The history of finance is littered with examples of the hazards of lending other people’s money and borrowing in other people’s names. Each new meltdown brings fresh reminders that financial intermediation – the vital economic function of transferring money from savers to investors – creates scope for self-dealing, fraud, and outright theft that can be curtailed only by public vigilance. In most financial crises, the victims lose their money. In Africa, some lose their lives.

Africa as a net creditor

Sub-Saharan Africa is widely perceived as being heavily indebted to international creditors including banks, western governments, and international financial institutions. Its foreign debt of roughly $175 billion amounts to more than $200 per person, a large burden in a region where the average annual incomes are under one thousand dollars. In some countries, including Burundi and the Democratic Republic of Congo, the foreign debt exceeds the nation’s total income.

What is less well known is the fact that sub-Saharan Africa experienced an exodus of more than $700 billion in capital flight since 1970. Some of this money wound up in accounts at the same banks that made loans to African governments. Africa is a net creditor to the rest of the world in the sense that its foreign assets exceed its foreign liabilities. But there is a key difference between the two: the assets are in the hands of private Africans, while the liabilities are public, owed by the African people at large through their governments.

Ins and Outs of Funny Money

Africa’s debt inflows and capital flight outflows are closely connected. As we document in our new book, Africa’s Odious Debts, there is a powerful statistical correlation between the two. For every dollar of foreign borrowing, on average more than 50 cents leaves the borrower country in the same year. This tight relationship suggests that a substantial portion of Africa’s capital flight has been debt-fuelled. Growing public external debts and private external assets are connected by a financial revolving door.

How does it work? Common mechanisms include inflated procurement contracts for goods and services, kickbacks to government officials, and diversion of public funds into the bank accounts of politically influential individuals. Some of Africa’s flight capital comes from other sources, too, such as earnings from oil and mineral exports. But foreign loans make an exceptionally easy mark in that there is no need to go through the messy business of extracting natural resources to convert them into cash.

Principals and agents

Africa’s debt-fuelled capital flight illustrates what economists call the ‘principal-agent problem.’ In fact it does so twice: first on the creditor side of foreign loans and then on the borrower side.

In creditor institutions there is a disjuncture between the interests of the depositors, shareholders and taxpayers whose money is being lent (the principals) and the interests of loan officers and their superiors who lend out the money (the agents). In theory, the agents are meant to serve the interests of the principals by making prudent loans that will be repaid with interest. But in practice, the agents are rewarded financially and career-wise for ‘moving the money,’ getting loans out the door. They may be tempted to put their self-interest first.

A similar psychology and pathology operate on the borrower side, where the agents are government officials who negotiate and disburse loans, and the principals are the citizenries on whose behalf they are supposed to act. Officials and their political bosses often borrow in the name of the government, line their own pockets and those of their cronies, and saddle the public with the debt.

Paying the price

When foreign loans come to Africa and a part of the proceeds is siphoned abroad, Africa still receives an inflow of money, albeit less than the face value of the debt. The net drain on African economies comes in subsequent years when the creditors are repaid with interest.

World Bank data on debt-service payments and public health expenditures by African governments offer stark evidence of the human costs of debt-fuelled capital flight. We estimate that an additional dollar of debt service means 29 fewer cents spent on public health. In economic parlance, the former ‘crowds out’ the latter.

Looking at the relationship between public health expenditure and infant mortality, we find that each $40,000 reduction in health spending translates into one additional infant death. Putting these findings together, we calculate that debt-service payments on loans that fuelled capital flight translate into more than 75,000 extra infant deaths each year.

It is not only money that is being stolen in Africa: it is human lives.

What can be done?

The hemorrhage of scarce resources from Africa can be stopped. Efforts by some African governments to recover wealth stolen by past officials have won international backing in the Stolen Asset Recovery Initiative launched by the World Bank and United Nations Office on Drugs and Crime. But more can and should be done to identify looters and their accomplices and to repatriate stolen funds.

Better enforcement of existing laws to curtail money laundering and new laws to strengthen safeguards are needed to staunch the outflow of illicit money from Africa into safe havens abroad. In the United States, for example, Treasury Department officials concede that banks routinely accept deposits of funds that enter the country in violation of existing laws. Moreover, the banks currently are not prohibited from handling proceeds from many activities that would be considered crimes if committed within the U.S.

More transparent information about financial inflows to African governments also can help. Just as the Publish What You Pay campaign launched by international NGOs has promoted disclosure of corporate payments for natural resource extraction, a Publish What You Lend campaign would strengthen transparency and accountability in financial markets.

