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From Dependence on Fossil Fuels to Dependence on Critical Raw Materials

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By  Christophe Nivelle

The conflict in Ukraine was a rude awakening for Europe. Europe became aware of its vulnerabilities in the energy sector. Dependence on Russian gas had a profound impact on the economies of European countries, with energy costs beginning to soar in 2021. This trend was amplified by the outbreak of war in Ukraine. Sanctions against Russia had an important economic and social impact, but Europe could find alternative sources of gas supply, in particular American LNG.

However, another far more serious type of dependence is around the corner. Critical raw materials (CRMs) are not only essential to our daily lives but also to our national security and defense. They are critical owing to :

–  their economic importance in strategic sectors

– their supply chain risks

– great complexity to substitute them

 What’s more, their recycling rate is sometimes very low, especially for rare earths. Geographical constraints have to be taken into account too. Indeed, the oil and gas markets are determined by their plurality and diversity of players. For example, OPEC has 13 member countries, to which must be added 10 other OPEC+ member countries. However, the situation is completely different for critical raw materials. In fact, the CRM market is characterized by the small number of producing players, leading to quasi-monopolies or even monopolies for some of them. Thus, in the event of shortages or export restrictions, CRM supply could prove complex due to the small number of players involved.

In its 2023 report, the European Commission states that China is the main supplier of 21 CRMs, in particular rare earths, gallium, natural graphite, germanium… It implies that there are sometimes no other supplier countries than China, even though these materials are essential to the energy transition and to sectors such as national defense. These CRMs take on a strategic character when they are destined for the defense, digital or renewable energy sectors. The geopolitical factor could pose a threat in the event of serious tensions or  conflict with Beijing. It’s worth remembering that in September 2010, during a dispute with Japan in the China Sea, China suspended its exports of rare earths to the latter in order to put pressure and to obtain the release of a trawler captain. Europe, handicapped by its low CRM production, is not immune to Chinese retaliatory measures, and may be the collateral victim of the trade war between the United States and China. On July 3, 2023, China decided to impose restrictions on gallium and germanium exports from August onwards. This is clearly a retaliatory measure against Washington’s policy of blacklisting numerous Chinese companies in order to restrict semiconductor exports to China and prevent it from gaining access to American technologies. Europe will be impacted by China’s decision, as both minerals are considered critical by the European Union.

Access to CRMs is already crucial in a context of energy transition, whereas their need is expected to increase sharply. For example, the need for natural graphite is set to increase 25-fold by 2040. Graphite is essential to the manufacture of lithium-ion batteries, as it is a vital component of the battery anode. The same applies, to varying degrees, to all CRMs. Will global production be able to increase sufficiently to meet the growing needs of the energy transition? Will Europe be able to catch up and avoid even greater dependence on renewable energies?

 The main threat in the CRM field is Chinese. Beijing recognized the importance of CRMs very early and built a long-term strategy around them.  It has gradually built up an ecosystem around critical raw materials and rare earths, and now controls the entire CRM value chain.

The criticality of CRMs is not only linked to whether or not countries have mining resources. However essential it may be to have these ressources, it is not enough to control the entire value chain for critical minerals. Mastery of the various mineral processing technologies is also essential. With the possible depletion of resources combined with a sharp rise in demand for CRMs, competition for access to mines and mastery of the various refining and processing stages will be crucial issues in the future. This is an additional problem for Europe. Not only does Europe have few mining and production sites, but it is also completely dominated by China when it comes to processing and refining.

What’s more, long before Europe, China realized that it was essential to secure its CRM supplies, as it could not produce all the materials it needed. So, some twenty years ago, it began to implement a investment policy in foreign countries. This strategy was reinforced in 2015 with the introduction of the Made in China 2025 plan, which aimed to make China a manufacturing superpower in ten industrial sectors, including batteries for electric cars, thereby boosting Chinese international investment, particularly (but not only) in cobalt and lithium mines.   Thus, the South African Institute of International Affairs estimates that China invested around $58 billion between 2005 and 2017 in the mining and energy sectors alone in Sub-Saharan Africa.

