The G20 must help Africa escape the financial death trap

JOHANNESBURG :US President Donald Trump may not be attending the first G20 summit to be held in Africa, but his tariffs are likely to dominate the discussions in Johannesburg. The fallout from Trump’s mercurial trade war is especially challenging for African countries, hindering their progress toward sustainable development and exacerbating existing global inequities. As the host of this historic event, South African President Cyril Ramaphosa is seeking to promote development priorities for Africa and the Global South more generally. Given Trump’s zero-sum, transactional worldview, his efforts are facing stiff headwinds.

Trump is ostensibly wielding tariffs to improve America’s trade balance, complaining that the world has been “ripping [the US] off” for the last 40 years. In fact, the countries that have been most exploited by outside powers are in Africa. For decades, the continent has consistently gotten the short end of the stick in international finance and trade negotiations, browbeaten through both real- and financial-sector channels.

Disadvantaged from the Start

The growth of African trade has been constrained by a combination of limited diversification into high-value goods, inadequate infrastructure, and weak bargaining power – legacy structural inequalities that the prevailing international order reinforces. This results in African countries being disproportionately exposed to global volatility and adverse terms of trade, leading to persistent trade deficits, recurring balance-of-payments crises, and the inexorable rise of external liabilities.

Over time, these external imbalances, stemming from the historical composition and direction of African trade, have heightened macroeconomic instability and distorted risk perceptions, with credit-rating agencies assigning most African countries sub-investment grade (junk) ratings. For instance, while S&P Global Ratings recently upgraded the long-term foreign debt of South Africa, the most industrialized and sophisticated African economy, for the first time in a generation, it remains two notches below investment grade. Weakened and poor credit ratings, in turn, subject African countries to growth-crushing and default-driven borrowing rates and refinancing risks on debt with short-term maturities.

Consistently paying much higher interest rates than more industrialized and prosperous countries amplifies the fiscal impact of African countries’ sovereign debt. Following Trump’s announcement of his “Liberation Day” tariffs on April 2, the yield on ten-year US Treasuries spiked from less than 4% to around 4.5%, spooking the White House. But that pales in comparison to the yields on most African countries’ sovereign debt. Nigeria’s ten-year government bond yield, for example, was around 19% in mid-April.

These elevated borrowing costs have drained African countries’ scarce resources and undermined their efforts to achieve fiscal and debt sustainability, creating a financial death trap. Although Africa’s external debt stock is relatively low ($746 billion, or 25% of the continent’s gross national income), more money is now flowing out of the continent for debt service than coming in from new financing and development assistance. According to the United Nations Development Programme, African countries could save up to $74.5 billion if credit ratings were based on less subjective assessments.

Even worse, African governments have been forced to focus on managing near-term balance-of-payments crises, at the expense of pursuing long-term economic policy. Over time, this has made it harder to invest in growth-enhancing infrastructure – both physical and digital – and human capital, which are essential for boosting productivity, catalyzing structural transformation, and creating a virtuous cycle of growth and development.

A Raw Deal

Lacking investment in these areas, African countries have remained on the margins of the global economy, overly dependent on commodities and unable to diversify their sources of growth. As a result, African exports have remained dismally low and are driven mainly by global demand for raw materials, with the continent’s median commodity export share at a staggering 90% – higher than any other region.

As high-value-added manufacturing and technology sectors have emerged as new growth engines in recent decades, Africa’s share of global trade has steadily declined, from 5% in the 1970s to less than 3% now. The continent has also become the world’s poorest, with nearly half of the population in Sub-Saharan Africa living below the poverty line.

To help Africa integrate into the global economy and improve living standards on the continent, UN Secretary-General António Guterres has repeatedly called for reforms to the international financial architecture, which has hampered the development of many unfairly indebted African economies. In a similar vein, South Africa’s G20 presidency seeks to ensure debt sustainability for low-income countries, reducing the cost of capital to a level that more accurately reflects the real risk in the developing world.