Finally, African governments should be encouraged to selectively repudiate debts incurred by past regimes that cannot be demonstrated to have been used for legitimate purposes. The doctrine of odious debt in international law provides a basis for repudiation of public debts from which the public derived no benefit if the creditors knew, or should have known, this to be the case. Further legal grounds for selective repudiation are found in the principle of domestic agency in British and American law, which requires agents to act in good faith in the interest of their principals.

These steps would not only benefit Africa’s people today. They also would help to repair our international financial architecture, strengthening incentives for the exercise of due diligence by creditors and responsible borrowing by governments. Absent these reforms, ‘debt relief’ can offer only a temporary palliative. Here, as in other arenas, Africa needs justice, not just charity.

Africa’s Odious Debts will be launched by the Royal African Society at SOAS on 10th Oct. For more details click here

According to Brown, the global financial system is not in good shape, and global growth continues to structurally marginalise poor countries. However, Africa has performed well in recent years with growth rates exceeding those of the developed world. Brown quoted Ngozi Iweala – Nigerian managing director of the World Bank – who now makes the argument for the Sub-Saharan African continental economy to be recognised as comparable to that of the existing BRIC states (Brazil, India, China – and now South Africa). She envisions a future of ‘African lions and lionesses’ rather than ‘Asian tigers.’

In this success he paid tribute to those companies that have invested in African markets, and commented upon the steady rise of inter-African and South-South trade. Particularly important in the latter phenomenon is the rise of the Asian economies, whose drive for economic development (notably that of China) has seen them invest heavily in African commodities and the infrastructure necessary for their extraction. The major questions for western investment in Africa remain political.

Whilst Brown recognises improved economic performance in Africa, he drew our attention to ‘the other side of the picture.’ His worries are concerned with the stability of this growth. Growth for the next 20 years will continue to be strong in developing African economies. In addition, Asian and African consuming power will expand, driven by the growth of middle class spending power. But large numbers of people will remain in poverty. The majority of the working population will be without educational qualifications and jobs.

Rising African populations (currently 15 percent of the world’s population, and growing to over 20 percent in the next 2 decades) still only receive 1 – 2 percent of the world’s investment, and produce 1 -2 percent of the world’s wealth.

On education and health Brown was most strident in his conviction that we can tackle global inequalities. Having advanced in the last decades, the number of children in school is now going into reverse. We must ‘train a million teachers, and build a million classrooms’, using technology more effectively to open up the world through computers.

Brown categorically asserted than we cannot tolerate a situation in which the expenditure on a child’s education in, for example, the US amounts to $100,000, whilst in Africa it is around $300.

He quoted further stark statistics regarding healthcare – in Nigeria there is one doctor per 39,000 people compared to 1 doctor per 39 people in the US. Inequity in healthcare provision in Africa is compounded by the continent having the heaviest disease burden.

Such facts illustrate the dramatic difference between Africa and the West. The Millennium Development Goals will not be achieved within any area even a century after they were implemented.

Despite some progress having been made, the gap in opportunities remains wide. According to Brown, economic empowerment is the issue.

Investment in infrastructure can greatly increase growth rates. However, there remains a huge infrastructure ‘gap’ in Africa preventing effective power supply to business, goods getting to market and further trade developing.

There is however no mechanism for solving problems of this scale. To develop solutions, we need to see them as cross border challenges. Innovative sources of finance must be explored with the World Bank taking a lead.

There is also huge economic gain to be made from technology – particularly broadband internet provision, which can help communities leap a generation in communication and education by opening up the resources of the internet to even the remotest communities.

The developed world made promises through the Millennium Development Goals. Brown stated that ‘we must honour these promises, and as global citizens, take seriously our responsibilities.’

‘Distance in not a justification for being less concerned…Empowerment not charity, economic development not aid.’

By Magnus Taylor

Photo by Siddharth Khajuria

Between 1822 and 2003, Grain Coast natives and repatriates transported there by a NGO fought nearly 90 “deadly conflicts” over land rights and trade issues. Under the highly centralized system of governance created by one fraudulent constitutional process and sustained by another, a de facto one party state retained state power when the “politics of pigmentation” ended in 1876, ruling uninterrupted for 103 years. Until 1964, Liberian citizens were differentiated by law and custom, with rights and privileges also differente4de. Absent popular sovereignty stymied Liberia’s pledge to (i) establish justice; (ii) ensure domestic peace and (iii) promote the general welfare, for national symbols are divisive and governance dysfunctional. Liberia’s Governance Commission’s draft “National Policy on Decentralization and Local Governance” mourns:

“…the highly centralized system of governance has impeded popular participation and local initiative, especially in the provision of public goods and services, and has contributed to the need for greater accountability and transparency in the management of public affairs and led to the gap in economic growth and development, equal access to social and economic opportunities and human wellbeing between Monrovia and most of the rest of Liberia.”

