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Africa’s Odious Debt: How Foreign Loans and Capital Flight Bled a Continent

Africa’s Odious Debt: How Foreign Loans and Capital Flight Bled a Continent. LEONCE NDIKUMANA JAMES K. BOYCE . Oslo, Norway 13 December 2011. ndiku@econs.umass.edu ; boyce@econs.umass.edu. Outline . 1. An international financial system plagued with perverse incentives.

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Africa’s Odious Debt: How Foreign Loans and Capital Flight Bled a Continent

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  1. Africa’s Odious Debt: How Foreign Loans and Capital Flight Bled a Continent LEONCE NDIKUMANA JAMES K. BOYCE Oslo, Norway 13 December 2011 ndiku@econs.umass.edu; boyce@econs.umass.edu Ndikumana and Boyce: Africa's Odious Debts

  2. Ndikumana and Boyce: Africa's Odious Debts

  3. Ndikumana and Boyce: Africa's Odious Debts

  4. Outline Ndikumana and Boyce: Africa's Odious Debts

  5. 1. An international financial system plagued with perverse incentives • In theory, everyone behaves honestly and acts diligently • Borrowers: public officials are expected to act on behalf of their countries; acting in good faith, they • borrow when benefits exceed costs • pursue the interests of their people • Lenders exercise due diligence • They lend when they, ex ante, expect borrowers to repay • They monitor the borrower’s behavior to maximize the chances of repayment Ndikumana and Boyce: Africa's Odious Debts

  6. In the real world … • Corrupt borrowers act in their own interests, embezzle the loan proceeds, leaving the people saddled with the debts • Greedy lenders turn a blind eye on illicit dealings by corrupt politicians Ndikumana and Boyce: Africa's Odious Debts

  7. An example: Capital flight from Zaire/DRC(2008) Capital flight, 1970-2008 (in 2008 dollars): $30 billion. Stock of capital flight (with imputed interest earnings): $48 billion. External debt: $12 billion. Ndikumana and Boyce: Africa's Odious Debts

  8. “Mobutu's villa has ripe lemons on its trees, extravagant floral arrangements in its stone urns, a black Mercedes in its drive, two pet sheep on its grounds, and a view over the shimmering sea to the high-rises of Monaco. It provides, in short, a perfect image of the fruits of three decades of absolute power in an African country bled to the bone.” -- Roger Cohen, “While Zaire Bleeds, Mobutu Rests on Cote d'Azur” New York Times, 9 November 1996. Ndikumana and Boyce: Africa's Odious Debts

  9. The Blumenthal report on Zaire/DRC (1982) ‘Any attempt to establish a more strict control of the budget is bound to fail because of one major obstacle: the Presidency… In this office, no distinction is made between state expenditures and personal needs.’ ‘Impossibility of control of frauds’ means that there is ‘not any – I repeat any – chance on the horizon that the numerous creditors of Zaire will recoup their funds.’ -- Erwin Blumenthal, ‘Zaire: rapport sur sa credibilité financière internationale’ (1982), quoted in Ndikumana & Boyce 1998. Ndikumana and Boyce: Africa's Odious Debts

  10. So why do the lenders keep signing the checks? • “Moving the money” • e.g., during 1984-94, the World Bank lent $4.6 billion to a Nigerian regime that “saw the most rampant corruption and governmental dysfunction in Nigerian history” (in World Bank experts’ assessment) • Exorbitant returns • e.g., the ‘yield’ on 1993 Occidental Petroleum oil-backed loan to the Republic of Congo was 467% • Export promotion • “Sovereign nations do not go bankrupt” (Walter Wriston, Citibank Chairman, 1995) • “Our good friend Mobutu, Bongo, …” … in the name of national interests Ndikumana and Boyce: Africa's Odious Debts

  11. Mobutu, the first African president to be received by President Bush… Ndikumana and Boyce: Africa's Odious Debts

  12. The borrower’s motives/incentives • On Africa’s soil, the “grabbing hand” works through: • Kickbacks on government loans • Padded procurement contracts • Direct transfers from public accounts • Financing “ghost” entities • On the other side of the “river”, the “helping hand” facilitates the moving of the money bag, … in the shadows of banking secrecy laws Ndikumana and Boyce: Africa's Odious Debts

  13. "It takes two to corrupt – the corrupter and the corrupted." - Joseph Désiré Mobutu, quoted in Bob Geldof, “A different crusade: Africa needs more than European platitudes,” Sunday Herald, 22 May 2005.   Ndikumana and Boyce: Africa's Odious Debts

