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Monday, 11 August 2008

A ravaged continent...

A new paper provides comprehensive new estimates of capital flight for a sample of 40 African countries between 1970 - 2004, and; offers new insights on the linkahges between external borrowing and capital flight. Excerpt:

This paper has presented new evidence on the dramatic financial hemorrhage of African economies through capital flight countries over the past four decades. The estimates indicate that for the sample of 40 countries as a whole over the period 1970 - 2004, real capital flight amounted to $420 billion (in 2004 dollars). Including imputed interest, the stock of capital flight for this group of countries reached a staggering $607 billion dollars in 2004. This exceeds the countries’ combined external debt by $398 billion, making Africa a “net creditor” to the rest of the world. For some countries, including Angola, Côte d’Ivoire and Nigeria, the stock of capital flight is more than four times the stock of external debt.

The paper investigated the causes of capital flight and, consistent with past studies, found strong linkages between capital flight and external borrowing. The regression results suggest that out of every dollar of new borrowing, as much as 60 cents left the country in the form of capital flight the same year. Furthermore, a one-dollar increase in the stock of debt resulted in 3 to 4 cents of capital flight in subsequent years. The evidence has clear policy implications for addressing the challenge of heavy indebtedness for African countries. It suggests that a solution to the problem includes a combination of better management of debt by African governments, prevention of capital flight, and repatriation of African assets held abroad.

The paper has advanced the strategy of challenging the legitimacy of parts of African debts based on three crucial arguments. First, the evidence of strong year-to-year correlations between external borrowing and capital flight implies that a substantial proportion of the borrowed funds ended up in private assets through debt-fueled capital flight. Thus, past borrowing practices failed the test of benefiting to the people. Second, historical evidence gives strong indications for complicity of the lenders, who in many instances were aware (or should have been aware) of the embezzlement and mismanagement of borrowed funds and the corrupt nature of the borrowing regimes. Thus, historical evidence establishes the test of creditor awareness. Third, the debts were borrowed in the name of the people without their consent, which is obvious in the case of undemocratic regimes. These regimes only exercised their prerogatives of agents of the people in committing the nations to binding debt obligations, while reneging on their attendant obligation of acting in the interest of the people. Thus, borrowing practices did not meet the condition of consent by the people. Consequently, much of Africa’s accumulated debts may be deemed as odious and their legitimacy challenged by the people of debtor nations.

We argue that the burden of proof of legitimacy of debts must rest on the lenders. Indeed given the practices of secrecy in western financial centers, it will be impossible for African governments to locate more than a very small fraction of the stolen funds that are stashed in foreign banks or other investments. Enforcing the doctrine of odious debt will result in a win-win situation for borrowers and lenders in future years. By inducing responsible lending by Western financial institutions and accountable debt management by African governments, the strategy will both maximize the gains from external resources for African economies and minimize the risk of default, maximizing profits for western bankers. As the African continent searches for ways to reach financial stability and increase resources for development financing, we believe that the strategies outlined in this paper for addressing the problem of capital flight must feature prominently in debates at the national level as well as in the international development assistance community.

6 comments:

  1. The paper investigated the causes of capital flight and, consistent with past studies, found strong linkages between capital flight and external borrowing.

    I think the linkage between capital flight and external borrowing is the combination of Foreign Direct Investment and Free Market Theory.

    Neoliberalism is all about corporation's rights to allocate capital anywhere around the world.

    So why should this be surprising?

    What we need is continuous re-investment of capital, which is the only way wealth is built - ask Warren Buffett.

    If the government put a cap on the amount of raw materials that could be exported, that would force a lot of industrialisation in Africa.

    And if had mandatory ownership of the mines, they would have the profits available for investment in infrastructure and other economic sectors.

    ReplyDelete
  2. So I read the paper.. Hmm hmm..

    1. The concept of odious debt is dubious. Or rather I think it needs refinement. For instance, how do we define "consent" ? Should countries organize referendums before taking out a loan ? Or is the fact that the loan is taken out by an elected government enough ? But even with an unelected one, are we sure the "people" opposed taking out the loan ? How many people in DRC really think Inga was a stupid expense ? How about when the debt is used to fund salaries or raise them at a convinient time ?

    2. It's hard to differentiate between legally obtained capital and illegally obtained capital. Yet, the paper does differentiate them, gives different solutions for either and spends a lot of time (in the part you quoted for instance) discussing illegally obtained capital. The assets of Mobutu and Abacha may be easy to identify but in the case of Businessman X, it's unclear what part of his assets are the result of corruption. And let's not get into how "legal" itself is a muddy concept here.

    3. Second, historical evidence gives strong indications for complicity of the lenders, who in many instances were aware (or should have been aware) of the embezzlement and mismanagement of borrowed funds and the corrupt nature of the borrowing regimes. is weak too. In the sense that if that happened, very few African countries would have been extended loans, which is fine by me but I bet a lot of people would be complaining. After all, aren't they complaining in the country that will remained unnamed ?

    4. But one interesting point is that corruption doesn't explain capital flight in a satisfactory manner. I mean, what stops those corrupt leaders from investing their embezzled money ? Don't they invest at least part of it ? Is it really only fear of reprisal ? Or do lower yields have something to do with it ?

    ReplyDelete
  3. MrK,

    "If the government put a cap on the amount of raw materials that could be exported, that would force a lot of industrialisation in Africa."

    I am reading a book (see the bottom of the blog), within that is a very interesting paper by my friends dad - a Zimbabwen economist called Daniel Ndlela. He makes some interesing arguments about what has constrained industrialisation in Africa. Worth reading it if you can get it from the library. He reckons the challenge is to bridge the gap between the formal sector and informal sector...and to do that one must explore the constraints between the two sectors, including the issue of value of chains...which you are a fan of course..but it is certainly not about restricting exports..

    Actually, I'll scan the paper tomorrow for you tomorrow and email it across...

    ReplyDelete
  4. Random,

    Will do...I have copied into PDF..

    I mean the paper is not that ground breaking! Infact its all usual stuff we have been dicussing here. I mentioned it to MrK purely because it was interesting that another person I know who talks about value chains as much as MrK does not talk about export restrictions!

    I'll forward right away.

    MrK,

    Please email me your address again, this time to :

    zambian.economist@gmail.com

    I have it on my btinternet, but can't access that at the moment..

    thanks!

    ReplyDelete
  5. That was an interesting paper..

    I'm not sure I understand what he actually suggests but it was interesting.

    Did you get my emails from yesterday and the day before ?

    ReplyDelete

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