Africa is a Creditor to the World
Capital flight from Africa, especially the illicit kind, is a far larger drain on the countries of the continent than previously thought and exceeds foreign loans and investment flows. PERI’s Leonce Ndikumana discusses his research findings
GREG WILPERT: It’s The Real News Network, and I’m Greg Wilpert.
Africa remains a relatively poor continent, despite decades of economic development, international aid and investment, and countless economic reforms. The reason for this may be the unfair trade conditions that incentivize investors and wealthy individuals to take their money out of the developing economies in Africa, and into the global North. This phenomenon is known as capital flight. The Political Economy Research Institute, PERI, is one of the few research institutions that has developed systematic analysis of the scope of this capital flight.
At The Real News, we have discussed previous PERI publications that deal with capital flight from Africa. But a new report that has just been published by PERI and authored by Leonce Ndikumana and James Boyce reveals previously unknown facts about the rate and importance of capital flight. Perhaps the most striking fact is that capital flight from 30 selected countries in Africa over the past 45 years has exceeded the total amount of foreign private investment and international aid into these countries. If this money had been properly registered and taxed according to the laws of these countries, those countries would have no external debts today, but would actually be net creditors.
Joining me to discuss Africa’s capital flight is one of the report’s authors, Leonce Ndikumana. He’s a professor of economics at the University of Massachusetts Amherst, and the director of the African Development Policy Program at PERI. Thanks for joining us today, Leonce.
LEONCE NDIKUMANA: Thank you very much for the opportunity to talk to you.
GREG WILPERT: So the fact that capital has been fleeing Africa for a long time now might not be that surprising to people who pay attention to Africa. But what in your mind is the most unexpected finding and important finding in your analysis of Africa’s capital flight problem?
LEONCE NDIKUMANA: Yes, thank you very much. That’s an excellent question. I think to understand, to understand why that’s an important question it’s important to remind our audience the context and the background. And that context has a number of features that I would like to reemphasize. One is that today, when you look at the African continent and African economies in general, they look very different from what they were 20 years ago. I mean, we’re talking about a continent that has seen much higher growth rates, especially since the turn of the century. It has seen massive improvement of the macroeconomic environment. We know that talking about the hyperinflation eras, and so on. And it has seen improved additional democratic governance, political stability, and the like.
And so that would signal to you an environment where investment is likely to produce higher returns, which will attract both domestic investment and foreign investment. At the same time, we’re talking about a continent that’s still lagging behind in terms of basic indicators of development, including poverty. Many [countries] are going to be high poverty levels. So it’s the only continent, I believe, where the number of poor people keeps rising, even though the poverty rate is declining.
So basically you see a picture of a continent where there are many things going positively, but also a number of challenges that need to be, to be addressed. and one of the biggest which means that the continent needs to accelerate it growth, needs to be increased investment in many, many areas, many sectors, including infrastructure and public services. And the biggest challenge now is that the continent does not have enough financial resources to meet the massive demands.
And one of the reasons is that the continent has not been able to keep its own resources on shore. Most of the time we analysts tend to jump on the idea of increasing aid, increasing foreign, attracting more foreign direct investment. But our analysis shows that that would not help. As money comes into the continent, more money is leaking out of the continent in the form of capital flight. So the striking factor of all of this phenomenon is that a continent that’s seen massive improvement in terms of the economic environment is at the same time seeing an acceleration of capital flight money out of the country. That’s contrary to the basic economics, as defined as where you would imagine the improved conditions in Africa would attract more money to Africa, rather than chasing money, seeing money out of the continent.
Which means that the phenomenon that we are describing is really not motivated by your basic, traditional portfolio management, where people move money across borders to seek higher returns to investment. That’s not the case. It is the, what is happening is that the money that’s leaking out of the continent is motivated by illicit means, illicit motives, where either the origin of the money is questionable, it’s not legal, and the owners of these assets want to hide it away from the from the prosecution, from the legal authorities. Or, for various reasons, the owners of these funds are not recording with the authorities how the money is being invested abroad; mainly, probably because they don’t want to have to pay taxes, to clear up where that money is going, and declare where they acquired the money.
So we’re dealing with [inaudible] that’s not been, that cannot be explained by simple financial calipers of return maximization, risk minimization. It’s a fundamental that has to be explained by other things, like corruption, embezzlement of natural resources, avoiding [inaudible] environment, tax evasion and tax avoidance. All these phenomena allow us to get a bit closer to understanding why is it that a continent that’s doing otherwise so well, in terms of making progress on various margins, keeps losing more money every year, to the point of making it this ironic situation of being a net creditor to the world.
