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 US$1.06.
Most of this hemorrhage is debt-fueled: approximately US$0.80 on every US 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-tripping" 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 US investment bank Salomon Brothers, the return of flight capital was estimated at around US$40 billion for Latin America in 1991, led by Mexico, Venezuela, Brazil, Argentina, and Chile. China recovered US$56 billion between 1989 and 1991.