China’s strategy revolves around acquisitions, taking stakes in mines or providing infrastructure in exchange for exploiting raw materials. This has enabled Beijing to secure its supply of minerals essential to new technologies, and give it an even more dominant position in the world market. To assert its dominance in CRMs, China uses state-owned or private companies close to the Chinese Communist Party. In addition, China has relocated its processing industries, which in just a few decades has enabled the country to go from being a simple rare earths producer to become the world’s leading supplier of permanent magnets.

Cobalt and lithium are perfect examples of China’s strategy. Firstly, cobalt is indispensable in the manufacture of rechargeable batteries of all kinds. It improves the performance of batteries used in smartphones, connected objects and laptops, and plays an important role in electric vehicles. The Democratic Republic of Congo, the world’s leading cobalt producer, has been the target of Chinese investment in the country’s mining sector, and 15 of the country’s 19 cobalt-producing mines are now owned by Chinese companies. China’s strategy has proved successful, in particular with the purchase in 2016 of US group Freeport-Mc Moran’s shares in the Tenke Fungurume cobalt and copper mine by China Molybdenum Company (CMOC) for $2.65 billion. China also has a stranglehold on cobalt refining. It has doubled its refining capacity to 140,000 tons by 2022, compared with just 40,000 tons in the rest of the world. What is more, despite a number of disputes with the Congolese state, CMOC is set to begin cobalt production in the Kisanfu mine, which is expected to become the world’s largest cobalt mine, with an announced output of 30,000 tons a year.

China’s dominance also extends to lithium. Beijing now refines 60% of the world’s lithium on its own soil, and controls 60% of global battery component manufacturing. Moreover, of the 200 mega-battery factories planned worldwide by 2030, some will be in Europe and the USA, but 148 will be in China. The paradox is that China produces only 16% of the world’s lithium, but refines two-thirds of the world’s production on its own territory, enabling it to produce 75% of the world’s lithium batteries. To do so, it uses its acquisitions or stakes in mines in Chile, Bolivia, Australia and, more recently, Argentina. Two Chinese companies, Tianqi and Ganfeng, control a third of lithium’s world production. Several African countries, in particular Zimbabwe and more recently Mali, have also been targeted by Beijing. This strengthening of China’s position in lithium will enable Beijing to become a hegemonic player in the production of batteries and electric cars, to the detriment of Europe, which is lagging far behind but has nonetheless woken up.

European countries cannot compete on equal terms with China in the field of CRMs. China is not bound by European environmental standards, which hinder the opening of mines for the extraction and production of CRMS. It should be remembered that activities linked to rare earths and other critical materials, mainly the extraction, separation and production stages, have an extremely negative impact on the environment due to the pollution generated and the high consumption of water and energy.  The problem of social acceptability is therefore extremely serious and needs to be taken into account. There are plans to open mines in Sweden, Portugal and France, but will they see the light of day, or will they be abandoned in the face of the emergence of increasingly violent environmental movements? In other countries, such as China, there is little debate about environmental standards. As a reminder, in the 80s, France refined 50% of the rare earths market at its Rhône Poulenc site in La Rochelle. But media and social pressure at the time led to the closure of the site, and China took over the refining activities. More recently, Rio Tinto’s Jadar project in Serbia was finally abandoned due to strong public opposition. For the time being, fears for the environment remain strongest, despite Europe’s urgent need to remedy its shortcomings in CRMs. Today, Europe is increasingly dependent on China and time is an additional obstacle for Europe. Even if mines were allowed to open in order to extract and produce critical minerals, it would take at least ten years from the discovery of a vein to the opening and the start of mining operations. What’s more, the closure of mines in Europe has resulted in a loss of skilled manpower that will take a long time to replenish.

