Africa’s battles with capital flight and unjust debt

THE global financial turmoil has dominated the international agenda for a couple of years now and there is hardly a clear way out of the crisis.

The fact that most developed economies especially in Europe are experiencing these financial meltdowns creates a whole new dynamic in international money-flow, be it debt or investment.

The obvious conclusion would be that the developing countries would in the end suffer more as the big donors/financiers have somewhat become basket cases themselves. Or is it the case that Africa will suffer more if its outmanoeuvred again as the developed world desperately seeks new means of plundering the world’s poorest continent.

However, the economic meltdown in developed countries may well be creating a new opportunity for developing countries as they suddenly look not so risky after all.

Indeed, the key question now is whether the global economic crisis ushers a new era of reverse capital flight, reduced indebtedness and brain gain. Will Africa ever a have a better chance to reform and achieve good governance, transparency, accountability and political stability that can, not only, retain but also attract new financial and human capital?

Still, Africa needs to achieve democratisation that attracts professionals into politics. The idea of politics being a risky adventure is not sustainable and Africa cannot afford it anymore. African politics needs to move from a violent discourse to a being market for ideas and engagement where professionals feel safe to partake.

The poorest countries of the world have for too long been on the on the receiving end of a skewed world order designed to milk them while giving an impression of support and help.

The world’s poorest continent is by far the world’s richest in terms of natural resources and this will probably remain the case for generations partly because of poor governance and induced destabilisation which creates a conducive environment for natural resources looting by the developed world as well as facilitating capital flight and brain drain.

In November 2011 a research by Canadian scientists, led by Edward Mills, chair of Global Health at the University of Ottawa, revealed that Sub-Saharan African countries that invest in training doctors end up losing US$2billion as the expert clinicians leave home to find work in more prosperous developed nations. The findings suggested the benefit to Britain was around $2.7 billion, USA US$846 million, Australia US$621 million and Canada about US$384 million.

Whilst Africa’s problems cannot be entirely blamed on an unjust world order it should be noted that while African suffers under the yoke of extortionate debts it has and continues to advance free capital to the developed world.

As noted by L. Ndikumana and J. Boyce, in their new book Africa’s Odious Debts, “The magnitude of African capital flight is staggering both in absolute monetary values and relative to GDP. For the thirty-three sub-Saharan African countries for which we have data, we find that more than $700 billion fled the continent between 1970 and 2008.

“If this capital was invested abroad and earned interest at the going market rates, the accumulated capital loss for these countries over the thirty-nine-year period was $944 billion. By comparison, total GDP for all of sub-Saharan Africa in 2008 stood at $997 billion.”

This means that the cumulative stock of capital flight from the thirty-three Sub-Saharan countries stood at $944 billion in 2008, compared to external debts of $177 billion. By this measure, these countries had positive net external assets to the tune of $767 billion. In other words, the rest of the world owes more to these African countries than they owe to the rest of the world.

This suggests that Africa could expunge its entire stock of foreign debt if it could recover only a fraction of the wealth held by Africans in foreign financial centres around the world. Sub-Saharan Africa, location of the poorest countries in the world, has generated net capital outflows for decades. One could, with small a exaggeration, say that for a generation Africa has provided aid to the United States and Western Europe.

The $944 billion estimate of the cumulative stock of African capital flight closely matches the total wealth of Africa’s high net worth individuals (HNWIs) as reported in World Wealth Report, an annual publication of the financial services firms Capgemini and Merrill Lynch Global Wealth Management which tracks the holdings of HNWIs around the globe.

The report defines HNWIs as people with investable personal assets of $1 million or more. The total wealth of Africa’s HNWIs peaked, according to this source, at $1 trillion in 2007 before slipping to $800 billion in 2008 as a result of the global financial crisis.

The sickening reality for Africa is that the assets accumulated by means of capital flight are private, while the external debts are public liabilities owed to the creditors by the people of Africa through ‘their’ governments.

Millions of Africans are desperately poor. But the continent is rich. According to the World Wealth Report, the continent had roughly 100,000 high net-worth individuals in 2008, twice as many as a decade before. Of these, about 1,800 were ‘ultra-high net-worth individuals’, with at least $30 million each in investable assets.

Together these rich Sub-Sahara Africans held about $800 billion in investable assets in 2008. Nigeria tops the list at US$296 billion followed by Angola US$72 billion. South Africa is fourth at US$36 billion and Zimbabwean is ninth at US$23 billion. In the case of Zimbabwe, total capital flight over the period was equivalent to 807 per cent of 2008 GDP.

Compared to other regions, African private wealth holders exhibit a stronger preference for foreign assets as opposed to domestic assets. If you can officially make your money in Africa how does it become unsafe to keep it invested in the same continent, one may ask?

According to a study by researchers at the World Bank and IMF, an astonishing 40 per cent of Africa’s total private wealth was held abroad as flight capital in 1990. The corresponding figure for South Asia was 5 per cent. For East Asia it was 6 per cent, and for Latin America 10 per cent.

Sub-Saharan Africa and South Asia had similar levels of total private wealth per worker, but in sub-Saharan Africa capital flight amounted to $696 per worker whereas in South Asia it was only $90 per worker. As a result, private domestic capital per worker in Africa was less than 60 per cent of what it was in South Asia.

The preference for foreign assets and aversion to domestic investment comes at a high opportunity cost to African economies. In the case of legally acquired assets, the continent is deprived of the gains that would accrue from investment at home, not only losing income and jobs, but also forgoing government revenue that could fund public services.

In the case of illegally acquired assets, African countries lose twice: first, they are robbed through fraud and embezzlement; then they are further deprived of any benefits that would trickle down if the loot were invested at home.

Whilst Africa’s elite externalise national capital, national governments increasingly borrow at extortionate rates to sustain public services. Interestingly, according to Jubilee Debt Campaign, since1980 Zimbabwe has been lent US$7.7 billion, has repaid US$11.4 billion yet the country is still said today to have a debt in excess of US$7 billion.

Africa is bleeding money, as capital flows into the private accounts of African elites and their accomplices in Western financial centres. At the same time, the continent is in dire need of financing.

For Africa to overcome widespread and extreme poverty, it needs sustained and sustainable economic growth. This will require very large increases in the levels of domestic investment, especially in infrastructure.

The Millennium Development Goal (MDG) of halving extreme poverty by 2015 remains elusive for much of Africa. The MDG Africa Steering Group estimated in 2008 that for Africa to achieve this and related development goals, public external financing would have to increase by $72 billion per year in the medium term Were Africa able to recoup only a fraction of what it has lost in capital flight, this would go a long way towards filling this gap.

Whilst the world undergoes a massive economic turmoil maybe this is a window opportunity for Africa to clean up its act and present itself a safe destination of world capital. For capital flight is just but a symptom of the continent’s multitude of problems stemming from political instability, greedy, poor governance to lack of accountability. God save Africa!