Should Africa Repay its ‘Odious’ Debts?
Monday, October 24, 2011
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. A new book titled Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent begins its conclusion with the following. During the past four decades, sub-Saharan Africa has experienced a financial hemorrhage. We estimate that from the thirty-three countries for which we have data, capital flight between 1970 and 2008 amounted to $735 billion in 2008 currency. Including imputed interest earnings, the drain of resources amounted to $944 billion. These sums far surpass the same countries’ combined external debts, which stood at $177 billion in 2008. This means that sub-Saharan Africa is a net creditor to the rest of the world. If this is true, why are so many of Africa’s people so poor? The answer, of course, is that the subcontinent’s external assets are private and in the hands of a narrow and wealthy stratum of its population, whereas its external debts are public and therefore borne by the people as a whole through their governments. Our statistical estimates indicate that half or more of the money flowing into Africa as foreign loans exited in the same year as capital flight. Now joining us are the authors of the book: Professor Leonce Ndikumana, who teaches economics at the University of Massachusetts Amherst and is a research associate at the PERI institute, and Professor James K. Boyce, director of the Program on Development, Peace Building and Environment at PERI institute. Thank you both for joining us.
JAMES K. BOYCE, DEVELOPMENT, PEACEKEEPING AND ENVIRONMENT PROGRAM, PERI: Thank you for having us, Paul.
LEONCE NDIKUMANA, PROF. ECONOMICS, UMASS AMHERST: Thank you very much.
JAY: So this is the beginning of what’s going to be a three-part series. In part one, we’re going to talk about the roots of this debt crisis in Africa. In the second part, we’re going to talk about the human costs of the crisis. And in the third part, we’re going to talk about solutions and just what the word "odious debt" refers to. So, Leonce, can you give us some background on what you mean by this odious debt, some of the historical roots of this debt?
NDIKUMANA: The simple way to think about the historical root of the issue of odious debts in Africa is that African countries have–at least they thought they were counting on the rest of the world to help them finance development, whereby they borrowed money or their governments money from lenders, private and public, which were, arguably, intended to finance projects. But in practice, a large amount of the money that was borrowed by African governments never financed any of the projects, the intended project. In contrast, the money ended up in private pockets of government officials with the help of the financiers, the private–the banks, whereby the government officials deposited the proceeds of the loans sometimes in the same bank that issued the loan to the government. And then you have a situation where the development projects are not being financed, but at the same time, the people of African countries are saddled with servicing these same debts.
JAY: James, a lot of this took place in the years that you studied during the Cold War. You looked, I believe, at from 1970 to 2008. And much of this was part of a Cold War strategy of installing and supporting dictators, a strategy by the US and the West in the name of fighting the Cold War, although it was also, I think, a large–to do with with the scramble for the riches of Africa. In your book you begin with the sort of poster boy for this kind of strategy, Mobutu, in the Democratic Republic of Congo, which he renames Zaire. Can you give us a bit of that background?
BOYCE: Sure, Paul. By the early 1980s it was very, very well known in the international community and in the banking community that the Mobutu regime in Zaire was thoroughly corrupt. In response to the problems of corruption there, the International Monetary Fund, or IMF, took the very unusual step of installing its own team of experts in the Central Bank of Zaire to try to clean things up. By 1982, the team had written its report and gone home in disgust. And in its report, Erwin Blumenthal, who headed that team, said that there was no chance at all that the creditors would ever be able to recover their loans to the government of Zaire. The money was down the drain. Despite that, creditors continued to lend money. Although the private bankers were getting increasingly nervous, the official creditors, the governments of the West, the international financial institutions, continued to lend money to Zaire. And by 1989, the debt had grown, and the Mobutu regime was facing a financial crisis, because the interest and debt service payments that were due on past loans were no longer fundable with the money that was continuing to come from the increasingly nervous creditors. In ’89, Mobutu flew on the Concorde jet, the supersonic jetliner (he had build a runway for that jet in his home village in the northern part of the country), flew to Washington DC, where he was the first African head of state received by President George Bush in the White House. Mobutu was coming basically in order to tap his old friend, Mr. Bush, who he’d known for a number of years, in hopes that more financial assistance would be forthcoming for his corrupt regime. Bush accommodated. At the meeting in the White House, he announced that the IMF would be making a new loan to Zaire. The World Bank followed shortly with additional money as well. This is years after the Blumenthal report had thoroughly exposed the corruption of the regime, at a stage where nobody, no private creditor in their right mind would have been lending money to this particular government. Why did they do it? Well, it’s very hard not to see the geopolitical motives here. Mobutu was often praised in Washington by President Reagan before President Bush as one of America’s great friends in Africa. And what that meant was that in the Cold War contest between the US the Soviet Union, Mobutu was considered a reliable ally, and all of his financial crimes were overlooked in the name of supporting that alliance.