However, it would be wrong to say that Europe is unaware of its CRM dependency problems. In 2008, the European Commission set up the Raw Materials Initiative to assess European dependency and plan a strategy for diversifying supplies. Several reports were subsequently published by this institution, analyzing Europe’s CRM requirements between 2011 and 2023. In the meantime, the number of CRMs studied has risen from 14 in 2011 to 30 in 2020, due in part to renewed international tensions and the emphasis on energy transition. But the new centerpiece of the European strategy was unveiled on March 16, 2023 with the Critical Raw Materials Act, which aims to secure critical materials supply chains in order to preserve Europe’s strategic autonomy in a much-deteriorated international geopolitical context with the war in Ukraine and growing rivalry between China and the USA. According to the Critical Raw Materials Act, objectives to be achieved by 2030 are as follows:

  • At least 10% of the EU’s annual consumption for extraction,
  • At least 40% of the EU’s annual consumption for processing,
  • At least 15% of the EU’s annual consumption for recycling,
  • Not more than 65% of the Union’s annual consumption of each strategic raw material at any relevant stage of processing from a single third country.

 We can therefore observe a desire to build an industrial ecosystem around CRM with all segments of the value chain. The emphasis is on processing and refining activities rather than extraction. Nevertheless, environmental constraints remain, and the development of mining activity is proving delicate and complex to implement. What is more, the European effort on refining may not be enough to compete efficiently with China. Beijing has invested massively in refining-related research, and also exercises dominance in the field of patents. Thus, since 2014, China has been responsible for nearly 80% of patents for rare earth refining worldwide, and around 60% for titanium and manganese.

Europe prefers to focus on recycling, but this is technologically complex and subject to the financial factor of profitability. What’s more, the recycling rate for rare earths is extremely low as it is estimated at 1% on average. Solutions have already been envisaged in the past. In 2012, Solvay developed a system for recycling the rare earths found in low-energy light bulbs. This was at a time when their price was very high due to the crisis between China and Japan. But in 2016, prices fell again, and the French company’s process was discontinued as it was insufficiently profitable.

In the lithium battery sector, however, things are moving more quickly. Several recycling plants have been set up in Scandinavia, including Fortum in Finland and Stena Recycling in Sweden. Both plants claim to be able to recycle 95% of the materials found in batteries. In addition, a gigafactory project by Glencore and Canadian company Li-Cycle should see the light of day in Italy in a few years’ time.

However, it should not be forgotten that recycling is not sufficient to replace the extraction and processing of CRMs. The first reason has to do with the sustainability of the products used in the energy transition. Electric batteries currently have a lifespan of around ten years, while wind turbines have a lifespan of around 30 years. As a result, it takes many years before they can be recycled. What’s more, the rate of growth in demand for CRMs is extremely high, and far outstrips the possibilities of recycling.

Innovation could be one of the solutions to decreasing the need for CRMs and thus reducing dependence on Beijing.  This requires the development of research projects to encourage innovation. One example is the French government, which, as part of its France 2030 plan, launched a research program in January 2023 to develop twelve projects with the Scientific Research National Center (CNRS) and the Atomic Energy Commission (CEA).   One of the projects focuses on sodium-ion battery technology, which could greatly reduce our dependence on China for critical raw minerals. This new type of battery should start being produced in northern France by the Tiamat company as early as 2025. However, even though substitution can both reduce European dependence on China and the price of CRMs in certain areas such as electric vehicles, it is important to note that this is often at the expense of performance. For instance, sodium-ion and lithium-iron-phosphate (LFP) batteries have so far had a shorter range than lithium-ion batteries. Moreover, substitution is not possible in strategic industries. These include defense and national security, where lower performance can’t be afforded. Civil and military industries have different needs and different performance requirements. It will therefore be extremely difficult for European countries to shake off their dependence on China when it comes to national security. In the event of geopolitical tensions with China, Europe could be impacted by sharp price rises for some CRMs, or even a shortage if Beijing again decides to restrict or halt the export of some of them. But, European countries need CRMs to preserve their national security, whatever the cost may be.

