Sub-Saharan Africa and global capital markets: past and present

Under the backdrop of the boom in global commodity prices and the expansion of Chinese interests in sub-Saharan Africa, this policy brief examines trends in commercial financial instruments such as equities, bonds and commercial bank lending and their impact on economic development. It also reviews the nature and behaviour of these instruments in developing countries compared with more traditional development finance, such as foreign aid.

The author explains that if current headlines are anything to go by, sub-Saharan Africa is the new bull of international financial markets. However, like many other low income countries in the past, sub-Saharan Africa has received negligible inflows of external commercial financing. If anything, the region has been additionally excluded from these flows due to very weak levels of financial sector development even compared to other low income countries. At the same time, recent changes in global and domestic conditions mean that the situation is evolving rapidly. Given good prospects that this trend will continue, the playing field for traditional donors is likely to alter significantly.

The brief concludes by reflecting on a number of policy priorities for donors:

• focus on domestic financial markets - a principal message of this policy brief is that deeper and more efficient domestic financial markets are essential for low income countries to attract and benefit from private capital inflows 
• promote comprehensive financing strategies in low income countries - comprehensive long-term public financing strategies can establish targets for the volume and nature of inflows of different forms of capital 
• make progress on global market failures - these failures can undermine the potential benefits from enhanced access to private capital flows 
• support enhanced data collection and transparency - data on the size and characteristics of private capital flows to emerging markets is far from complete.