The Comprehensive Peace Accord (CPA) of 2003 presented an auspicious second chance to Liberia to redeem its pledge but its guarantors disavowed responsibility to ensure popular participation to improve governance, even though the CPA acknowledged poor governance as a cause of the conflict. The guarantors rejected suggestions to link timing “democratic elections” with prior reform of the dysfunctional governance structure–John Rawls’ “veil of ignorance”. The guarantors’ strategy negated Albert Einstein: “The thought that created the problem cannot be the thought to solve the problem”.

Inevitable in an unequal relationship, the International Contact Group on Liberia (ICGL) imposed exit before capacity to govern effectively and improve fiscal capacity, as Chand and Coffman demonstrate, were met. Elections were held with the discriminatory laws and illiberal civic values inhospitable to reform were in place. Since then, the political culture remains committed to division, patronage, impunity and corruption, denying voice and accountability. A European Commission funded National Conflict Mapping Project and other studies have warned that the conditions that led to a succession of deadly conflicts remain potent. The ODP stands out as a major reason for the dire situation; with it, return to conflict is inevitable.

The ODP’s longevity is explained by entrenched development strategy that makes foreign direct investments (FDI) by persons the apartheid clause of even Liberia’s current Constitution bar from citizenship: eligibility for citizenship is defined by skin color in the State that, with Ethiopia, sued Verwoerd’s South Africa before the International Court of Justice. The ODP underlies poor governance in Liberia and ensures high illiteracy and unemployment, and low fiscal capacity. It is a hindrance to industrialization by ensuring reliance on raw material export.

The Open Door Policy created Liberia’s love for all things foreign and discrimination against all things national. Presidents and senior politicians travel abroad at public expense to seek medical attention. With the civil service politicized and lacking capacity, in 2009 the Liberian government does not prepare its “Investor’s Guide”. Rather, it is prepared for the National Investment Commission by the Corporate Council on Africa and Arcelormital.

Liberia has a dual currency regime and opted for “observer status” in ECOWAS’ Second Monetary Zone, circumstances explained by low capacity and fiscal indiscipline. The uncritical acceptance of IMF proscription of De-dollarization, with scant prescription against inflation, confirms unhealthy reliance on external advice for public policy formulation. Besides, dual currency regime alleviates the need for fiscal discipline and policies toward regional integration.

The ODP discriminates against Liberian capital and frustrate the development of Liberian entrepreneurship because it was adopted to disenfranchise the mulatto merchants and planters who, in the 1860s, produced and processed sugar cane into molasses; planted liberica coffee; tapped wild rubber and then exported these produce to Europe in Liberian built, seagoing vessels. Focusing “mega FDI” ignores agriculture and ensures food insecurity. It sustains an unsuitable educational curriculum, for appointments are based on criteria other than competence.

Pursuant to the ODP, Firestone and other merchant capital continue to enjoy exemption from taxation in 2009. It unjustifiably grants “investment incentives” to gigantic foreign direct investment as it ignores agriculture and small, medium enterprises. Liberia qualifies for preferential access to major markets but has not made an AGOA export.

The ODP grew public disdain for every vocation except politics, zero-sum game in Liberia: you win and acquire wealth and influence; you lose and gain harassment, jail terms, vilification, becoming a virtual non-person. Loss has led to death or flight into exile.

The coming of Firestone first revealed the odious character of the Open Door Policy. Firestone’s domestic legal team included anyone who was anybody in the TWP, thus paying protection fees to individuals in the hierarchical political patronage system. Sponsors of FDI can, like their protectors, be exempt from the law.

The ODP created foreign-owned oases exploiting natural resources, virtually de-linked from the national economy. Senior government officials “play for pay” assisting concessions and the World Bank’s Doing Business in Liberia 2009 reports that “paying taxes” and “trading across borders” became more difficult in 2009. Protecting [national] investors is reported difficult, reflecting absent rule of law. Because of the ODP, Liberians remain “drawers of water and hewers of wood” in their economy, even as the elite dominate the services sector, peddling influence and selling protection. The result, groups of non-nationals dominate the economy. Middle Easterners and Asians control wholesale and retail trade; Europeans and Americans own and manage the enclaves. Persons ineligible to own land ironically are the landlords, even to the government.

