Gaming, naming and shaming “licit financial flows”
“Foreign Direct Investment (FDI) is always prefaced with the two words ‘much needed,’” my colleague Sarah Bracking insisted last week at a Zimbabwe NGO conference. “Have you ever heard FDI referenced without those two words?” We all shook our heads.
The meeting in Harare was dedicated to fighting illegal capital flight from across the African continent. But would some of the region’s sharpest economic-justice NGOs take the next step and also consider fighting legal financial outflows—in the form of profits and dividends sent to TransNational Corporate (TNC) headquarters, profits drawn from minerals and oil ripped from the African soil?
In other words, in this neoliberal era, can a more general case be made against TNCs based on their excessive profiteering and distortion of African economies? If so, are exchange controls the easiest antidote, prior to nationalization and socialization?
To do the latter requires a profound social revolution, with the current leaders of all Africa’s present governments swept away. Meantime, the question is whether enforcing patriotism on the business elite is possible using policies like exchange controls. That less intimidating challenge was mine to argue.
The worst FDI tends to come solely in search of raw materials, but commodity prices have been crashing over the past year: oil by 50%, iron ore by 40%, coal by 20%, and copper, gold and platinum by 10%. Far greater falls can be traded to prior peaks in 2011 and 2008. Far worse is to come as China devalues its economy.
Commodity Price Crash
Source: Reserve Bank of Australia
The slowing of FDI inflows is promising in part because the so-called 2002-11 commodity “super-cycle” appears definitively over, so the extractive industries’ extreme pressures on people and environments will probably slow dramatically. Although traumatic job losses are on the cards—Anglo American last week announced a third of its South African mining jobs will soon be shed—that could also mean less financial looting of Africa. My argument to the conference proceeded through seven points.
1) Illicit Financial Flows
First, the category of so-called “illicit financial flows” (IFFs) reflects many of the corrupt ways that wealth is withdrawn from Africa, mostly in the extractives sector. These TNC tactics include mis-invoicing inputs, transfer pricing and other trading scams, tax avoidance and evasion of royalties, bribery, “round-tripping” investment through tax havens, and simple theft of profits via myriad gimmicks aimed at removing resources from Africa. Examples abound:
- In South Africa, Bracking and Khadija Sharife did a study for Oxfam last year showing De Beers mis-invoiced $2.83 billion of diamonds over six years.
- The Alternative Information and Development Centre showed that Lonmin’s platinum operations—notorious at Marikana not far from Johannesburg, where the firm arranged a massacre of 34 of its wildcat-striking mineworkers in 2012—has also spirited hundreds of millions of dollars offshore to Bermuda since 2000.
- The Indian mining house Vedanta’s chief executive arrogantly bragged at a Bangalore meeting how in 2006 he spent $25 million to buy Zambia’s Konkola Copper Mines, which is Africa’s biggest largest, and then reaped at least $500 million profits from it annually, apparently through an accounting scam. Zambian communities are this week in London courts trying to halt Vedanta’s KCM toxic pollution and at seven protest sites across the world last weekend, the vibrant Foil Vedanta movement showed how inspiring the networked transnational activists can be. The firm’s share price has fallen 61% this year and its critics can claim at least some credit.
The most profound analysis of IFFs at continental scale is being done by Burundian political economist Leonce Ndikumana, a professor at the University of Massachusetts-Amherst. He presented his latest work here, on how Africa is both “more integrated but more marginalized.”
In addition to these tireless researchers and activists, there are also policy-oriented NGOs working against IFF across Africa and the South, including several with northern roots like Global Financial Integrity, Tax Justice Network, Publish What You Pay, and Eurodad. IFFs represent one of those trendy linkage topics that give hope to so many who want Africa’s scarce revenues to be recirculated inside poor countries, not siphoned away to offshore financial centres.
The implicit theory of change adopted by the head offices of such NGOs often strikes me as touchingly naïve, if they argue that because transparency is like a harsh light that can disinfect corruption, their task is mainly a matter of making capitalism cleaner by bringing problems like IFFs to light.
To their credit, the NGOs and allied funders and grassroots activists generated sufficient advocacy pressure to compel the African Union and UN to commission an IFF study led by former South African president Thabo Mbeki. Reporting a few weeks ago, and using a conservative methodology, his estimate is that IFFs from Africa exceed $50 billion a year.
