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Financing the Green Economy Transition in Africa

Is the green economy the most sensible way forward for Africa?

Africa has more than enough problems to solve. Most Africans live in abject poverty and lack the essential basics of clean drinking water, medical care, electricity and education. It is the only region of the world that has witnessed a rise in absolute poverty since 1990. In 2011, 57 percent of the African population lacked access to electricity and 25 of the 54 nations faced an energy crisis. Nearly 40 percent of sub-Saharan Africans lacked access to clean water and nearly 70 percent lacked access to proper sanitation facilities. The high levels of inequality that characterise the continent are associated with disparities in access to basic services. This explains why less than 10 percent of children who enrol in primary schools in sub-Saharan Africa make it through to university.

Urban population growth rates and the resulting growth in urban slums are putting severe pressure on already constrained public services. Economic growth that can help overcome high and persistent inequality, although impressive in recent years, is varied, episodic and still not high enough to make a real dent in the pervasive poverty. To top it all, while a number of countries are rebuilding themselves after civil wars that have severely set back their development, new conflicts continue to mark other parts of the continent.

Urban populations living in slums globally, estimated in 2001. Image: Global Urban Observatory

It is not surprising then that I find myself asking why we should add the burden of moving towards a green economy to Africa’s woes. Some people tell me that the green economy approach, with its basic limitations on fossil fuel use, could be a barrier to Africa’s development. But perhaps the answer is to be found in the very problems that Africa is trying to deal with.

Africa needs economic growth that will translate into a meaningful reduction of poverty, enhanced equity and decent employment for all, while providing universal access to basic services. The green economy approach seeks to deliver such growth.

Let’s take a moment to understand what green economy means. Without going into detailed definitions, the philosophy underpinning the concept supports

■ investment in natural resource management and ecological restoration, particularly in the natural systems on which poor and indigenous communities depend for their livelihoods;

■ fair allocation of environmental benefits and costs to achieve a more just and equitable society;

■ green economic services and industries that incorporate efficiency gains in production while providing employment prospects and affordable sustainable alternatives for consumption;

■ resource-efficient low carbon economic development.

Africa’s economic growth and broader development objectives have relied heavily on the exploitation of its vast natural resources, exported as primary or semi-processed products to industrialised or rapidly industrialising countries. This has helped the continent perform well on economic parameters and amass wealth, but failed to bridge the gap between the rich and the poor. At the same time, it has had daunting implications for development.

Current patterns of resource extraction threaten arable land, water resources, forests and timber, and human rights. They have a disproportionate effect in the rural areas where poverty is heavily concentrated, and among vulnerable groups, such as women and indigenous people, who access a less-than-equal share of the benefits of resource exploitation. They lead to an increasing number of conflicts, with farmers, forest dwellers or workers on one side and industrialists or governments on the other.

A DeBeers mining site on South Africa's once pristine West Coast. Image: Gianluigi Guercia, AFP.
A DeBeers mining site on South Africa’s once pristine West Coast. Image: Gianluigi Guercia, AFP.

However, the green economy approach could prevent such stand-offs between economic and social development. Given the heavy economic dependence on resources, and given that the vast majority of people rely on natural systems for their livelihoods, the threats to environment and economic growth could be mitigated with improved natural-asset management and by capturing the economic value of natural and ecosystem functions, thereby reaping the benefits of Africa’s abundance.

Although this is a simplified view, and although there is no guarantee that the green economy approach would lead to economic and social justice, one cannot deny that the underlying philosophy of the green economy could provide better outcomes. It will require good governance, adequate financing, improved public sector budget management and prudent policymaking.

It may seem that the huge costs required for the transition – particularly the high initial costs – would likely be beyond the reach of most African countries. But this perspective ignores three related issues. First, many African countries are already paying the cost under the garb of “disaster risk management”. For example, 53.9 percent of the resources dedicated to Mozambique’s ministry in charge of disaster management were allocated to disaster risk reduction.