The ODP discourages competition in the political arena. Excluding foreign investors from eligibility for citizenship, foreigners become beholden to political godfathers for protection. Investors pay economic rent for the protection, which rent finances patronage. By rewarding loyalty handsomely and harshly punishing any attempt to create independent wealth, government in the de facto single party state internalizes the prevalent illiberal civic values of intolerance, deference and order. The ODP socializes Liberians to conform. So the evolved political culture concentrates power, retains autocracy and empowers patronage to breed and sustain impunity, to obviate the rule of law.

Having established today’s governance architecture, the ODP underlies successive public finance management scandals, past and contemporary. The GOL is unwilling or incapable to expend the revenues it collects. For in a country with woefully inadequate basic infrastructure that virtually disappeared during some twenty five years, the GOL accumulated budget surpluses in the past two fiscal years.

As primary material export grew, public finances grew significantly but not the result of improvement in tax administration capacity. Corruption then led to diversion of payments to government remained a miniscule portion of profits that Concession Agreements allow them to repatriate freely. The increasing contributions to public finances accommodated the Open Door Policy in that collected “royalties” increased without the necessity of enhanced administrative capacity. Also, as the public financial resources grew, and with no law or institutional capacity for transparency, mismanagement of the enlarged resources also greased. Perhaps this assertion is understood in terms of extant politics.

The current and only public financial legislation is the IMF prescribed “2000 Tax Code” whose single purpose is revenue generation. Provisions of the 2000 Code violate the constitution in that it permits officers of the executive branch to waive taxes. Liberia has no Public Finance Management law similar to Ghana’s “Financial Administration Act 2003” (Act 654). Liberia does not publish exposure drafts of laws and there is no public office that sells public documents.

Severely limiting the economic base and hence public finances as it grew corruption government’s resulting virtual assimilation policy constrained the educational system. The educational curriculum is designed to produce bureaucrats but neglects training of farmers, artisans and craftsmen. Education promotes rote memorization, for financing R&D is abhorred.

The more than thirty regular and forensic audits of government agencies have invariably concluded that public resources were abused and wasted. Corruption is, in the words of the Auditor General of Liberia, is more than three times what it was even in the admittedly corrupt NTGL. Corruption is rooted in the mutual reciprocity of the ODP that does not allow the development of regulatory capacity; it proscribes the adoption and implementation of domestic preference rules, as its political culture undermines data unavailability.

Liberia’s Poverty Reduction Strategy (PRS) rests on the Open Door Policy. It restores exploitation of natural resources in enclaves, exported as primary commodities, phenomenal growth that had resulted in Growth without Development. The PRS posits strengthening governance and the rule of law as a major objective but half way into its term, Liberia’s first post-conflict government has yet to demonstrably initiate reforming governance. The tenure of elected officials is longer than in most ECOWAS member states. The settler constitution and laws repugnant to it remain valid, and Liberia has yet to demonstrably and effectively tackle the three major challenges impeding improved governance. Excessive presidential power remains non-delineated. Decentralization is disavowed and the legislature and judiciary not yet empowered.

The ODP’s response to capacity deficit reduction is importation of Diaspora cronies to compensate them with disregard for job titles and responsibility. Reliance on World Bank and IMF not unselfish, inappropriate advice continues. Absent rule of law stymies Liberia’s attractiveness as an investment destination, neglecting establishment of functioning standard organization.

Three years after the first post-conflict elections, Liberia still prepares a single year budget as it acknowledges the need to adopt the Medium-Term Expenditure Framework. The budget process remains non-participatory with Liberia missing most international benchmarks for public finance management. Donors fund international NGOs, a virtual parallel government whose programs remain uncoordinated and not harmonized with public strategies. Expenditures on these programs are much larger than those by the Government, but are unreported.

In the mid-1960s, Robert Clower et al concluded that Liberia’s ODP had led to growth without development. Their conclusion is explained by William Baumol and his colleagues in Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity: the FDI Liberia attracts is not industrial but merchant capital. Merchant capital inevitably leads to growth without development. Kosack and Tobin conclude similarly.

Excepting the Portuguese, Macmillan’s wind of change blew European colonizers out of West Africa without a fight, thanks primarily to the mosquito and other natural inhospitality. Despite the withdrawal, neo-colonialism strengthened its grip on West Africa. The incestuous relationship between the elites who succeeded the colonizers and the industrialized countries achieved colonizers’ policy objective. Elite rulers were handsomely rewarded through aid to which West Africa became addicted. BWI advice, inappropriate and provided pursuant to “one size fits all” by hosts of well funded planners sustained dependency. Not only have the ever changing prescriptions been inappropriate, the consistently distort the history of free trade and its role in pernicious globalization. West Africa imbibes distorted history of globalization, but recruitment of ex-BWI staffers continue ignoring unequal treaties and what Chang describes as “kicking the ladder away”.