Against this backdrop, Africans have responded to Trump’s claim that America has been treated unfairly with disbelief and ridicule. After all, the dollar’s supremacy in global trade and finance confers an “exorbitant privilege” on the US, enhancing the sustainability of its deficits and debt. The “convenience yield” – the premium investors are willing to pay to hold a highly liquid and safe asset – has kept the costs of funding America’s debt at historically low levels. In addition to the depth and liquidity of its capital market, the US still accounts for 27% of global GDP, even though Americans comprise only around 4% of the world’s population, and the country remains a global leader in higher education, scientific research, technology, and innovation.

These exceptional attributes have long attracted scholars, investors, and immigrants to America, fueling US economic expansion and alleviating the demographic headwinds that have dampened growth elsewhere. Between 1980 and 2024, GDP per capita in the US (at constant 2015 dollars) rose from $31,082 to $66,683, whereas global GDP per capita increased by only $5,899, to $11,876. In Sub-Saharan Africa – where 16 countries’ GDP per capita was under $1,000 in 2024 – it increased by only $115 to $1,601.

Of course, there are many reasons for this huge disparity between Africa and other regions of the world. Poor governance and frequent conflicts have impeded economic development across the continent, with military expenditures rising 22% from 2015 to 2024, to $52 billion, further exacerbating already-tight budget constraints. Annual growth in conflict-affected countries is about 2.5 percentage points lower on average, with the cumulative impact on GDP per capita increasing over time.

But the inequities baked into global trade and finance are the primary source of Africa’s dismal growth performance. The financial death trap, together with wealthy countries’ subsidies for key sectors (such as agriculture, manufacturing, energy, and technology), has encouraged the misallocation of resources, undermined international competition, strangled African industrialization, and perpetuated the colonial development model of resource extraction. Africa’s resource-rich countries have thus been relegated to the role of raw-material supplier in a world where manufacturing drives long-term growth, higher-value job creation, and effective integration into the global economy.

Decades after many African countries gained independence from colonial powers, the politics of resource extraction continues to shape their relations with the rest of the world. Recall that former US President Joe Biden’s only trip to Africa was centred around the Lobito Corridor, a US-backed infrastructure project for transporting essential minerals from the Central African Copperbelt, which straddles Zambia and the Democratic Republic of the Congo, to the Port of Lobito in Angola for export. Trump’s first engagement with Africa in his second term was securing a “peace” deal in exchange for access to critical minerals in the DRC.

As a result of the persistence of the colonial development model, African countries export their raw materials and then import manufactured goods at higher prices, with negative consequences for regional economic development and macroeconomic stability. In 2023, the continent’s trade deficit widened to $65.5 billion, more than double the $31.1 billion recorded in 2022. This deficit is expected to increase over time as Africa’s population growth boosts demand for imported goods, and commodity terms of trade deteriorate.

One example that aptly illustrates Africa’s position in the prevailing global economic order is the nature and composition of its trade with India, the continent’s third-largest trading partner. India imports crude oil from African fossil fuel-producing countries and then exports refined petroleum products to the continent. This carbon-intensive “round-tripping” highlights the stickiness of the colonial development model of resource extraction, which European imperial powers first established and global actors have continued to exploit during the era of US-led globalization.

Not All Boats

After the 1944 Bretton Woods conference, the US became the world’s growth engine, leveraging its large consumer market (which still accounts for around 30% of global consumption) to shape supply chains and boost demand for intermediate and final goods. This began in Western Europe, where the three decades following World War II came to be known as les trente glorieuses. More recently, the model has shifted to Asia, where emerging-market economies have pursued export-led manufacturing growth and integrated into global supply chains, linking the region with North America and Europe.

In effect, America has been a rising economic tide lifting those countries and regions that have integrated into US-led global supply chains. But Africa has been relegated to the role of natural-resource provider for other markets, making it difficult for countries on the continent to capture the growth and development potential offered by the Generalized System of Preferences, America’s trade preference program, or the African Growth and Opportunity Act, which the US enacted in 2000 to provide eligible African economies with duty-free access to its market.