Despite all the measures recently announced with the Raw Critical Materials Act, Europe will have to find alternatives to recycling in order to secure its CRM supply chain. Similarly, more resources will have to be allocated to innovation. Thanks to an effective strategy pursued over the past twenty years, China has succeeded in mastering the entire value chain for many CRMs, even those for which it had little or no domestic supply. Europe has been warned and is faced with a difficult choice in which the strategic stakes are likely to come up against environmental standards. Opening mines, however polluting they may be, will be essential but not sufficient. Europe will have to be much more active in obtaining more equity stakes in mines situated in Africa, Asia and Latin America. Brussels practices friendshoring and has partnerships with countries with which it shares the same democratic values (Australia for lithium, for example). But that won’t be enough. Partnerships with other countries will have to be considered, even if human rights are not respected there. Plurality and diversity of partners will be essential for Europe.  If we are to survive in an increasingly hostile environment, with an increasingly powerful and uncompromising China, we will have to make difficult choices to cope with possible shortages of CRMs, for which Beijing would have a hegemonic position. If  we don’t or can’t, so we’re in for a rude awakening.


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BUSINESS & ECONOMY

What is the State of the Indonesian Economy in 2024

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Imagine a nation with a rich past, abundant resources, and an unwavering drive to rise on the global stage—that’s Indonesia in 2024. As the largest economy in Southeast Asia, Indonesia is on a transformative journey, aiming to diversify its industries and redefine its future. From a legacy rooted in colonial trade to a modern economy embracing digital innovation, Indonesia’s story is one of resilience and reinvention. This year, Indonesia is focusing on balancing its traditional strengths in natural resources and manufacturing with booming sectors like digital technology and green energy.

In this article, we’ll take you through Indonesia’s economic evolution—from its early days under colonial rule to the rapid transformations post-independence. You’ll gain insight into the industries that drive today’s economy and discover the ambitious projects designed to position Indonesia as a powerhouse in the global market. Whether you’re a curious reader, investor, or simply looking to understand the heartbeat of Southeast Asia’s largest economy, this exploration of Indonesia’s growth will uncover both the challenges and promising paths ahead.

A Historical Overview of Indonesia’s Economy

Indonesia’s economic history dates back to the Dutch colonial period, during which the region served primarily as a source of raw materials for the colonial powers. The Dutch East India Company monopolized resources, exporting spices, tea, coffee, and later, oil, primarily for the benefit of the Dutch economy. Infrastructure developed in the colonial era largely supported this export-driven structure, with limited investments to foster local industry or diversify economic activities.

During World War II, the Japanese occupation further strained Indonesia’s economy, redirecting resources to support Japan’s war efforts. When Indonesia declared independence in 1945, it inherited an economy still structured around extraction and raw materials, with minimal industrial capacity. The path forward was challenging, as early leaders sought to gain control over resources and establish a foundation for economic autonomy.

Post-Independence Economic Transformation

The 1950s and 60s saw attempts to nationalize industries under Sukarno’s leadership, with a focus on self-sufficiency. However, these guided policies faced setbacks, including inflation, political unrest, and limited international trade relationships, which stunted growth.

Under Suharto’s New Order regime, Indonesia adopted an open economy, welcoming foreign investment and establishing policies to diversify its economic base. Benefiting from high global oil prices, Indonesia’s oil and gas sectors boomed, while manufacturing and textile industries gained ground, becoming significant contributors to GDP. This era saw rapid industrial growth, laying the foundation for the modern Indonesian economy.

The Asian Financial Crisis of 1997 brought severe economic hardship to Indonesia, resulting in reforms to stabilize its financial sector and reduce governmental control over businesses. With support from the International Monetary Fund (IMF), Indonesia stabilized its currency and restored investor confidence, setting the stage for a more resilient economic structure.

Indonesia’s Economic Landscape in 2024

Today, Indonesia has transformed into a diverse and vibrant economy with a well-established mix of natural resources, manufacturing, and a growing digital sector.

Indonesia’s 2024 GDP is primarily driven by sectors including agriculture, manufacturing, services, mining, and construction. Natural resources such as oil, gas, and coal remain central to the economy, while the manufacturing sector, especially in textiles, automotive, and electronics, contributes significantly to exports and employment.

