Use Africa’s $60bn remittances to power industrialisation

Use Africa’s $60bn remittances to power industrialisation
  • PublishedJune 14, 2013

Remittances from Africans in the diaspora are now estimated at around $60bn annually. While these help millions of Africans in their day-to-day needs, a proper harnessing of this resource could well see the continent on its next development stage – industrialisation.

As the world wakes up to the idea of Africa as a centre for economic growth, it is considered, in many ways, the final frontier for investment opportunities. Industrialisation is widely seen as the next phaseof Africa’s development, an imperative on the path towards sustained wealth creation.Successful industrialisation requires ambitious entrepreneurs that are willing to take up the challenge. It is therefore important not only to have favourable regulatory and business environments, but also a stable po-litical landscape.

The African continent has increased its competitiveness in the global marketplace in recent years, primarily as a result of nation states decreasing country risk.Business and investment is driven by confidence. As investors feel more comfortable with stability across the region it has, and will continue to, increase prospects for sustained investment – as we have already seen with Chinese and Middle Eastern interests.Africa’s diaspora communities sit in a very promising position, having played such a crucial role in the continent’s development, thus far.

The diaspora are not only well informed about the opportunities existing in their communities of origin, they are willing to invest in fragile markets when others will not.Diaspora finance has been one of the main drivers of Africa’s surge over the past 20 years helping sustain not only families but, within many countries, trade and industry as well. A recent report by Send Money Africa, an initiative of the World Bank-partnered African Institute for Remittances (AIR) Project, estimated that Africa received a total of $60bn in remittances last year.

According to the same report, these funds were sent by Africa’s 30m-strong diaspora to around 120m recipients. Remittances to Africa exceed official development aid (ODA) by around 50%, while for most African countries the amount sent home by migrants surpasses foreign direct investment.

With limited official data, such figures are only estimates, but what is certain is that remittance flows to Africa have grown remarkably over the last two decades. Indeed, there is a broad consensus that they have more than quadrupled in that time to account forapproximately 3% of Africa’s overall GDP.

Harnessing potential

It is no surprise therefore that policy makers are looking at ways to harness the development potential of diaspora remittances. A paper released in March following a conference in Abidjan of the Economic Commission for African (EAC) and the African Union Commission (AUC) highlighted the growing importance of remittances as a source of external financing, and drew special attention to their potential in driving Africa’s industrialisation and helping to fill its persistent infrastructure gap.

Despite significant progress across the continent, many communities within Africa’s 54 states are considered amongst the ‘bottom billion’, a term coined to describe the poorest of the poor. Diasporan remittances play a vital role in boosting household incomes and keeping millions of people above the poverty line.

The average amount of most remittance transfers is between $200-$300, which can support an average family for a month. Once the basic needs of survival are met, recipients with cash to spare often spend it on healthcare and education. Beyond that, a rising trend of investment in land, construction and small enterprise indicates that remittances have become an important tool for sustainable growth. In short, they are a valuable resource for efficient, bottom-up economic development.

Our business, Dahabshiil, is Africa’s largest money transfer company, serving customers across the continent and enabling them to send and receive money to and from locations all over the world. Dahabshiil’s story is closely bound up with that of the Somali diaspora, which grew rapidly during the late 1980s and early 1990s as the state collapsed, and later expanded into the Horn of Africa and beyond. Since then, remittance income has in many ways underpinned the Somali economy, maintaining consumption and providing the necessary capital for private sector growth. This demonstrates the power of remittances in sustaining communities without access to a formal banking system.

Africa’s diversification towards a more industrial economy has already begun, with sectors such as manufacturing and telecoms in particular flourishing in many parts of Africa. In the Somali territories, a deregulated business environment led to a rapid expansion of the mobile industry and the entry into the market of a number of dynamic firms. One of these, Somtel, went on to be acquired by Dahabshiil. The early growth of the Somali telecoms industry was marked by intense competition as private operators vied for market share. Intra-regional trade needed African economies are among the fastest growing in the world, yet intra-regional trade accounts for only 10% of the continent’s commerce – significantly less than in other regions.

Many constraints impede trade expansion in Africa: obsolete infrastructure, fragmented economic space, low production capacities, limited investment financing and high transaction costs. Eliminating these obstacles is a prerequisite to fully realising Africa’s economic potential and helping to address the continent’s socioeconomic and developmental challenges. Healthy intra-African trade can free the continent from its reliance on international aid and improve its resilience to macroeconomic and other external shocks.

Industrialisation can benefit the expansion of intra-African trade by supporting a more diversified export economy. In particular, the development of rural and food processing industries could help to lift significant numbers from poverty. But, to facilitate trade in goods and services, it is essential to reduce distribution costs by improving and expanding road, rail and other communication infrastructure. At present, however, many of Africa’s national economies are still largely agrarian.

Early attempts at urban-based industrialisation collapsed as a result of economic liberalisation programmes. Meanwhile, resource extractive industries have provided little in the way of urban employment. In order to develop more capable indigenous manufacturing capabilities, Africa is reliant on its infrastructure development, which remains its Achilles heel. Furthermore, the continent still faces serious human capital deficiencies. Schools, governments and the private sector need to work together to close skill gaps, particularly the need for more engineers and technicians.

While diaspora finance alone cannot be expected to achieve such a huge undertaking, it can help provide stable economic foundations on which to build. While these latest figures for remittance volumes give reason to be optimistic, more needs to be done at government level for diaspora money to be the kind of catalyst for growth from which the Asian powerhouses such as China and India have benefited.

It goes without saying that comparisons between the two continents must take into account the fact that Africa’s past left it heavily dependent on extractive, commodity industries while Asia was able to industrialise and to emerge as the dominant manufacturing base, but that certainly does not mean diversification is beyond Africa’s grasp.

With millions of African migrants arguably at the peak of their skills and earning potential, now is the time for active engagement to lure human and financial capital back to Africa. Diaspora bonds such as Ethiopia’s make debt available to entrepreneurs who need it.

The recent announcement by the AUC of plans for three new financial institutions – the African Investment Bank, the African Monetary Fund and the African Central Bank – is a hugely encouraging one and sends a strong message of intent to investors: Africa is being readied to complete its industrial revolution.

Written By
New African

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