 26.7% in 2023, according to the Mo Ibrahim Foundation’s latest figures. Most Africans say “this is nothing new. We have been going to meetings and talking about the aid architecture for a long time.” We need to ask why there have been so few graduations from IDA in the last 15 years. Has the model as we know it run its course? The private sector unfortunately is also moving resources out of Africa.

How can the EU and Africa work better together, with ODA a less significant part of that relationship? What else should we be doing together?

First, do no harm. Policies adopted by the advanced economies should not undermine growth in Africa. We’ve seen a number of these hurdles over the last few years. Take gas, for example. If you say to the Multilateral Development Banks (MDBs) “do not fund gas”, essentially the message to countries like Senegal, Mauritania, Mozambique, Nigeria, and Cameroun is “You cannot grow competitively”. These countries need to develop their gas. They still have some of the highest energy prices and are crumbling under the weight of subsidies, though these are often poorly targeted. At the same time, Europe continues to buy African gas and also gas from Russia. Some proportionality is important. Then there is the Carbon Border Adjustment Mechanism (CBAM) which could have detrimental impacts on certain African countries that have carbon-intensive exports. The point here is to see if we can accelerate the sharing of technology, so countries adapt rapidly to the new low-carbon norms. Egypt is a good example where the EU could help support the green transition in energy-intensive sectors, like cement, aluminium and fertiliser. There are a number of other Non-Tariff Barriers from Europe which are trade distorting and need review.

Second, on the African front, governments must implement better policies, which include reducing subsidies on fossil fuels, and increasing energy supply. Some countries are spending 4-5% of their resources on fuel subsidies. You should focus on the hard-to-reach, last-mile populations, and not go over 1-2%. A cut in subsidies would free up additional resources to deploy to more important tasks. Notice I say “implement better policies” because, in many countries, policies have been enacted but are not being implemented. There is so much more that can be done to improve the business environment for both local and foreign businesses. In the age of AI and rapid innovation, countries must implement policies that allow quick, affordable, and dependable access to the internet.

Third, additional resources are needed. Can we increase donor contributions and raise more revenue? I think it is very difficult in the current environment. But there may be other ways to help, such as schemes to provide guarantees, which improve credit-worthiness and make deploying capital easier. We could also work to make the MDBs do more and better. They could be leaner, and disburse faster, and put into effect the many recommendations made from the Capital Adequacy Framework review and the G20 MDB report, such as on loan to equity ratios. At the country level, domestic resource mobilisation is where African countries must do much better, in terms of tax administration and policy. Europe can play a role here, by strengthening systems and the technology needed for tax offices to do their job. Many governments have achieved a lot, but some definitely need a bit more support. In this way, we might be able to release an additional 2-3% of GDP over the medium term - I haven’t done the detailed work to substantiate the figures, but this is the likely order of magnitude.

Let’s also look for new revenue streams, such as is being done by the Solidarity Levies Taskforce , led by Laurence Tubiana. This taskforce is examining global revenue systems, and the options for levies on airlines, shipping, wealth, and financial transactions. Together it is reckoned they could deliver up to $800bn yearly, which would be a very helpful contribution to the collective problems we face. We’d need to work out whether you create a global fund to manage these revenues, or whether the levies provide finance directly into national treasuries.

Then there is the question of SDRs. SDR on-lending has been the most debated topic in development circles since 2021. However, the ambitious $100 billion proposed at the May Paris Summit that year has not yet materialized. Rather than focus solely on on-lending, maybe it is time to re-introduce the call for new issuance of SDRs. The statutes of the IMF call for issuance either in times of crisis or every 3 years. We can argue that both cases apply, since there is a slow unravelling crisis around debt and climate, and its 3 years since the last issue. SDRs could certainly help provide for more investment. At the national level, there is also potential new revenue from carbon taxes and carbon markets.

Finally, and most of all, we need additional long term affordable concessional capital for the MDBs.

On SDRs you’ve been advocating to mobilise more SDRs for a long time. What has been getting in the way?

Three things - focus, understanding and clarity of purpose. With increasing interest from Regional Development Banks (RDBs), also prescribed holders of SDRs, a new coalition can be built to make the argument in favour. SDRs are not the panacea, especially now with US interest rates tending up rather than down, however they remain a cheaper source of long-term capital. If allocated to RDBs, the resources could be securitized and leveraged to deliver more than 4 times their principal value, for a range of development causes. In Latin America, the IADB has just launched a Foreign Exchange risk-absorbing facility, which could be replicated in Africa using the SDRs. RDBs will need to work closely with the IMF, which was a big supporter of the last SDRs, to see how to develop a strategy for action. And organisations like the Africa-Europe Foundation can play a critical role by making strong arguments for new SDRs.