GREG WILPERT: [Crosstalk] Sorry. I just want to dig a little deeper into some of these issues. For example, looking at the long-term trend of capital flight, adjusted for inflation, your suggest that in non-oil rich countries the rate of capital flight is relatively steady. But in oil-rich countries it is increasing at an alarming rate. Nigeria, for example, stands out as an oil-rich country with capital flight that is enormous, both in absolute numbers and as a proportion to its GDP. What is your explanation for this? Why are all rich countries losing capital faster than others? And does this have something to do with the distinction that you make between licit and illicit capital flight?
LEONCE NDIKUMANA: That’s an interesting observation which we have found in even our previous studies. We find that even as capital flight keeps increasing in general in African countries, the phenomenon is even worse in oil-rich countries. And one would have to ask the question: Why is it that oil-rich countries in Africa are more exposed to capital flight? One of the things that happen, that is also interesting, if you look at other resources like minerals, and so on. It’s not the case that all mineral resource-rich countries have seen high capital flight. Botswana doesn’t have a high capital flight, even though it’s one of the dominant producers of diamond. So our guess is that it has to do with the way resources are managed. It has to do with the institutional environment in the country where the resources are being exploited, which has to have- which has implications on how trade is managed, trade is recorded.
In many in those countries it simply means that the problem is that some of the oil is exported without being recorded. Some of the revenues do not get back to the country. And it is through a fundamental which is called export misinvoicing. So that’s what, it’s not that oil is so different from other products. It’s that just this happens that the countries which have the largest amount of oil in African countries also have very poor governance institutions. We’re talking about Nigeria, Angola, Gabon, Congo. These are countries that also are on the tail end of the lower scale in terms of the quality of governance.
GREG WILPERT: OK. I just want to turn now to your conclusion that the 30 African countries in your study are, in fact, net creditors. The stereotype normally is that the developing countries, especially in Africa, are collapsing under the burden of foreign debt. So how do you come to the opposite conclusion? And perhaps more importantly, how can these countries claim their credit, which emerges from what you say is mostly illicit capital flight?
LEONCE NDIKUMANA: Yes. So again, the paradoxical phenomenon, situation that we see in African countries is that they seem to have to be sending more money abroad than they are receiving, which contradicts the classic view that African countries as being developing countries; they are actually aid recipients, they drain the resources of donor countries. In fact, if you compare aid to capital flight, there is a vast difference in the fact that capital flight exceeds aid; capital flight exceeds the external borrowing that countries have incurred; capital private seed, or private financial flows, in terms of FDI, in investment.
In a sense, if African countries were able to keep the resources that they have collected, they will not need more aid. They will not need to borrow more money. They will be able to fill the gap, to meet the financing needs in their economies. The message is that, in fact, in terms of trying to fill the financing gap by seeking, seeking more external resources, the priority should be on how to stop, how to prevent, how to curtail further capital flight. That should be the primary focus. Which means that the question is about how the governments manage the money that comes into the country, how governments manage the exports of their mineral and oil resources. It’s about transparency, or public resource management.
The government first has to be more transparent, and also we need to see more transparency in trade transactions and financial transactions. And on that point, the burden is not just on Africa and African countries and governments. It’s also on the role of the global community, because in the end, the money that leads out of the African countries, the money that flees African countries is not in Africa. It is outside of Africa. So if we need to, we have to make progress, the banking system globally has to be more transparent. We need to be systematically reporting of where the money is coming from, and who is the person with the money. We need to see more transparency in the way corporate, megacorporations and national corporations pay taxes, where they should be paying more taxes when they undertake activities.
Because it’s not acceptable to see that in African countries which are rich in mineral resources and oil resources, they lag behind in terms of revenue or possession. You cannot explain, for example, how Nigeria, being a rich country, the second, the first, largest economy on the continent, is mobilizing less than 10 percent of its GDP in taxes. It does not make sense. It means that there are lots of activities that go untaxed. And those include activities or matters of corporations. Many of them, some of them, operate in the oil sector.
So I think the changes have to be both at the Africa level, where there has to be more transparency and accountability in both trade, investment, and finance. But also at the global level more transparency and accountability in banking and trade transactions.
GREG WILPERT: OK. Well, we’re going to have to leave it there. I was speaking to Leonce Ndikumana, professor of economics at the University of Massachusetts Amherst, and co-author of the report Capital Flight from Africa. Thanks again, Leonce, for having joined us today.
LEONCE NDIKUMANA: Thank you very much.
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