Second, the incremental costs of the green economy need to be compared to the costs resulting from current economic and environmental damage, such as those of managing conflicts caused by resource scarcity and those of rehabilitation following climate-related extreme events. Relief efforts during the 2005–2008 drought in Uganda cost USD 120 per person, on average. In Malawi, droughts and floods reduce total GDP by an average 1.7 per cent per year. Rising food and fuel prices are a huge draw on foreign exchange, make food and energy unaffordable, and don’t deliver energy security. The social costs are also high. School enrolment rates in Côte d’Ivoire declined by 14 and 11 percentage points among boys and girls, respectively, living in areas that experienced a rainfall shock, while increasing in all other areas.

Areas most at risk from climate change. Image: The Economist
Areas most at risk from climate change. Image: The Economist

Third, current public spending is not benefitting the poor. Take the case of fossil fuel subsidies. They are a huge fiscal burden for most African governments, but they don’t benefit the poor who rely on either traditional biomass, which provides low quality energy, or diesel, which is unreliable and costly. An estimated 44.2 percent of fossil fuel subsidies in Africa benefit the richest 20 percent of the population, while only 7.8 percent goes to the poorest 20 percent.

Likewise, about 45 percent of subsidies for kerosene go to the richest 40 percent. At the same time, these subsidies divert public resources away from education, healthcare and basic infrastructure.

So the question is not so much about the costs of the transition, or whether financing these costs will come at the cost of development. It is about how the available finance can be better utilised for the green economy and how that financing can be socially just.

The answer is two-fold. First, there is a need to reform existing government spending – including subsidies that are environmentally and socially harmful. This would free resources that could be used to improve public services and to promote green economy technologies. For example, the development of renewable energy technology for energy service provision is likely to be cheaper than extending the grid over Africa’s sparsely located rural population and will place lower cost burdens on both the poor and the fiscus.

Removing inefficient fuel subsidies could also contribute towards the green economy transition by improving the functioning of price signals and markets (although state intervention would be necessary where informational asymmetries and institutional lock-ins render markets inefficient). Increased government spending would reduce the high upfront investment costs and risks associated with green economy technologies, subsequently incentivising and leveraging private investment. Plans will need to be made to mitigate consequences for the poor and vulnerable, such as appropriate social safety net programmes, targeted consumption subsidies, and the redirection of funds into high-priority areas like healthcare and education.

Second, governments can use their market power as consumers of goods and services to create markets for green economy producers and to incentivise investment in the green economy transition by adopting sustainable public procurement policies favouring products and services that minimise economic, social and environmental costs.

You will notice that my answer doesn’t rely on global climate fund mechanisms. Various funds already exist. The Green Climate Fund (GCF) was launched in 2013 by the United Nations Framework Convention on Climate Change (UNFCCC); its aim is to disburse the USD100 billion that has been pledged to flow annually to developing countries by 2020. Bilateral donors are also playing a significant role. In April 2014, the African Development Bank approved the creation of the Africa Climate Change Fund, a bilateral thematic trust fund to support African countries in their transition to climate-resilient and low-carbon development.

The idea behind the Green Climate Fund is that the countries hardest hit by climate change are often poor and contribute the least to climate change, and thus richer countries should help pay the costs. Image: Mother Jones
The idea behind the Green Climate Fund is that the countries hardest hit by climate change are often poor and contribute the least to climate change, and thus richer countries should help pay the costs. Image: Mother Jones

If Africa’s transition could be based on such international climate funding, the continent would well be on its way. But that is not the case. First, international funding persistently bypasses national budgets and, by implication, the countries’ spending priorities. Second, this funding takes the form neither of sequenced interventions that are required to make a real transition nor of a viable pipeline for programmes to effectively tackle the systemic problems. Third, it focuses on either social projects or environmental projects. It does not look to combine the pillars of economy, environment and social order to determine the most effective interventions. Finally, as evidence shows, funding is often wasted through inefficient project management or it ends up in the pockets of unscrupulous business and political leaders.

With all the hope that has been pinned on the GCF, the actual funding that will be mobilised and the mechanisms of disbursement remain to be seen. Although it proposes to give priority to the most vulnerable countries – primarily in Africa – there is no guarantee of this. So Africa can either wait without assurance for more international funding, or it can use its own resources more effectively.

A final word: the green economy will not be a miracle for Africa. But with its underlying philosophy of enhancing longterm equitable growth and enabling job creation, poverty eradication and resource efficiency, it is the most sensible way forward for Africa.

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