Taking stock of long-term finance for sustainable development in Sub-Saharan Africa (SSA) involves several tasks. This paper addresses these tasks by reviewing the broad trends in investment and savings in Africa, examining the investment-savings gap that suggests the need for external resource inflows, and identifying the key components of external resource flows to SSA. Finally, the paper discusses the impact and the effectiveness of external resource inflows and draws some policy conclusions. The paper builds on the observation that the economic growth performance of SSA countries has been poorer than that of other developing regions. Attempts to explain this growth performance uncovered inadequate investment and low returns to investment as key contributory factors. They also suggest that long-term finance remains the key to the region's investment and growth. The average gross domestic investment as a proportion of GDP in SSA countries has been lower than the corresponding average for all developing countries. In addition, the gap in investment rates between SSA and other developing regions has widened from 6-8 percentage points in the 1960s to 10-15 percentage points in the mid-1990s. Low investment rates in SSA countries can be traced to low domestic savings, which are, in turn, explicable in terms-of the region's low income, underdeveloped financial institutions and markets that constrain savings, and massive capital flight from the region. Against this background, various estimates suggest that African countries will need substantial, foreign long-term financing if they are to achieve reasonable, poverty-reducing, real GDP growth rates. This is not new. Domestic resources were inadequate to finance even the limited investment rates that Africa achieved since the 1960s,. the difference has typically been sourced externally. But while the share of SSA countries in total private capital flows to developing countries in 1977-82 was almost 9 per cent, the share had fallen to less than 2 per cent by 1990-96. In spite of this fall in relative share, however, as a percentage of gross domestic investment, the stock of FDI in the SSA countries in 1995 was 17 per cent compared to 14 per cent for Asia and 18 per cent for Latin America. Official development assistance (ODA) flows have played a predominant role in financing development in SSA since the early 1960s. As late as 1996, ODA accounted for as much. as 53 per cent of the total net external resource flows to SSA. Although total ODA to developing countries fell by 20 per cent in real terms during 199297, ODA flows to SSA have remained largely static in the 1990s. However, some analysts suggest that ODA flows to SSA are likely to suffer a long-term substantial decline beyond the 1990s. The literature suggests that the heavy reliance of SSA countries on external development finance is not without some inherent disadvantages. In general, the level of ODA and per, capita economic growth of recipient countries have shown no systematic relationship. Aid and growth appear to be correlated only in countries where economic management was good. In addition, large private capital flows may, through. exchange rate appreciation, threaten macroeconomic stability and impair the export competitiveness of SSA countries. In general, foreign private capital typically finances only a small fraction of total domestic investment. Hence, external resource inflows are not a substitute for domestic capital formation. The solution to the problem of low growth in SSA must be sought through policies that increase both domestic investment and savings.
