The growth surge observed in Africa before the global financial crisis (about 6 percent real GDP growth rate during 2001-2008) and its resilience during the crisis (2.8 percent growth) continue to nurture optimism with regard to the continent’s future economic prospects. These developments feed hopes that ‘Yes, Africa can’[1] win the war against poverty, hunger, and deprivation.
Indeed, at the continental level, there has been a steady decline of the poverty headcount from 59% in 1994 to 48% in 2008. However, the long-term gains in poverty reduction appear modest, with only a 3 percentage point drop over 3 decades from 1981 to 2008.[2] But most importantly, even as the poverty headcount declined, the absolute number of the poor has increased steadily from 205 million to 386 million during this period, in contrast to Asia where the poverty headcount and the number of the poor have declined simultaneously. Thus for Africa the glass is half-full or half-empty depending on the observer’s degree of optimism.
Generally there are also significant improvements in the health status in the majority of African countries over the past decades. Today, in about 24 African countries, people on average live one third times longer than four decades ago. In a dozen African countries, life expectancy is 40 percent (or more) higher today compared to the 1970s. However, Africa is still lagging substantially behind other developing regions in health development. Although infant mortality has declined, it remains substantially higher in SSA than in other regions: 76 per thousand live births in 2010 compared to 18 in Latin America and 19 in East Asia and Pacific.
The majority of countries in the sub-continent are behind target for reaching the millennium development goals (MDGs) with regard to access to basic health-improving amenities such as clean drinking water and decent sanitation: only 31 percent of SSA population has access to improved sanitation facilities compared to 79 percent for Latin America. Thus, while some countries have made substantial progress in promoting access to health services, deprivation on this dimension remains more the norm than the exception for African people in many other countries.
The question then is how can African countries accelerate growth and win the war against poverty, diseases, and hunger? The success in this fight hinges on the continent’s ability to keep its resources onshore. It is clear that achieving prosperity in Africa will require scaling up financing for development.
Traditionally, the policy focus at national and international level has focused on increasing domestic resource mobilization and attracting more external capital in the form of aid, debt, and private capital inflows. This strategy has proven inadequate, and that is why African countries are still punching below their weight with regard to growth and poverty reduction. Yes, progress has been recorded, but the performance remains much below the potential. And the key reason is that African countries have been unable to tap their resources, which continue to leak through illicit financial flows.
From the outset it is clear that domestic resource mobilization must remain the primary focus in development financing strategies. Indeed, an often overlooked fact about development financing in Africa is that the largest source of financing is domestic public revenue from taxation and non-tax sources. In 2008, ODA and net FDI inflows represented only 9 percent and 12 percent of total government revenue, respectively. It is clear that achieving sustainable financing of growth and development in Africa is contingent to African countries’ capacity to mobilize large and stable volumes of tax revenue.[3] More generally, the capacity to mobilize domestic financing for investment can be harnessed with creative and innovative means, such as domestic currency bonds, increased banking penetration in the rural sector, and mobile banking, which have demonstrated remarkable results in some countries such as Kenya[4] and South Africa. The focus should be on incentivizing domestic private saving and investment.
How about official development assistance (ODA)? While ODA remains an important source of financing, it cannot and will never be the foundation of growth acceleration and poverty reduction. On the one hand, the supply of ODA is severely constrained by the difficult fiscal positions faced by many donor countries as well as the need to support the flattering European economies plagued by sovereign debt distress. If developed countries have to choose between bailing out beleaguered European governments and banks on the one hand and Africa on the other, the choice will always be undeniably clear: financing African development will take the back seat. This is unfortunate and myopic, for a prosperous Africa is good for the whole world.
On the other hand, by design, aid allocation processes keep the levels of aid at inadequate levels to finance the big push necessary to shift African economies to a higher gear. In 2010, Africa received a total of $44.6 billion in official development assistance. But this is just barely enough to bridge the gap in infrastructure alone.[5] And we know that Africa faces dire needs in infrastructure especially energy, water and transport if it is to achieve sustainable growth and economic transformation. The problem of development assistance is especially pronounced for low income countries, which are constrained from accessing debt and are limited to grant-only financing. For these countries, without alternative financing sources, ODA amounts to life support.
Can Africa pull it off with more external borrowing? The record is not encouraging. Decades of external debt accumulation have produced limited results in growth and development. In contrast, African countries have faced debt distress, further constraining their ability to raise more resources. In fact, on net basis, African countries often have paid annually to the rest of the world more than they have received from external borrowing.