As a result, the trade imbalances that the Trump administration has obsessed over are largely with countries in North America, Europe, and Asia. In 2024, China, Japan, Mexico, Canada, and Germany accounted for $621.4 billion of the US trade deficit – more than half of the roughly $1 trillion total. Africa’s trade deficit with two of these countries – China and Germany – exceeded $70 billion over the same period.

Despite this, Trump’s “reciprocal tariffs” targeted several African countries, including some of the world’s poorest. Madagascar, for example, whose main export to the US is raw vanilla, was threatened with a 47% tariff on Liberation Day, before ultimately being slapped with a 15% rate in August. In 2024, all 54 African countries’ exports to the US totaled just under $40 billion, which pales in comparison to other regions and often individual countries. Vietnam’s exports to the US, for example, exceeded $124 billion, resulting in a $113.1 billion trade deficit.

While African countries and the US have faced persistent trade deficits, that is where the similarities end. The benefits conferred by the dollar’s status as the world’s reserve currency cannot be overstated. Global demand for dollar-denominated assets allows the US to issue debt more cheaply and maintain robust economic growth.

By contrast, the balance-of-payments constraint associated with dollar funding has imposed an anti-growth straitjacket on African governments, owing to the “original sin” (the inability to borrow in domestic currency on international markets) and the risk premium that sustains higher interest rates on their sovereign bonds. Default-driven borrowing costs have hindered public investment and dramatically increased the fiscal incidence of external debt, undermining efforts to crowd in private capital and accelerate trade diversification. Reliant on aid and commodity exports, African countries suffer from economic stagnation and high poverty rates, both of which fuel international migration.

Now comes Trump’s zero-sum approach to reducing the US trade deficit, which has triggered turbulence in bond markets, dollar depreciation, and macroeconomic uncertainty, thereby raising short-term risks to global growth and financial stability. For African countries already at risk of a debt crisis, these shifts in US trade policy could be the tipping point: Tariffs reduce their access to the US market, preventing them from obtaining the dollars they need to finance imports and pay creditors.

Leveling the Playing Field

Addressing these disparities requires a coordinated, comprehensive overhaul of international trade and finance. Guterres has championed this, urging countries to build resilience to the forces of fragmentation, foster fair trade, and promote equitable access to finance. These reforms would boost investment and drive structural transformation worldwide, establishing the foundation for stability and shared prosperity.

Overhauling the global trade regime requires corresponding changes to the international financial architecture. To that end, South Africa has established a G20 expert panel during its G20 presidency to deliver a review of the unjustifiably high borrowing costs faced by developing countries. The panel’s highly anticipated report, to be presented at the summit on November 22-23, will be one of the major highlights of the South African G20 presidency, which has emphasized equitable access to affordable long-term financing.

Fairer financing rules would create the fiscal space that developing countries need to pursue bold economic policies; increase foreign capital flows to higher-return investments in low-income economies, especially human-capital development; and limit the asymmetric allocation of government subsidies. An additional benefit of leveling the playing field could be broader access to frontier technologies, including productivity-enhancing AI. Over time, this would enable African countries, and other developing economies, to leverage their intellectual capabilities to engineer commodity-based industrialization and expand industrial capacity, improving human-development outcomes.

Such a shift would also diversify global supply chains, which are currently concentrated in a handful of markets, particularly in Asia. As more African countries move up the value ladder, their economic resilience would be enhanced, and persistent imbalances between domestic demand and supply would be alleviated. This, in turn, would accelerate economic convergence and, most importantly, could pave the way for a fairer, more representative multilateral system that emphasizes equitable and inclusive development.

South Africa’s historic G20 presidency has laid the foundation for a more inclusive approach to international finance and cooperation. Maintaining that momentum will be a challenge in our increasingly zero-sum world. But it is a challenge the G20 leaders must meet – with or without Trump – if the global community is to address the macroeconomic imbalances and inequalities that fuel migration pressures and geopolitical tensions.

Copyright: Project Syndicate, 2025.
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