  1. Natural Resources: Indonesia continues to be a major global producer of oil, gas, coal, and minerals. These resources form the backbone of its exports, though the government is actively seeking to diversify to reduce dependency on volatile commodity prices.
  2. Manufacturing: Indonesia’s manufacturing sector includes textiles, automotive, and electronics. This industry has been instrumental in driving employment and regional development, with both domestic and international markets fueling demand.
  3. Agriculture: The agricultural sector remains a significant part of Indonesia’s GDP, with commodities like palm oil, rubber, and coffee. Palm oil, in particular, is a key export, although it faces international scrutiny for its environmental impact.
  4. Services and Digital Economy: With high internet penetration and a young demographic, Indonesia’s digital economy is growing rapidly. E-commerce, fintech, and digital services are expanding, attracting investments, and generating new jobs, with the sector expected to continue its upward trajectory.
  5. Tourism: Efforts to expand tourism include promoting cultural tourism, eco-tourism, and Muslim-friendly travel. This sector provides vital foreign exchange and employment opportunities, though challenges such as infrastructure and environmental sustainability remain.
Major Economic Challenges
  1. Infrastructure Deficit
    Indonesia’s infrastructure has improved in recent years, with projects like the Trans-Sumatra Highway and regional connectivity initiatives. However, rural and remote areas still lack sufficient infrastructure, hindering inclusive growth.
  2. Income Inequality and Poverty
    While Indonesia’s economy has grown, wealth distribution remains uneven, with notable disparities between rural and urban areas. Addressing poverty and supporting micro-entrepreneurs are crucial steps to achieve equitable economic growth.
  3. Environmental Concerns
    Deforestation and pollution from industries such as palm oil production challenge Indonesia’s sustainability goals. Balancing economic growth with environmental protection is a central priority, as global scrutiny intensifies around environmental practices.
  4. Dependency on Natural Resources
    Heavy reliance on commodity exports makes Indonesia vulnerable to global price fluctuations. Government initiatives to diversify and reduce this dependency are ongoing but require strategic focus and innovation.
Future Projects and Strategic Goals

Indonesia’s Vision 2045, an ambitious development agenda, aims to position the nation as a high-income country by its centennial anniversary. The agenda emphasizes industrialization, digital economy growth, and human capital development, targeting a well-rounded, sustainable growth model.

One of the most talked-about projects is the relocation of Indonesia’s capital from Jakarta to Nusantara in Kalimantan. This move aims to alleviate congestion in Jakarta and promote regional development by distributing economic activities more evenly. The new capital is envisioned to be an environmentally friendly, smart city, fostering sustainable growth.

Indonesia has committed to shifting toward renewable energy, with projects in solar, wind, and geothermal power. The goal is to reduce dependency on coal and achieve a greener energy mix by 2060, positioning Indonesia as a leader in renewable energy in Southeast Asia.

The government recognizes the potential of the digital economy and is actively supporting the expansion of fintech, digital services, and creative industries. This sector is expected to be a major contributor to economic growth, fueled by high demand for innovation, particularly among Indonesia’s young population.

In 2024, Indonesia stands as a growing economic power in Southeast Asia, reflecting a blend of historical influences, industrial growth, and forward-looking strategies. While traditional sectors like natural resources and agriculture continue to play vital roles, Indonesia’s efforts to diversify into digital and renewable sectors signify its adaptability and ambition. The state of the Indonesian economy in 2024 is both promising and challenging, with projects like Nusantara, the Vision 2045 agenda, and renewable energy transitions highlighting its readiness for a sustainable, inclusive, and prosperous future.


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Lifting the Bottom Billion: Will It Work This Time?

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Imagine being part of a billion people stuck in a cycle of extreme poverty—unable to break free due to war, corruption, lack of education, and isolation from global markets. These individuals make up what economist Paul Collier famously termed the “Bottom Billion.” Despite countless international efforts to address their struggles, many remain trapped in some of the most challenging conditions on earth, particularly in sub-Saharan Africa. With new strategies and technologies emerging, the big question is: Will it work this time? In this article, we’ll dive into the latest global initiatives and the hurdles still standing in the way of lifting the Bottom Billion out of poverty once and for all.

Understanding the Bottom Billion Crisis

For decades, poverty reduction efforts have centered on providing aid, improving infrastructure, and addressing public health issues. However, the situation for the Bottom Billion is complex and often resistant to traditional development strategies. According to Collier, these individuals are caught in one or more of four traps: conflict, natural resource dependence, landlocked countries with bad neighbors, and poor governance. These traps create cyclical poverty that is difficult to escape.