  14. 2. Capital flight – measurement and magnitude • Further refinements: • Account for Debt Forgiveness (to compute change in debt); • Adjust for inflation (to compute real capital flight); • Impute interest earnings (to compute the stock of capital flight) Ndikumana and Boyce: Africa's Odious Debts

  15. Capital flight varies across countries… Ndikumana and Boyce: Africa's Odious Debts

  16. Africa is a ‘net creditor’ to the rest of the world! • Over 1970-2008: a total of $735 billion in real terms; $944 billion with interest earnings. • Export under-invoicing = $312 billion • Africa is a ‘net creditor’: capital flight exceeds the stock of debt by $757 billion • By comparison: • SSA’s total GDP = $1005 bn • Africa’s infrastructure investment over 10 years: $930 bn • wealth of Africa’s “High Net Worth Individuals”: $800 bn • Total ODA to the 33 countries over 1970-2008: $687 bn Ndikumana and Boyce: Africa's Odious Debts

  17. 3. The revolving door… The moral hazard problem ‘Sovereign nations don’t go bankrupt.’ - Citibank chairman Walter Wriston The principal-agent problem Ndikumana and Boyce: Africa's Odious Debts

  18. The twin problem of capital flight and external borrowing • Two-way relation: • External borrowing leads to capital flight: debt-fueled capital flight; debt-driven capital flight • Capital flight also induces external borrowing. • How much money spins through the revolving door? • About 60 cents out of every dollar borrowed every year • About 2-4 cents extra in subsequent years Ndikumana and Boyce: Africa's Odious Debts

  19. Who owes whom? Ndikumana and Boyce: Africa's Odious Debts

  20. 4. Capital flight imposes heavy human costs on Africans At the Brazzaville main teaching hospital … elevators are out of service… piggyback rides cost $2 a flight each way… only the morgue operates at full tilt… Ndikumana and Boyce: Africa's Odious Debts

  21. The African child’s unfortunate inheritance: indebted before birth! Ndikumana and Boyce: Africa's Odious Debts

  22. The servicing of odious debt kills African babies… • Each year, one million of under-five children die from malaria worldwide: 75 percent of these are Africans • Many African countries pay more on debt service than on health care: • servicing odious debt indirectly kills African children • an estimated 77,000 infant deaths/year are attributable to servicing odious debt • Ironically the richest African dictators can’t find a clinic at home when they most need it: • Mobutu (Congo) died in a Moroccan hospital; Bongo (Gabon) died in a Barcelona hospital; Ndikumana and Boyce: Africa's Odious Debts

  23. 5. What is to be done? Ndikumana and Boyce: Africa's Odious Debts

  24. Addressing the problem of capital flight • Promote non-debt generating financing • Stolen asset recovery • Curtail money laundering: enforce existing laws • Tackling tax transparency – tax havens • Strengthen transparency: • ‘Publish What You Lend’ – aid transparency • ‘Publish What/Where you Invest’ – corporate investment transparency • Repudiate odious debts: • Attack the foreign loans-capital flight nexus • The onus should be placed upon creditors to demonstrate that their loans were used for legitimate purposes Ndikumana and Boyce: Africa's Odious Debts

  25. Sovereign Debt Onerous Debt Virtuous Debt Odious Debt Imprudent Debt Criminal Debt Despotic Debt Types of Sovereign Debt Ndikumana and Boyce: Africa's Odious Debts

  26. Much of Africa’s past debts can be considered as ‘odious debts’ The doctrine of ‘odious debt”: The “classical” Sack (1927) definition: • Consent: public debt contracted without the consent of the people. • Benefit: the public did not benefit from the loan. • Creditor knowledge: the lenders knew – or should have known – these facts. Ndikumana and Boyce: Africa's Odious Debts

  27. There is strong basis for the ‘odious debt’ argument • The principle of domestic agency: • “The very power of making binding commitment for another person carries with it the special responsibility of acting in the interest of that person”: African rulers (the agents) often did not act in the interest of their people (the principal) • Crime of assisting an ‘agent’: • A third party can be held liable for assisting an agent in the breach of his obligations towards his principal: The bankers of African rulers are guilty of shared responsibility for ‘criminal debt’ Ndikumana and Boyce: Africa's Odious Debts

  28. Burden of proof The burden of proof should lay on the lender, not the borrower, to show how the money was used Ndikumana and Boyce: Africa's Odious Debts

  29. Success will require close synergies between: Ndikumana and Boyce: Africa's Odious Debts

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