Liberia and ECOWAS are prevented by rules imposed by the unholy trinity–the World Bank, IMF and the WTO, retain primary materials its major export, failing to adopt nationalistic policies. Liberia, a peculiar country, has a lot in common with the rest of Africa.

GOL purchases foreign debt but, unconcerned about domestic opinion, has said nothing about redeeming national savings bonds citizens purchased during the Samuel Doe regime.

References

Baumol, William J., Robert Litan and Carl J. Schramm (2007), Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity. New Haven and London: Yale University Press.

Chand, Satish and Ruth Coffman, “How Soon Can Donors Exit from Post-Conflict Countries?” www.centerforglobaldevelopment.

Chang, Ha-Joon (2007), Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. London: Bloomsbury Press.

Clower, Robert W. Clower et al. (1966), Growth without Development: An Economic Survey of Liberia. (Evanston: Northwestern University Press)

Goldberg, Jeffrey (1995), “A war without purpose in a country without Identity”. The New York Times, January 22, 1995, pp.36-39.

International Crisis Group, “Liberia: Resurrecting the Justice System”, Africa Report #102, 6 April 2006.

Cossack, Stephen and Jennifer Tobin (2006), “Funding Self-Sustaining Development: The role of aid, FDI and Government in Economic Success”, International Organization 60, Winter, pp. 205-243

Levitt, Jeremy I. The Evolution of Deadly Conflict in Liberia: From “Paternaltarianism” to State Collapse. Durham, North Carolina: Carolina Academic Press.

Liberia Governance Commission (2009), “National Policy on Decentralization and Local Governance (draft).”

Yoder, John C. (2003), Popular Political Culture, Civil Society, and State Crisis in Liberia. Lewiston, New York: The Edwin Mellen Press.

I make that case in a new article distributed by Project Syndicate, which appeared in The Guardian in late March.

My piece briefly explains why Africa’s financial “marginalization” helps position the region for better economic growth during the
crisis. My argument is positive fact-based, logical – and contrary to conventional wisdom about the Sub-Saharan region – that it is weaker, poorer and more fragile than other regions in the world. Everyday life in a major African city, such as Kampala or Accra, provides evidence for the pay-as-you character of African life, both for consumers and for owners of business. Because credit is hard to obtain, “leverage,” or the role of borrowed money in household expenditures and business operations, is far less than elsewhere in the world. So Africans are indeed much better prepared to survive a global “credit squeeze” than others.

The benefits of pay-as-you-go, during a credit crisis, would have to be undeniable even to the many professional pessimists on the subject of African development. The broader question is whether the slump in global demand will harm African economies. I don’t address this question in my Guardian column in part because the answer isn’t surprising.

Yes.

African countries who produce industrial materials will especially be hurt. So will oil producers of course. But producers of food and farm products should fare better, since demand for certain crops – rice, coffee, cocoa, maize and others – should not see price and demand declines in any way approaching those happening in, say, the diamond (Botswana), copper (Zambia) or oil (Nigeria, Angola) sectors.

My hypothesis, then, is that the heavily rural character of most African countries provides another ballast against any prolonged global downturn. The insight isn’t as prosaic as insisting that most African families, even those who live in cities, have a plot of land somewhere on which they can grow food for themselves. The upside for rural Africans, who already earning more money in areas without a civil war since any time since the 1960s, is bright. Even in a period of stagnant global industrial demand, the appetite for foodstuffs will not stagnate. The middle classes of India and China remain on a trajectory towards higher-value foods, a growing percentage of which will come from Africa. European consumption of African farm output has also grown sharply in recent years – and that trend should continue. Finally, the economic downturn may compel Western government, and even China, to begin withdrawing the cash and service subsidies to some of their own agriculture sectors. China, for instance, heavily subsidizes its cotton producers, who consume valuable and water that might go to higher-value activities. That Africa will grab a greater share of global agricultural output seems inevitable.

In the short run, African economies -– individual consumers and business alike — will benefit from their relative independence from debt. How costly will the commodities bust be for Africa remains an open question.

***

G. Pascal Zachary is the author of “Married to Africa,” a memoir (Scribner, 2009). Links to his publications on African affairs can be found at www.africaworksgpz.com. He has also published a column on this topic in the Globe and Mail.