The IFF looting is mostly—but not entirely—related to the extractive industries. In an even more narrow accounting than Mbeki’s, the United Nations Economic Commission on Africa estimated $319 billion was robbed from 2001-10, with the most theft in metals, $84bn; oil, $79bn; natural gas, $34bn; minerals, $33bn; petroleum and coal products, $20bn; crops, $17bn; food products, $17bn; machinery, $17bn; clothing, $14bn; and iron and steel, $13bn.
2) From IFFs to LFFs
But second, even if IFFs were reduced, there’s another reason that FDI leaves Africa much poorer: what I term Licit Financial Flows (LFFs). These are legal profits and dividends sent home to TNC headquarters after FDI begins to pay off. They are hard to pin down but can be found within what’s called the “current account,” along with trade.
So to find out, strip out trading: according to the International Monetary Fund’s (IMF’s) database, the last fifteen years or so witnessed mostly evenly-balanced trade between Sub-Saharan African countries and the rest of the world, with a slight surplus (more exports than imports) from 2000-2008, and then a slight deficit, growing in 2014.
Africa’s rising debt, trade deficit and current account deficit
Source: International Monetary Fund
The current account measures not only whether imports are greater than exports, but also the flows of profits, dividends and interest. Africa had a fair balance (and even in 2005-08 a surplus) but since 2011 has rapidly fallen into the danger zone, with a current account deficit at 3.3% of GDP last year. The continent’s two largest economies—Nigeria and South Africa—are in especially bad shape – due partly to crashing mineral and oil prices in a context where TNCs take home way too many profits.
3) FDI in retreat
Third, the legal LFFs are volatile, no more so than Africa where FDI has fallen from its $66 billion peak annual inflow in 2008 to a recent level around $50 billion. That’s not only thanks to shrunken global commodities markets and the end of the Chinese growth miracle. The UN Conference on Trade and Development (Unctad) also records a sharp rise in “new national investment policies that are restrictive” since 2001, though cargo-cult Africa has been slow to keep up with that trend.
Then there’s the overall problem of capitalist crisis as it appears in 2015: what we Marxist political economists term capital’s worsening “overaccumulation,” or glutting of markets. (Das Kapital spelled it out and David Harvey is the best guide.)
As a result, nearly everywhere, FDI is in retreat, with 16% less flowing globally in 2014 than in 2013, according to Unctad’s new World Investment Report. In 2008, 2009 and 2012, there were also impressive double-digit declines in the rate of FDI growth from the prior year. This is potentially very good news for those concerned that TNCs loot through LFFs, in Africa and everywhere.
4) Foreign debt explodes
Fourth, getting back to the danger zone in Africa, the current account deficit in turn requires that state elites attract yet more new FDI, so as to have hard currency on hand to pay back old FDI, or to take on new foreign borrowings so as to make payments on home-bound TNC profits and dividends. So as to make those payments, foreign debt is soaring. For Sub-Saharan Africa, what was a $200 billion foreign debt from 1995-2005 (when G7 debt relief shrunk it 10%) is now nearly $400 billion.
In South Africa’s case alone, the debt soared from the $25-35 billion range then to nearly $150 billion today, i.e. from 20% of GDP in 2005 to more than 40% now. The last time this ratio was reached was in 1985, and the result – thanks also to anti-apartheid activist sanctions pressure against foreign bankers – was that apartheid president PW Botha was forced to default.
South Africa’s emerging debt crisis
Source: Reserve Bank of South Africa
5) Exploitation also comes from within Africa
Fifth, more nuance is important in terms which firms are doing the looting. It’s not just the Western TNCs, which looted this continent for centuries. The single biggest country-based source of FDI in Africa is internal, from South Africa.
In June, the South African Reserve Bank revealed that Johannesburg firms were in 2012-14 drawing in only half as much in profits (“dividend receipts”) from their overseas operations as TNCs were taking out of South Africa. But that was a step-up from the 2009-11 period when local TNCs pulled in only a third of what foreigners took out. It seems that Johannesburg companies have been busier looting the rest of Africa.
That’s not good news, because it means a dozen companies with Johannesburg Stock Exchange listings draw out excessive FDI profits: British American Tobacco, SAB Miller breweries, the MTN and Vodacom cellphone networks, Naspers newspapers, four banks (Standard, Barclays, Nedbank and FirstRand), the Sasol oil company and the local residues of the Anglo American Corporation empire.
