Remember the good old days, when global investors were pouring money into Africa just because they wanted to get rich?
Up until the financial crisis, emerging markets were hot, and Africa was the last frontier. Mark Mobius, an emerging markets investment pioneer, was the best-selling author of Passport to Profits. Jim O’Neill, a Goldman Sachs economist, coined the term “Bric” in 2001, representing the four most exciting growth opportunities for investors, to which SA was added a decade later to form Brics, an acronym that galvanised those countries to establish a real partnership.
Back then, bulge bracket asset managers set up emerging markets funds, some even creating specific Africa funds. Giant private equity firms such as Carlyle and KKR assembled billion- dollar funds to invest in Africa. The logic was compelling: Africa’s middle class was emerging, its governments were improving, and its relatively young population meant its growth would outpace the world.
How the narrative has changed. Africa’s pitch has become far less about the prospect of returns and more about climate change. Last week’s COP29 in Baku disappointed many by managing to get only $300bn of annual climate funding for developing countries. The pitch was about need and moral obligation, rather than returns.
The moral obligation is real — developed countries have become rich by burning fossil fuels, but now want to prevent developing countries from following the same path. It is only right that the capital accumulated in the process of their development should be used to fund mitigation and adaptation in the developing world.
But morality seldom coincides with realpolitik. The agreement was struck a day after talks were meant to end and after food had run out in Baku’s Olympic Stadium, which served as ground zero for the climate talks. The $300bn was three times the previous commitment that had been in place but was far short of the $1-trillion developing countries wanted.
The money is meant to finance developing countries to adapt to climate change and limit emissions. The $300bn is also vague — as has become typical in such global commitments, it is made up of all sorts of instruments such as guarantees and commitments of investment, but little by way of cold, hard cash that could really make things happen.
In the shift in narrative from returns to climate I am reminded of the dependency theorists, who argued that core wealthy countries fed off a periphery of poor, underdeveloped ones. Popular in the 1960s and ’70s, those arguments had unfortunate policy prescripts, including import substitution industrialisation. They fell into disrepute when the true escape route from dependency — aggressive export competitiveness as demonstrated by Korea and then China — showed that the way to engage with the developed world was to compete.
It seems few developing countries were in the room when the final last-minute deal was struck in Baku. Their compliance is being taken for granted because the hundreds of billions of dollars on the table is as good as it gets. Amid the things they got wrong, the dependency theorists got a few things right about power dynamics between developed and less developed economies, which was put on full display in Baku. They were also right about how global financial institutions are designed to serve the interests of the developed world.
It should concern policymakers that the money risks disempowering developing countries, undermining their agency in seeking their own development. It will inevitably be tied to certain policy prescriptions, reduced emissions most obvious among them. In line with the dependency theorists’ original arguments, there is little consideration of how developing countries can develop their own capacity to finance investment and attract returns-seeking capital sustainably.
In the Global South part of the policy conversation should be about how we compete for international capital. To avoid the worst of the dependency theorist’s fears, countries such as SA should be using climate finance to crowd in additional commercial capital, helping to channel investment towards long-term sustainable competitive advantage while meeting climate commitments.
Even the $1-trillion sought is a fraction of the global investment pool of about $175-trillion. The key development question, and route for developing countries to ensure resilience to climate change, is to ask how some of that money can be attracted on its own terms — as an opportunity to generate returns. If developing countries can offer that, they can regain control of their own policy decisions and seek a development path that deals with the world as it is, in which there is no such thing as a free lunch and development must be driven by domestic objectives.
In SA this need is well understood. The presidential climate commission is positioned as a smart conduit for global funding flows. It has established various funding channels, such as its just energy transition funding platform, to direct fund flows in a way that serves SA’s wider development objectives. However, that must enable sustainable development that can attract commercial capital, triggering long-term competitiveness.
• Theobald is chair of research-led consultancy Krutham.
This article first appeared in Business Day.