In 2000, sub-Saharan Africa as a whole (without South Africa) transferred to the rest of the world nearly $6 billion through debt transactions, even as the total debt stock was declining thanks to debt restructuring and debt relief mechanisms since 1995.[6] Moreover a substantial fraction of the borrowed funds is often not used for the intended development financing purpose, but rather siphoned out as capital flight by corrupt leaders.[7] It is estimated that between 40 and 60 cents of each borrowed dollar ends up in offshore financial centers in the form of private assets with the complicit assistance of bankers. Over the past four decades, sub-Saharan Africa has lost over $735 billion to capital flight, or over $944 billion including accumulated interest on past illicit flows.[8]
These estimates are conservative as they do not include all forms of illicit financial flows, such as proceeds from criminal activities like drugs and human trafficking, smuggling of services, etc. Some estimates put the figure to over one trillion dollars for the Africa as a whole.[9] African countries are therefore in a tight bind: trying to finance development with a leaking purse. For the continent to achieve sustainable development, it must find a way to keep its resources onshore. This requires concerted efforts at the national, regional and global level to tackle the problem of illicit financial flows from African countries.
On the part of African countries, the focus must be on establishing mechanisms and processes to increase transparency in the management of government resources, both domestically generated revenue as well as borrowed funds. At the regional level, the issue of capital flight and strategies to prevent and reverse capital flight must move to the center of the policy debate. In this respect the creation of the High Level Panel on Illicit Financial Flows[10] by the United Nations Economic Commission for Africa is a commendable initiative.
This initiative helps raise public awareness on the problem of illicit financial flows and stolen wealth, and provides a platform for formulating policy recommendations to address the problem at the national and regional level. Africa’s development partners can help the cause by supporting the initiative both financially and technically, following the lead of the government of Norway which has been behind this and other initiatives aimed at tackling the problem of illicit financial flows from developing countries.[11] An effective strategy to definitively turn the page on corrupt management of public resources including aid and borrowed money is to open up the books of the recipient governments as well as those of donors and lenders so as to systematically publish detailed accounts of the origin, conditions, utilization and results of all external financing.
Systematic ‘debt audit’ of borrowed funds and aid will increase aid effectiveness by ensuring that every penny lent or donated to African countries is effectively put to the intended use. The increased transparency will build credibility of the development financing process in the eyes of the beneficiaries in African countries as well as the taxpayers who finance the aid budgets in donor countries.
The war against offshore finance will be hard as it challenges massive financial interests, both private and public. The proliferation of secrecy jurisdictions and expansion of offshore finance rob Africa of massive valuable resources by enabling corrupt leaders to hide abroad the proceeds of theft and embezzlement, and by helping private wealth holders to evade taxation.
Africa’s leading development partners can help the continent by enforcing rules of financial and corporate transparency, especially country by country reporting and automatic exchange of information as advocated. Indeed, the chances of success of individual countries in challenging offshore centers head on are limited. Offshore finance is a global problem that deserves a global solution. And Africa’s development partners ought to consider it as part of the overall strategy to scale up development assistance for the continent.
A version of this note was published in September in Swedish by Internationella Studier (IS), a research magazine published by the Swedish Institute of International Affairs.
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[1] World Bank (2011) Yes Africa can: success stories from a dynamic continent, editors: Punam Chuhan-Pole, Manka Angwafo. Washington DC: The World Bank.
[2] Source: World Bank, POVCALNET (online).
[3] See African Economic Outlook 2010 for an analysis of African countries’ performance in domestic resource mobilization (DRM) and suggestions for strategies for increasing DRM.
[4] In February 2009 the Kenyan government floated a $232 million infrastructure bond which was oversubscribed by 45 percent. Later in the same year, two other bonds were issued and were oversubscribed as well.
[5] Africa’s infrastructure financing needs to support the growth rates required to reduce poverty are estimated at $93 billion annually, of which only about half are currently met.
[6] The data cited here are from the World Bank’s World Development Indicators.
[7] Ndikumana, L. and J.K. Boyce (2011) Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent. London: Zed Books.
[8] Ndikumana and Boyce (2011), ibid.
[9] Kar, D. & D. Cartwright-Smith (2010) “Illicit Financial Flows from Africa: Hidden Resource for Development”. Global Financial Integrity (March).
[10] Chaired by South African former President Thabo Mbeki, the High-Level Panel on Illicit Financial Flows from Africa was established in 2012 following a resolution of the 4th Joint Annual Meetings of the ECA/AU Ministers of Finance, Planning and Economic Development in Africa in March 2011.
[11] Norway has been a key supporter of the Task Force on Financial Integrity and Economic Development, a global coalition of civil society organizations and over 50 governments seeking to address systematic inefficiencies and inequalities in the global financial system including the facilitation of illicit financial flows.
Instructive analysis, Professor Ndikumana. African scholars, though, in addition indeed of all scholars of progress across the world can’t but be critical of the meaning and use of the epithet, “sub-Sahara Africa” – please see link
http://re-thinkingafrica.blogspot.co.uk/2012/08/sub-sahara-africa-is-racist.html
Herbert Ekwe-Ekwe
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