The SDGs Are Falling Short on African Poverty: SME Investment Could be a Game Changer
Poverty is the single largest challenge facing the African continent. Though there has been some progress on overall poverty metrics, the number of people in extreme poverty (i.e.: living on less than $1.90 a day) has grown substantially since 1990, according to the latest World Bank Africa poverty report. The report estimates that the share of Africans who are poor fell from 56% in 1990 to 43% in 2012, but the number of people living in extreme poverty rose from 280 million in 1990 to 413 million by the end of 2015, driven by a population growth that is higher than the poverty reduction rate.
Of the 17 UN Sustainable Development Goals (SDGs), goal number 1 – eradicating poverty – is the biggest challenge faced by the global body. And by the UN’s own admission, this challenge is not on track to be met: Global population projections suggest that 6% (500 million) of the world population in 2030 (8.5 billion) will still be living in extreme poverty. That means’ the world is on track to miss not only the ambitious goal of complete poverty eradication, but also the more modest target of reducing extreme poverty to less than 3% of the global population.
A Global Failure That Hits Hard in Africa
One extremely alarming aspect of this failure is the large margin by which the African continent, in particular, will miss this target. Projections indicate that over 23% of sub-Saharan Africa’s estimated 2030 population of 1.7 billion will still be living in extreme poverty. If these predictions come to pass, the continent will have the dubious distinction of accounting for nine out every 10 people living in extreme poverty globally: Of the 500 million people that will be living in extreme poverty in 2030, 479 million will be in sub-Saharan Africa.
There is a clear argument that Africa needs to look beyond just the UN strategies, if it wants to come anywhere near addressing the imminent failure of achieving the SDGs by the close of this decade. The UN’s approach has been skewed towards providing enhanced social protection to the most vulnerable through both government and NGOs. But while social programs can help prevent and alleviate poverty and provide a safety net for the vulnerable, they are simply not a reality for the large majority of the world’s population. In 2016, 55% – as many as 4 billion people – were not covered by any social protection cash benefits, with large variations across regions: While just 14% lacked coverage in Europe and North America, 87% lived without coverage in sub-Saharan Africa. It’s easy to see that a strategy based on these programs will not be able to lift Africa out of poverty.
A Better Approach: Unlocking SMEs and Natural Resources
What the continent needs is a clear, focused approach to unlocking the potential of its substantial small and medium enterprise (SME) sector. Every economic paradigm highlights the key role SMEs play in advancing the growth of emerging economies, through their contribution to employment creation, poverty reduction and gross domestic product (GDP). Supporting this sector undoubtedly holds the solution to taming the continent’s poverty challenge. Creating household wealth at the bottom of the pyramid with the poorest of the poor is a tested strategy that offers benefits across all development metrics, from access to health and education, to clean water, sanitation and housing for all.
Yet despite this potential impact, the International Finance Corporation has estimated that SMEs face a financing gap of over $136 billion annually. The fact that these SMEs account for 90% of all businesses in sub-Saharan Africa illustrates the massive investment potential of the continent. Additionally, the region holds six of the world’s 10 fastest-growing economies, which had an average GDP growth of 5.2% in 2014 – 3% above the average growth in developed economies.
The continent’s economic growth is driven by a highly educated and vibrant young population, with 60% of residents below 25 years of age. Africa also holds around 30% of the world’s known mineral reserves – and yet it contributes only around 3% to global GDP. These resources include the world’s largest reserves of natural gas, oil, gold, copper, precious minerals and diamonds. This unique combination of natural and human resources gives the continent a valuable leverage opportunity for mutually beneficial international business partnerships that would also offer a pathway out of poverty for its residents.
Helping Africa Help Itself
Bilateral and multilateral support to address Africa’s challenges has continued to pour into the continent, but it has not created enough impact to allow countries to emerge from poverty. And this monetary support may not be as significant as it seems. In 2015 Africa received an estimated US $162 billion in aid, loans and personal remittances. However $203 billion was taken from the continent that same year, either through multinationals repatriating profits or illegally shifting money into tax havens, or through climate change adaptation and mitigation costs imposed by the rest of the world. Meanwhile, extreme poverty levels are not decreasing fast enough to meet the SDG goals or sustain the continent’s economic growth agenda.
That’s why it is imperative that we unlock financing to the SME sector, allowing investors to play a key role in re-energizing the drive towards poverty alleviation in this final decade of the SDGs. One way investors can do this is by providing blended finance impact investing to support sustainable economic growth that has both social and environmental impact, as well as a financial return. This financing will be even more effective if it’s directed through financial intermediaries, such as local fund managers, that fully understand the SME landscape. By partnering with these local fund managers, investors will be able to implement financing programs that are practical and commercially viable, supporting SMEs that are currently investment-ready, locating emerging investment opportunities, and creating the necessary platforms and track record to draw in additional capital at scale.
By 2030, Africa’s population will be approaching 2 billion – and though extreme poverty levels are projected to average around 23%, they could be as high as 42% in some countries, according to a study conducted by Development Finance Associates, a non-profit social enterprise fund manager out of Zambia. It is imperative that all African governments, the private sector, international investors and cooperating bilateral partners realign their approach and exploit the SME sector’s vast potential – not just for poverty reduction, but for the ultimate economic emancipation of the continent. Africa has an SME sector that’s as dynamic and vibrant as its population: These businesses can pull the continent out of poverty, if they’re given the right investment support.
Trevor Hambayi is a financial analyst and senior partner at Development Finance Associates (DFA).
Photo courtesy of Brian Wolfe.