JAY: Right. It’s not a problem he’s a dictator and it’s a kleptocracy, as long as it’s, quote, our dictatorship and kleptocracy. And I guess just to quickly remind people that don’t remember, Mobutu came to power as a result of a CIA-backed coup overthrowing Patrice Lumumba, who was a legitimately elected prime minister. Leonce, Mobutu’s not unique in this story, though. What are some of the other examples that still repercussions exist today?
NDIKUMANA: The story of Mobutu is not unique. In fact, you find, because of the underlying motives, both financial and political-strategic, you’re dealing with a financial system with very perverse incentives, whereby the bankers have the incentives to keep lending because they have–they generate the profits. In fact, they make the profit on the loans themself: they make the profits on the deposit of the stolen money. You have the official lenders who have the motives of keeping the lending going to support their allied regimes. So political motives sustain this lending, although, as Jim has indicated, in some cases you have clear evidence that the money is being embezzled, it’s not being–is not finding the development project. We have heard–we have–many [incompr.] have read in the news about massive amount of money that have been stolen from Nigeria by governments of–past governments and the Abacha regime. The government have–the country has never been able to recover a fraction of those stolen loans. In all these cases, it’s a combination of stealing foreign external–the proceeds of external borrowing, but also it’s a story of embezzlement of the proceeds from natural resources, as in the case of the Congo, especially in natural resource rich countries, you have a lot of money that goes missing because of the [incompr.] invoicing between the sellers and the buyers. And with these huge deals, in very complex contracts, where government official–African governments many times find themselves at the short end of the deal because of lack of capacity, the opacity of the nature of the transactions, and massive amount of wealth then is channeled out of the country. So the Congo is not alone, and Mobutu is not the only one that can be identified as having been responsible for bleeding and the hemorrhage of the–the financial hemorrhage that the continent has suffered.
JAY: And when we talk about the amount of capital flight in comparison to the entire external debt, we’re talking to a large extent, you know, dictators, their families, and the loyal elites parking their money in Swiss bank accounts and other safe havens. So these are individuals that have enriched themselves with billions of dollars they’re sticking in these accounts. And I urge people to get this book, because it’s a good narrative of this, but also the data is very rich. But, James, it’s not just about parking money. The banks that loan this money to, like, Mobutu and others like him, they knew not only was this going to be individually put in their pockets, but that a lot of this money was going to be spent in arms. And arms manufacturers and sellers were a big piece of this whole story. And as we know in the Congo, it led to millions of deaths. Maybe you can speak a bit about that.
BOYCE: Yeah. I mean, one of the motives–there are a number of motives that explain why lenders would be providing money for projects of dubious merit, uses of dubious benefit to the population of the recipient countries. And one of the motives, as you mentioned, Paul, is that in some cases these loans were intended to finance imports of weapons or of other materiel from companies that were themselves clients of the lending banks. So that segue between lending money and then the money flowing back into purchases from bank clients is one piece of the story. Another important piece, however, is that if you think about the incentive structures for the loan officers in the banks, the way that they are rewarded, the way that they’re promoted is above all based on how quickly they can move the money, how quickly they can get the money out the door. And there’s a good reason for that, or I suppose you could say it’s a bad reason, but it’s a reason, which is that the ways that banks make their profits are twofold. One is by charging fees or commissions on the initial transactions, just like when you take a mortgage on your house, often you pay points, loan origination fees. The other is by the spread between what the bank charges in interest and what it pays to the depositors that are providing capital to the bank. Well, unlike the spread, which takes years to materialize and pay back, the fees are bookable as profits on the bottom line of the bank in the same quarter that those fees are received. And so from the standpoint of a myopic institution, which many institutions are, those upfront fees become a very important motivator for doing business and a very important piece of what people get rewarded for doing. The result of that is that a lot of loans get made for purposes that are really very risky at best, sometimes just utterly dubious. So this is a theme that you find not only in the lending to Africa, where loans were made for bogus projects, for projects with inflated price tags, for purposes where the money was basically cycling back out through this revolving door, linking borrowing and capital flight. You can also find this same phenomenon of irresponsible lending being driven by the incentives to book those fees and get those promotions and bonuses at the root of the subprime crisis that broke out in the United States in 2008; you can find it in many of the financial problems in Europe today, where again irresponsible lending fueled booming real estate markets in countries like Ireland and Spain, where again ultimately the bubble pops and the taxpayer ends up holding the bill.
JAY: Well, in the next part of our interview, let’s talk a little bit about the ongoing cost of this odious debt. I mean, it’s bad enough that these kleptocratic dictators pocketed all this money and that the banks made all these fees, and it’s bad enough so much of it went to spend on military expenditures, but the real cost is in the years afterwards, which is servicing this odious debt. And in part two of our series, we’re going to drill into that. Thank you both for joining us. And thank you for joining us on The Real News Network.
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