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Sub-Saharan Africa’s appalling poverty and living conditions have been exposed repeatedly through television and the Internet. But these agonizing pictures represent only the symptoms of an underlying – and largely unreported – malady: capital flight.
Capital flight stems from myriad causes: debt servicing, the awarding to foreign firms of almost all contracts financed by multilateral lenders (and exemptions from taxes and duties on these goods and services), unfavorable terms of trade, speculation, free transfer of benefits, foreign exchange reserves held in foreign accounts, and domestic private capital funneled abroad. According to the UN Industrial Development Organization (UNIDO), every dollar that flows into the region generates an outflow of $1.06.
Most of this hemorrhage is debt-fueled: approximately 80 cents on every dollar that flows into the region from foreign loans flows out again in the same year. This implies active complicity between creditors (the OECD countries and their financial institutions, especially the IMF and the World Bank) and borrowers (African governments). Capital flight provides creditors with the resources they need to finance additional loans to the countries from which these resources originated in the first place – a scheme known as “round-tipping” or “back-to-back” loans.
Borrowers, in turn, use these foreign loans to increase their accumulation of private assets held abroad, even as strict budget discipline and free capital movement – implemented in line with IMF and World Bank structural adjustment programs – have led to skyrocketing interest rates. The lethal combination of these factors thwarts any prospect of economic growth while leading to an unsustainable level of debt.
The pool of fleeing capital includes assets acquired legally at home and legally transferred abroad; capital acquired legally at home and illegally transferred abroad; and illegally acquired capital that is funneled abroad illegally. Using the latter two types to impose “odious debts” on Africans undermines western lenders’ credibility concerning money laundering, good governance, transparency, fiscal discipline, and macroeconomic policies conducive to economic growth.
Repudiating unwarranted and unjustified debts would be consistent with economic logic and international law. Well-functioning credit markets require that lenders face the consequences of irresponsible or politically motivated lending. But two obstacles must be overcome. First, African leaders, who should repudiate these debts, are the ones who contracted them in the first place, with the obvious aim of enriching themselves. Second, creditors may retaliate by withdrawing subsequent lending.
These obstacles are neither insurmountable nor unique to sub-Saharan Africa. Capital flight is most likely to be sparked by uncertainty regarding good governance, political stability, civil liberties, accountability, property rights, and corruption. Sound economic policies, sustainable economic growth, and adequate rates of return on investment tend to reverse capital flight. According to figures released by the American investment bank Salomon Brothers, the return of flight capital was estimated at around $40 billion for Latin America in 1991, led by Mexico, Venezuela, Brazil, Argentina, and Chile. China recovered $56 billion between 1989 and 1991.
Equally revealing, several Middle East economies are booming. The United Arab Emirates and Saudi Arabia are flooded with capital as a result of billions of dollars poured back into the region in the past two years by domestic investors. The Saudi stock market index is up by 78% since the start of the year, hugely out-performing the main US and European indices – and this in a region plagued by conflict, nuclear tensions, terrorism, and acute political challenges.
As for sub-Saharan Africa, the “Washington Consensus” – economic liberalization, deregulation of capital movements, suppression of subsidies, and privatization – runs against the very policies needed to promote political improvements, a stable macroeconomic environment, enlarged financial markets, and lower debt overhang.
Private firms that have acquired public assets should be induced, through legislation, to recapitalize these companies. New shares should be earmarked for residents to encourage the repatriation of private capital. Capital controls and fiscal incentives will keep legitimate private capital at home and promote domestic investment.
These are the essential conditions for launching sustainable economic growth in the region. Common sense points to the need for the OECD countries, the IMF, and the World Bank to sever their dubious complicity with sub-Saharan African leaders and support policies that are in the long-term interest of the West and the world.
Ignoring the negative investment climate would be unwise. According to the New York Times , quoting US military personnel, the Sahara Desert is becoming a “new Afghanistan.” This threat, together with terrorist attacks in Kenya, Tanzania, Tunisia, and Morocco, has prompted the Bush administration to install military bases in the region. But only policies that privilege social justice and economic development can win the fight against terrorism definitively.
Tony Blair is America’s closest ally in their “war on terror.” He also believes that conditions in Africa are “a scar on the conscience of the world,” and has established a Commission for Africa that will report to the G8. But, in addition to the trade distortions that Blair has promised to address, he and other Western leaders should put an end to scandalous “round-tipping” or “back-to-back” loans and return the funds embezzled by African leaders and their Western friends.
Copyright: Project Syndicate, November 2004.