The result is the systematic internal looting of Africa by South Africa. There’s no better example than the little shops near the Harare hotel where I’m staying: during the 1980s when I lived here, “made in Zimbabwe” was found on virtually everything. Now it’s “made in China” and “made in South Africa,” as the main retail chains—especially Walmart-owned Massmart and its affiliates—use the larger market in the south to achieve production economies of scale production that then swamp and wipe out Africa’s basic-needs manufacturing sector.
At the same time, since the late 1990s, South Africa’s current account deficit has soared because the country’s biggest companies nearly without exception relocated to London or New York, and took LFFs with them: Anglo American (the gigantic mother firm) and its historic partner De Beers, plus SAB Miller, Investec bank, Old Mutual insurance, Didata, Mondi paper, Liberty Life insurance, Gencor (BHP Billiton) and a few others. Exchange controls are desperately needed before, as some local commentators predict, paying profits to the unpatriotic bourgeoisie lands South Africa in a foreign debt crisis like 1980s, and then the dreaded emergency IMF loan.
6) Yet more public subsidisation of FDI?
Sixth, a threat to this pleasing trend of declining FDI, and hence less looting, is renewed and yet more frenetic mining. To this end, vast public subsidies may be pumped through the new Program for Infrastructure Development for Africa. The donor-supported, trillion dollar project is mainly aimed at neo-colonial extraction of minerals and oil, and its transport along new roads, railroads, pipelines and bridges to new ports, along with electricity generation overwhelmingly biased towards mining and smelting.
If they materialize, subsidies of this sort will bring back the worst of the FDI, especially from BRICS countries like Brazil’s Vale mining (in Mozambique), Russia’s Rosatom nuclear (with its proposed $100 billion South African deal), India’s Vedanta and various Chinese firms—and the sub-imperialist Johannesburg firms.
Don’t believe the hype of BRICS as the source of Bandung-style South-South financial unity. A new book I’ve co-edited with Brazilian political economist Ana Garcia, BRICS: An anti-capitalist critique, highlights dangers of South-South super-exploitation which lubricates and relegitimates global-scale imperialism, including attraction of “much-needed FDI.”
7) Better public policies are needed
So seventh, we should be reconsidering the historic colonial-era bias of the continent towards extraction of non-renewable “natural capital,” i.e., minerals, oil and gas (the exploitation of which leaves Africa far poorer in net terms than anywhere else) – given how the continent’s net wealth has been shrinking rapidly the last few years, even the World Bank admits in its Wealth of Nations series.
We should instead focus economic policies towards rebalancing, which might require:
- in the short term, reimpose exchange controls to better control both IFFs and LFFs, then lower interest rates to boost growth, audit “odious debt” before further repayment, and better control imports and exports;
• adopt an ecologically sensitive industrial policy aimed at import substitution, sectoral re-balancing, social needs and true sustainability;
• increase state social spending, paid for by higher corporate taxes, cross-subsidisation and more domestic borrowing (and loose-money “quantitative easing,” too, if necessary and non-inflationary);
• reorient infrastructure to meet unmet basic needs, and expand/maintain/improve the energy grid, sanitation, public transport, clinics, schools, recreational facilities and internet; and
• in places like South Africa and Nigeria rife with fossil fuels, adopt “Million Climate Jobs” strategies to generate employment for a genuinely green “Just Transition.”
These are radical-sounding policies, not that far off Syriza’s Greek programme. But assuming state power can be won in a democratic election (OK, far-fetched everywhere in the short term, to be sure), they are attractive to those Africans with even a “Keynesian” worldview that band-aids bleeding capitalism, i.e., nearly all the NGOs and funders operating on this turf.
Indeed, John Maynard Keynes was the most brilliant economist of the last century, when it came to saving capitalism from its worst excesses. As he put it in his 1933 Yale Review essay, “National Self-Sufficiency”: “I sympathise with those who would minimise, rather than with those who would maximise, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and, above all, let finance be primarily national.”
Today we might term this the “globalization of people and de-globalization of capital,” and it is a perfect way to sloganize a sound short-term economic strategy—”transitional demands” if you like—appropriate for what we might hope will be a post-FDI world. In Africa, the name Samir Amin—the continent’s greatest political economist and at age 83 still going strong—has argued this sort of delinking strategy since the 1960s.
At least here in Zimbabwe, whose ongoing economic plunge has roots in the 1990s crisis of neoliberalism, I would like to optimistically think that the resonance of these seven points is growing, as fast as the FDI is retreating.
Patrick Bond is based at the University of KwaZulu-Natal Centre for Civil Society and University of the Witwatersrand School of Governance in South Africa.
A version of this article appeared originally in TeleSUR.
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