Recent data shows that while global poverty rates have decreased—thanks to economic growth in places like China and India—the situation for the Bottom Billion remains unchanged in many regions. Sub-Saharan Africa, for instance, continues to struggle with high poverty rates, despite decades of international aid. The challenge is not just about money; it’s about addressing the root causes that keep these populations poor.

Current Global Efforts: What’s Being Done?

Several initiatives have been put in place to address the unique challenges faced by the Bottom Billion. These include:

1. Sustainable Development Goals (SDGs)

The United Nations’ Sustainable Development Goals (SDGs) aim to end poverty in all its forms by 2030. Goal 1 specifically targets the eradication of extreme poverty, focusing on providing social safety nets, access to basic services, and job creation. While the SDGs offer a comprehensive approach, progress has been uneven, particularly in conflict-affected regions where governance and infrastructure are weak.

2. International Aid and Debt Relief

Foreign aid and debt relief programs have been crucial in offering immediate assistance to impoverished nations. In 2020, the International Monetary Fund (IMF) and World Bank launched initiatives to alleviate debt for the world’s poorest countries, especially in the wake of the COVID-19 pandemic. The IMF’s Debt Service Suspension Initiative (DSSI) has temporarily freed up resources that these countries can use for critical healthcare and social services. But critics argue that aid, while necessary, often doesn’t address the systemic issues—like governance and corruption—that perpetuate poverty.

3. Microfinance and Social Entrepreneurship

Microfinance has been a popular tool for lifting people out of poverty. By providing small loans to individuals, particularly women, microfinance initiatives aim to stimulate local businesses and empower communities. Organizations like Grameen Bank and Kiva have made significant strides, but scaling these efforts to reach the Bottom Billion remains a challenge. Social entrepreneurship—businesses that focus on generating social impact rather than profit—has also emerged as a promising solution, but its effectiveness is still debated.

The Role of Technology in Poverty Alleviation

One of the most promising developments in the fight against poverty is the role of technology. In recent years, digital tools have shown the potential to bridge gaps in education, healthcare, and financial services.

1. Mobile Banking and Digital Inclusion

Mobile banking, particularly in countries like Kenya with platforms like M-Pesa, has revolutionized financial access for the poor. These platforms allow users to transfer money, save, and even access loans without needing a traditional bank account. For the Bottom Billion, many of whom live in rural or underserved areas, mobile banking provides a lifeline for economic participation. However, challenges around digital literacy and infrastructure still need to be addressed.

2. Online Education and E-Learning Platforms

Education is another area where technology can make a transformative impact. The rise of e-learning platforms offers the opportunity to bring quality education to even the most remote regions. Projects like Khan Academy and Coursera have made strides in offering free educational content to people worldwide, but scaling this in regions where internet access is scarce or expensive remains a hurdle.

3. Telemedicine and Healthcare Access

Telemedicine has the potential to bridge gaps in healthcare, particularly in areas where access to hospitals or doctors is limited. With the help of mobile technology, remote consultations and diagnostics are becoming more common in developing countries. In the context of the COVID-19 pandemic, telemedicine has become a critical tool, allowing healthcare workers to reach vulnerable populations. However, expanding this service to the Bottom Billion will require investment in both digital infrastructure and healthcare systems.

One of the biggest barriers to lifting the Bottom Billion out of poverty is poor governance. Corruption, weak institutions, and lack of transparency make it difficult for aid and development programs to reach those who need them most. Transparency International’s Corruption Perceptions Index consistently shows that the most impoverished countries are also among the most corrupt.

In countries with poor governance, even well-meaning efforts can fail. Aid money often doesn’t reach its intended recipients, infrastructure projects stall, and political instability exacerbates existing problems. Addressing governance issues is critical to making any poverty alleviation program successful.

