Why Africa stays poor

Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent

by Leonce Ndikumana and James K Boyce

Published in association with the International African Institute, the Royal African Society and the Social Science Research Council in 2011 by Zed Books, London and New York

Review by Peter Gillespie

IN June 1989, Mobutu Sese Seko, dictator of Zaire, flew to Washington to meet his old friend George HW Bush, the newly-elected president of the United States. Mobutu had been a valued US ally during the Cold War. Now the Cold War was coming to an end and Mobutu was worried. Zaire was carrying a $9 billion debt and couldn't make its loan payments. Several years previously, the International Monetary Fund (IMF) had reported that corruption by Mobutu and his cronies was so entrenched that there was no chance the country's creditors would ever be repaid. 

Nevertheless, Mobutu's visit to Washington was a success. The IMF approved a new loan of $187 million, and the World Bank added $87 million more. By the time Mobutu fled the country in 1997, his personal fortune was estimated to be $5 billion while the country's debt had swollen to $14 billion. Zaire, renamed the Democratic Republic of the Congo, descended into anarchy and war. By the end of the next decade, more than five million people were dead.

The story of Mobutu's kleptocracy is told in Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent by Leonce Ndikumana and James Boyce. The authors, economists with the University of Massachusetts, Amherst, have been examining the problem of capital flight from sub-Saharan Africa since the 1990s. Theirs is a story of massive looting at the expense of the people of the region, and the complicity of Western banks that have laundered stolen wealth without questioning its provenance.

Ndikumana and Boyce are particularly interested in the relationship between the money borrowed by African governments and capital flight - money that flows out of these countries. Their findings are staggering. More than half of the money borrowed by African governments departs the continent in the same year, often ending up in private accounts at the same banks that provided the loans in the first place.

In 33 sub-Saharan countries the authors studied, $700 billion fled the continent between 1970 and 2008. If this capital had been invested and earned interest, the accumulated loss for these countries would be $944 billion. What these figures mean is that sub-Saharan Africa is a net creditor to the rest of the world, its foreign assets far exceeding its foreign debts of $175 billion. The problem is that much of these assets are in the hands of private individuals, while the liabilities are public.

Mobutu is only one particularly flamboyant example of a variety of African kleptocrats who converted loans and revenues from oil and minerals into private wealth. Sani Abacha of Nigeria reportedly ordered the Bank of Nigeria to transfer $15 million a day to his Swiss bank accounts, accumulating a personal fortune estimated at between $2 billion and $5 billion. At the time of his death in 2009, Gabon's Omar Bongo owned 39 luxury properties in France and had more than 60 offshore bank accounts. Last October, the US Department of Justice announced that it was seizing over $70.8 million in corrupt assets, including a $30 million Malibu mansion, from Teodorin Obiang, son of the President of Equatorial Guinea.

Ndikumana and Boyce's findings are corroborated by other studies. In a 2011 report, the Washington-based Global Financial Integrity project (GFI) calculated that, between 1970 and 2008, Africa lost more than $850 billion in illicit financial flows, outpacing official development assistance by at least 2 to 1. GFI noted that this is likely an underestimate and that the magnitude of African illicit outflows during this period could be as high as $1.8 trillion.

Corporate outflows

Corrupt African dictators, however, are only a small part of the problem. GFI estimates that falsified accounting practices and tax avoidance by transnational companies account for 60-65% of illicit outflows. These practices include trade mispricing, inflating costs, under-reporting revenues, and the use of tax havens as a base for corporate activity. The outflow of resources from Africa is enabled by a shadow financial system comprised of tax havens, secrecy jurisdictions, shell corporations, anonymous trusts, and bogus foundations.

It is impossible to deal with illicit capital flight without addressing the secrecy services provided by the shadow financial system operated largely by mainstream banks in places such as London, New York, Geneva, the Channel Islands, the Cayman Islands, and various small states.

It would be no exaggeration to assert that these outflows have resulted in the stunting and the deaths of hundreds of thousands of people in Africa. Ndikumana and Boyce estimate that every additional dollar in debt service means 29 cents less spending on public health, and each $40,000 reduction in health expenditure translates into an additional infant death. They calculated that debt service payments on loans that fuelled capital flight have resulted in more than 75,000 additional infant deaths annually in the sub-Saharan region.

The impoverishment of Africa will only end when these outflows are curtailed. Ndikumana and Boyce believe that African countries should repudiate their debts if they are incurred without public consent and benefit, and they support the Norwegian proposal for an international debt settlement court to adjudicate disputes over debt legitimacy. 

Equally important is to put an end to the shadow financial system that launders the proceeds of corruption, crime, and commercial tax evasion. This will require coordinated international efforts to curb financial flows to tax havens and secrecy jurisdictions that have facilitated the movement of assets offshore and concealed them from public view. 

This has been on the international agenda for a number of years, but little progress has been achieved and it is still business as usual.                   

Peter Gillespie is with the Halifax Initiative, a coalition of Canadian social justice organisations concerned with international financial issues.