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.
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.
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 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. British Prime Minister 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-tripping" or "back-to-back" loans and return the funds embezzled by African leaders and their Western friends.
Sanou Mbaye is a former economist with the African Development Bank.
Copyright: Project Syndicate
Could Asia be on the verge of a new wave of nuclear proliferation? A look back at the early history of the North Atlantic Treaty Organization (NATO), which recently celebrated its 75th anniversary, illuminates some reasons for concern in the Indo-Pacific today. US Secretary of Defense Lloyd Austin recently described NATO as “the most powerful and successful alliance in history,” but the organization’s early years were not without challenges. At its inception, the signing of the North Atlantic Treaty marked a sea change in American strategic thinking. The United States had been intent on withdrawing from Europe in the years following
My wife and I spent the week in the interior of Taiwan where Shuyuan spent her childhood. In that town there is a street that functions as an open farmer’s market. Walk along that street, as Shuyuan did yesterday, and it is next to impossible to come home empty-handed. Some mangoes that looked vaguely like others we had seen around here ended up on our table. Shuyuan told how she had bought them from a little old farmer woman from the countryside who said the mangoes were from a very old tree she had on her property. The big surprise
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices. The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and
As former president Ma Ying-jeou (馬英九) wrapped up his visit to the People’s Republic of China, he received his share of attention. Certainly, the trip must be seen within the full context of Ma’s life, that is, his eight-year presidency, the Sunflower movement and his failed Economic Cooperation Framework Agreement, as well as his eight years as Taipei mayor with its posturing, accusations of money laundering, and ups and downs. Through all that, basic questions stand out: “What drives Ma? What is his end game?” Having observed and commented on Ma for decades, it is all ironically reminiscent of former US president Harry