Everyone is now talking tariffs. The last 30 years have seen a process of globalisation, the spread of trade and investment flows across the world, driven in large part by the extraordinary economic transformation of China and other emerging economies especially in south and south-east Asia. The African continent has not benefitted as much as might have been hoped from these global flows. Does this mean a re-think is necessary, for African countries to design a pathway to growth, jobs, and structural transformation which is less focused on attracting capital from outside and more focused on mobilising domestic funds and skills?

First, the world has changed. Economic competitiveness has been replaced by security as the driving force of policy. No country wants to be too dependent on foreign geographies for its health and medical supplies, energy, chips and much more. Africa depends largely on Europe and India in particular for medicines. Yet, in the case of antibiotics, a lot of the re-agents come from East and Central Africa. Why is Africa not producing its own antibiotics? Maternal mortality rates could be reduced if Africa produced high-quality low priced oxytocin, for example, and the list of other things which could be done is long. Rather than question the change in industrial policy, Africa must adjust, adapt and take control. During COVID Africa proved it can pivot its economic and trade policy. It must continue to pivot with the African Continental Free Trade Area as the lever.
If I was advising leaders in Africa, I would ask them first to look closely at their country’s initial endowments and ask the question “are we getting the most we can from it?” Chile grew out of copper mining into a diversified economy, Saudi Arabia began with oil and has diversified into technology, Vietnam moved from a strong agricultural base to electrical machinery and equipment.

Second, I would ask “what structures and policies are in place to support growth and transformation?” In Africa this must include education and skilling the youth for work and the marketplace. In some countries, it still takes 3 months to start a business as opposed just one day in others - how do you explain this big gap to investors? I believe markets fundamentally work if you take away impediments. As an advisor, I would propose that government prioritize unlocking investment in specific sectors, rather than picking winners within a given sector. Government can usefully support a range of investments in a sector to gain market intelligence, learn and to show commitment. This is especially important as spending on R&D is very low on the continent.

You’re a member of the South African President’s Economic Advisory Council, and they’re currently G20 President. What does a successful G20 look like to you, given they hand on to the US at end of year? Are there some areas of continuity for the G20 – such as in digital and AI – where common ground could be sought with the US administration?

There will need to be continuity. This is the prime multilateral economic forum the world has today. The G20 established its global role as a result of the 2008-9 global financial crisis, when global collective action was critical to address the crisis. Today, the world is still confronted with a number of crises that need a collective response to achieve success, such as restoring global economic growth, managing epidemics, addressing global debt and fiscal challenges and, of course, climate change actions. South Africa hopes to tackle all these issues, building on the achievements of the G20 Presidencies of India and Brazil. Of course, the introduction of large and widespread tariffs is a new question, and it is expected that they will continue to be discussed under the US Presidency of the G20 next year as we continue the jobs and growth conversation. But there are also issues like Digital Public Infrastructure and AI, private sector development, energy security and financial inclusion which are all important components of South Africa’s G20. South Africa will continue the reform of the global financial architecture, of MDBs, and hopefully will accelerate progress on the G20’s Common Framework for debt resolution. President Ramaphosa has also called for issuance of new SDRs. These are but a few of the issues on the G20 agenda which have broad support.

Please tell us how the Liquidity and Stability Facility (LSF) is getting on? Does it have a particular focus on Africa?

Africa’s biggest challenge is getting cheap, affordable financing – what we call “liquidity”. Africa’s capital markets are not developed and are not well-harmonised. As a result, in many cases countries and investors lack access to the portfolio of instruments that exist in other emerging and developed capital markets to fund development. The aim of the LSF is to build market-based liquidity solutions for the African market on a par with the best performing markets elsewhere. Crowding more investors into the African market will bring down the cost of capital, grow the market offer, reduce the debt burden and we hope usher in a virtuous cycle of growth and development. In partnership with S&P, the LSF launched the iBoxx LSF USD African Sovereigns Index the first All Africa sovereign bond index, now trading on the London Stock Exchange.

In addition, last month the LSF officially became a Euroclear Direct Member. Being a Direct Member means the LSF gains immediate access to Euroclear's extensive global network of over 2,000 financial institutions, and benefits from Euroclear’s global expertise as Triparty Agent in the realm of collateral management for large institutional repo transactions. The triparty set up enhances liquidity management through optimization of collateral assets, while providing robust risk mitigation through independent valuation, automated margin calls, and comprehensive settlement services. In addition, the LSF has defined for Euroclear a standardized Africa General Collateral Triparty repo basket featuring 176 African Sovereign and Corporate International bonds. It is designed to centralize liquidity within this asset class and enables investors to execute triparty repo transactions on this basket.

In this way, the LSF is helping to build the financial infrastructure needed to make trades efficient and cost effective. We’re essentially a financial infrastructure company, not a fund. Each time we develop a new instrument, we’re creating a new road, bridge or highway for finance to travel quicker and more effectively between investors and Africa. It helps generate more liquidity and brings down the high cost of capital. There is much more that must be done and there are many challenges, but I am quietly and impatiently optimistic.