So, will it work this time? The answer lies in a multifaceted approach that goes beyond just financial aid. Here are a few key elements that must be addressed for any hope of success:

  1. Improving Governance: Without addressing corruption and weak institutions, any efforts will be undermined. Initiatives that promote transparency, accountability, and democratic governance will be crucial.
  2. Inclusive Economic Growth: Economic development must reach the most marginalized groups, particularly women, rural communities, and those living in conflict zones. Programs that focus on building local economies and creating jobs will be vital.
  3. Leveraging Technology: Digital tools offer immense potential, but they must be accessible to all. Expanding internet access and digital literacy will be key in enabling the Bottom Billion to participate in the global economy.
  4. Local Solutions for Local Problems: Global strategies must be adapted to local contexts. What works in Southeast Asia may not work in sub-Saharan Africa. Engaging local communities in the decision-making process is essential for sustainable progress.

Lifting the Bottom Billion is one of the most daunting challenges of our time. While the task is immense, it is not impossible. By focusing on good governance, inclusive growth, and technological innovation, the global community has a chance to make meaningful progress in reducing extreme poverty. Will it work this time? Only if we approach the problem with a comprehensive, targeted, and sustainable strategy. The stakes are high, but the rewards—improving the lives of a billion people—are worth every effort.


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Easing Africa’s Debt Burdens: a Fresh Approach, Based on an Old Idea

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In his address to the 79th session of the UN general assembly this week, South African president Cyril Ramaphosa described debt as “a millstone around the neck of developing countries”. Three legal and economic scholars set out the African debt problem and what must happen if African countries are to get out of what Ramaphosa described as “a quicksand of debt”.

The statistics are stark: 54 governments, of which 25 are African, are spending at least 10% of their revenues on servicing their debts; 48 countries, home to 3.3 billion people, are spending more on debt service than on health or education. Among them, 23 African countries are spending more on debt service than on health or education. While the international community stands by, these countries are servicing their debts and defaulting on their development goals. The Group of 20’s current approach for dealing with the debts of low income countries is the Common Framework.

It requires the debtor to first discuss its problems with the International Monetary Fund (IMF) and obtain its assessment of how much debt relief it needs. Then it must negotiate with its official creditors – international organisations, governments and government agencies – over how much debt relief they will provide. Only then can the debtor reach an agreement – on comparable terms to the official creditors – with its commercial creditors. Unfortunately, this process has been sub-optimal.

One reason is that it works too slowly to meet the urgent needs of distressed borrowers. As a result, it condemns debtor countries to financial limbo. The resulting uncertainty is not in anyone’s interest. For example, Zambia has been working through the G20’s cumbersome process for more than three and a half years and has not yet finalised agreements with all its creditors.  The need for a new approach is overwhelmingly evident. Although the current crisis has not yet become the “systemic” threat it was in the 1980s when multiple countries defaulted on their debt, it is a “silent” sovereign debt crisis.

We propose a two-part approach that would improve the situation of sovereign debtors and their creditors. This proposal is based on the lessons we have learned from our work on the legal and economic aspects of developing country debt, particularly African debt.

First, we suggest that official creditors and the IMF create a strategic buyer of “last resort” that can purchase the bonds of debt distressed countries and refinance them on better terms.

Second, we recommend that all parties involved in sovereign debt restructurings adopt a set of principles that they can use to guide the debtor and its creditors in reaching an optimal agreement and monitoring its implementation.

The current approach fails to deal effectively and fairly with both the concerns of the creditors and all the debtor’s legal obligations and responsibilities. Our proposed solution would offer debtors debt relief that does not undermine their ability to meet their other legal obligations and responsibilities, while also accommodating private creditors’ preference for cash payments.

Our proposal is not risk-free. And buybacks are not appropriate for all debtors. Nevertheless it offers a principled and feasible approach to dealing with a silent debt crisis that threatens to undermine international efforts to address global challenges such as climate, poverty and inequality.

It uses the IMF’s existing resources to meet both the bondholders’ preferences for immediate cash and the developing countries’ need to reduce their debt burdens in a transparent and principled way. It also helps the international community avoid a widespread default on debt and development.

Bondholders are a major problem

Foreign bondholders, who are the major creditors of many developing countries, have proven to be particularly challenging in providing substantive debt relief in a timely manner. In theory, they should be more flexible than official creditors.

