Who Finances Whom?: The Controversial Role of External Financial Resources in Africa
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Hungarian Journal of African Studios
Vol. 16, No. I (Spring 2022)
ISSN 1788-6422 pp. 38-56
0 Publikon Publishors, Pecs
JUDIT KISS
IR)FESQ OF INTERNATIONAL ECONOMICS AND DEVELOPMENT STUDIES, INTERNATIONAL BUSINESS
C /HE UNIVERSITY OF BUCKINGHAM
B H ROFESSOR INSTITUTE FOR WORLD ECONOMICS, CENTRE FOR ECONOMICS AND REGIONAL
DRJKISS@CMAL.COM
In contrast to the highly developed countries and some developing regions, Africa
highly depends on external resources of financing development. According to the
saving-investment gap concept, there is a significant gap between savings and
investment rates. As domestic resources are limited and their mobilization is slow,
the region should rely on external sources of finance (i.e., aid, export revenues,
FDI, loans, and remittances) in order to close the finance gap. Despite the mas-
sive inflow of external resources, the 200 billion USD yearly financing gap still
prevails. The outflow of financial resources from Africa in the form of profit repa-
triations, debt service, tax dodging, capital flight and illicit financial flow exceeds
the inflow, suggesting that Africa is a bottomless barrel. The long-standing con-
cept about the saving-investment gap does not provide a full explanation for the
prevailing financing gap. The main research questions are as follows: (a) Why is
there a permanent financing gap in Africa? b) Why does the outflow of financial
resources exceed the inflow? c) What should be done to close the financing gap
and solve the problem of financing development?
The paper is structured as follows: Section 1 is based on the saving-investment-
gap concept and explores the validity of this theory in Sub-Saharan Africa. The
conclusion of Section 1 is that there is a permanent finance gap in SSA, conse-
quently, the region should rely on external sources of finance. Section 2 introduces
the main external sources of finance (aid, FDI and remittances) and reveals the
major trends and characteristics of these flows. As the saving-investment gap is
smaller than the amount of external financial inflow, two questions arise: Where
does the money go? Is Africa suffering from a financial haemorrhage? Section
3 tries to identify those leaks which drain Africa's accumulated domestic and
external resources by analysing the main channels of financial outflows such as
capital flight and illicit financial flows. In the conclusion we present the financ-
ing situation of Africa and answer the question Who finances whom? and make
recommendations for enhancing development finance. The final conclusion is that
not the external world finances Africa, but Africa finances the world. The issue of
financing Africa's development cannot be solved without (a) mobilizing domestic
resources (including domestic savings), (b) attracting external resources as well as
improving the use and avoiding the misuse of inflowing financial resources, and
(c) curbing capital flight and tackling illicit financial outflow.
saving-investment gap, aid, FDI, remittances, capital flight, illicit financialflow,
financial haemorrhage
Received: April 2022 l Ist Revision: August 2022 I Acccopted: September 2022
Kiss, Judt (2022). ho Finances hom? The Controversial Role of External Financial
Resources in Africa. Hungarian Journal of African Studies [Afrika Tanulmanyok], I6(),
38-56.](ViewImageLocal?handle=hein.journals/hgnjloa16&div=8&collection=&method=preview&ext=.png&size=3)
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Who Finances Whom?: The Controversial Role of External Financial Resources in Africa
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