What Role Can Alternative Finance Play in Africa's Sustainable Development Trajectories?

Abstract

ABSTRACT This paper analyzes the impact of alternative financing (i.e., green finance, remittances and foreign aid) on sustainable development in Africa. It is based on a panel of 47 African countries from 1990 to 2021. Using the Sustainable Development Index (SDI) developed by Hickel, the study evaluates the influence of three primary sources of alternative financing: migrant remittances, green finance (as measured by investments in renewable energy), and official development assistance (ODA). The methodology is based on Tobit and instrumental variables (IV)‐two‐stage least squares (2SLS) models, adapted for endogeneity resolution. The results show that remittances positively and significantly impact sustainable development, especially in middle‐income countries. However, green finance and ODA negatively impact sustainable development overall. Analysis by income group shows that green finance benefits low‐income countries more and that ODA is more effective in high‐income countries. Additionally, the study emphasizes the catalytic role of financial innovations, particularly mobile money, in amplifying the effects of alternative financing on the SDI. These results underscore the importance of strengthening institutional frameworks, governing financial resources more effectively, and implementing appropriate public policies. Furthermore, it is relevant to provide easier access to digital services and encourage the use of innovative methods to mobilize diaspora resources. Other policy implications are discussed.