Developing countries have been paying bondholders a premium to compensate them for providing financing to borrowers that are perceived to be risky. As a result, bondholders have already received larger payouts than official creditors. Therefore, they should be better placed than official creditors to assist the debtor in the restructuring processes. However, despite having received  large returns from defaulted bonds, bondholders have remained obstinate in debt restructurings. Our proposal seeks to overcome this hurdle in a way that is fair to debtors, creditors and their respective stakeholders.

How it would work

First, the official creditors and the IMF should create and fund a strategic buyer “of last resort” who can purchase distressed (and expensive) debt at a discount from bondholders. The buyer, now the creditor of the country in distress, can repackage the debt and sell it to the debtor country on more manageable terms. The net result is that the bondholders receive cash for their bonds, while the debtor country benefits from substantial debt relief. In addition, the debtor and its remaining official creditors benefit from a simplified debt restructuring process.

This concept has precedent. In 1989, as part of the Highly Indebted Poor Countries Initiative, the international community’s effort to deal with the then existing debt burdens of poor countries, the World Bank Group established the Debt Reduction Facility, which helped eligible governments repurchase their external commercial debts at deep discounts. It completed 25 transactions which helped erase approximately US$10.3 billion in debt principal and over US$3.5 billion in interest arrears.

Some individual countries have also bought back their own debt. In 2009, Ecuador repurchased 93% of its defaulted debt at a deep discount. This enabled the government to reduce its debt stock by 27% and promote economic growth in subsequent years. Unfortunately, the countries currently in debt distress lack sufficient foreign reserves to pursue such a strategy. Hence, they need to find a “friendly” buyer of last resort.

The IMF is well positioned to play this role. It has the mandate to support countries during financial crises. It also has the resources to fund such a facility. It can use a mix of its own resources, including its gold reserves, and donor funding, such as a portion of the US$100 billion in Special Drawing Rights (SDR), the IMF’s own reserve currency, which rich economies committed to reallocate for development purposes. Such a facility, for example, would have enabled Kenya to refinance its debts at the SDR interest rate, currently at 3.75% per year, rather than at the 10.375% rate it paid in the financial markets.

It is noteworthy that the 47 low-income countries identified as in need of debt relief have just US$60 billion in outstanding debts owed to bondholders. Our proposed buyer of last resort would help reduce the burden of these countries to manageable levels. Second, we propose that both debtors and creditors should commit to the following set of shared principles, based on internationally accepted norms and standards for debt restructurings.

Guiding principles

1. Guiding norms: Sovereign debt restructurings should be guided by six norms: credibility, responsibility, good faith, optimality, inclusiveness and effectiveness.

Optimality means that the negotiating parties should aim to achieve an outcome that, considering the circumstances in which the parties are negotiating and their respective rights, obligations and responsibilities, offers each of them the best possible mix of economic, financial, environmental, social, human rights and governance benefits.

2. Transparency: All parties should have access to the information that they need to make informed decisions.

3. Due diligence: The sovereign debtor and its creditors should each undertake appropriate due diligence before concluding a sovereign debt restructuring process.

4. Optimal outcome assessment: The parties should publicly disclose why they expect their restructuring agreement to result in an optimal outcome.

5. Monitoring: There should be credible mechanisms for monitoring the implementation of the restructuring agreement.

6. Inter-creditor comparability: All creditors should make a comparable contribution to the restructuring of debt.

7. Fair burden sharing: The burden of the restructuring should be fairly allocated between the negotiating parties.

8. Maintaining market access: The process should be designed to facilitate future market access for the borrower at affordable rates.

The G20’s current efforts to address the silent debt crisis are failing. They are contributing to the likely failure of low income countries in Africa and the rest of the global south to offer all their residents the possibility of leading lives of dignity and opportunity.

Danny Bradlow is Professor/Senior Research Fellow, Centre for Advancement of Scholarship, University of Pretoria

Kevin P. Gallagher is Professor of Global Development Policy and Director, Global Development Policy Center, Boston University

Marina Zucker-Marques is a Senior Academic Researcher, Boston University Global Development Policy Center, Boston University

Courtesy: The Conversation


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