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Africa: Fix Resource Leaks
AfricaFocus Bulletin
Feb 8, 2006 (060208)
(Reposted from sources cited below)
Editor's Note
"What matters for ensuring that governments have adequate resources
to finance development are net flows. This means factoring in not
just inflows ... but also what is lost to the rest of the world.
Debt servicing is [only] one [such] outflow. ... Indeed, the
reality of Africa is that the resources that leak out far exceed
those that flow in." - Charles Abugre
For Charles Abugre, currently the head of policy and advocacy at
Christian Aid, the international campaigns for better aid, debt
cancellation, and more just trade policies are necessary. Even if
successful, however, he says, they will be insufficient. Activists
need to focus more on what African countries can do for themselves,
Abugre argues. Moreover, he goes on to give specific examples such
as the need for changes in tax policy and other measures to keep
resources in Africa and ensure they are spent on development needs.
This AfricaFocus Bulletin includes a shortened version of a paper
presented by Mr. Abugre to an Africa consultation of the Global
Call to Action Against Poverty, held in Harare, Zimbabwe from 7-10
November,2005. This essay appeared originally in Pambazuka News
(http://www.pambazuka.org).
For previous AfricaFocus Bulletins on economic issues, see
http://www.africafocus.org/econexp.php
++++++++++++++++++++++end editor's note+++++++++++++++++++++++
A leaking ship: The role of debt, aid and trade
Charles Abugre
Pambazuka News 240
February 2, 2006
http://www.pambazuka.org/index.php?issue=240
The rationale behind the "more and better aid, debt cancellation
and more just trade policies" is that these will create the
conditions to ensure adequate resources to finance Africa's
development. Undoubtedly, if fully addressed, these will put more
money in the hands of governments and people and ease the resource
constraint. We will argue however that on their own - never mind
the quality of aid, the speed of debt cancellation, the degree of
market opening in the north and the end of export subsidies - these
demands will not provide the resources adequate for Africa's
development.
These demands, though relevant, are slightly misplaced in their
singular focus on sources of "inflows" to the total denial of the
mechanisms of "outflows". It is the balance of inflows and outflows
that create the net resources for development. We will also argue
that the singular focus on "inflows" entrenches the sense of
Africa's dependence and perpetuates the myth of Africa's resource
poverty and powerlessness. In addition, in focussing on trade
policy per se at the exclusion of what underlies trade, we miss a
fundamental explanation for government's persistence on
liberalisation - beyond the view that they are reckless, ignorant,
powerless or uncaring.
More and Better Aid
Our demand that governments in the north fulfil their obligation to
deliver 0.7% of the gross national products for international
development is right. It is indeed a right of African countries in
particular, to demand it in view of the fact this promise has been
used repeatedly in the past as a bait to secure economic and social
reforms in Africa. But realistically, we know it won't be
delivered. The slow pace and low volume of aid increases committed
at the 2005 G8 meeting in spite of all the noise, and the
subsequent threat by the US to undermine the 0.7% target itself,
shows how difficult and risky it is to rely on increasing volumes
of aid for Africa's development. The explanation is simple, to the
extent that traditional aid continues to depend on taxpayers in the
north, its ebbs and flows will depend on the political temperature
and economic performance in the north, especially Europe.
But the key problems of aid are its purpose, its governance and its
impact on the psychology and accountability of our governments and
elite. Official development aid is hardly ever completely
altruistic or single-purpose or hardly ever completely divorced
from foreign policy. Consequently, we are constantly going from
opposition to one thing or the other associated with the provision
of aid, e.g. tied aid, policy conditioning; human rights
conditioning, policy leveraging and more recently the increasing
link with the war on terror.
Regardless of the rhetoric, aid cannot be separated from foreign
policy objectives and to the extent that these shift, the purpose
of aid will shift. In any case why not? Why shouldn't taxpayers in
the north demand that their taxes serve values and goals they hold
as dear to them? Why shouldn't they expect their governments to
account for the impact of aid, therefore put in place measures to
ensure that their money delivers the purpose for which it is given.
Conditionality is an important issue for Africa largely because aid
forms too large a share of budgets, therefore risks associated with
aid policy are more significant for African than other continents
where aid forms a minuscule proportion. Whilst it is proper to keep
ensuring that the conditions associated with the provision and
management of aid do not exacerbate Africa's development problems,
the real challenge is to reduce its importance to Africa's
development.
The more debilitating impact of development aid is what it does to
the mentality of the African elite and to the democratisation and
accountable governance process. Governments have developed the myth
that their economies cannot survive without aid. In reality it is
their governments and the patronage systems that maintain them
which are under threat without the aid machinery.
The competition among African governments for inclusion in the club
of favoured nations leads to wilful abandonment, to donors, of
sovereignty won at the cost of lives in the anti-colonial struggle.
The multi-donor budget support arrangement is one manifestation of
this loss of sovereignty. Without a break in the aid dependency
mentality Africa stands no chance of building democracy based on
accountability to citizens. Worst still, the imagery that aid
agencies - private and official - find necessary to deploy in order
to sustain domestic political interest for aid is often an affront
to the African personality and spirit, diminishes the African
self-worth and perpetuates negative stereotypes. Whilst we cannot
ignore aid, we should not be glorifying it.
Sometimes we in civil society contribute unconsciously to the
erosion of sovereignty and the loss of self-worth. We are sometimes
quick to demand or endorse "governance conditionality" where aid
and debt relief is made conditional to progress in these areas. To
monitor compliance often requires even greater involvement and
power of donors in domestic governance. It is like saying that new
forms of colonisation are acceptable on human rights grounds. This
is dangerous. Yet, there are cases where human rights abuses,
dictatorship and corruption are at such a level that the impact of
debt relief and aid will be to strengthen repression and enrich a
few than promote development. What do we do under this situation?
A solution could be based on the principle that regional political
bodies are better placed to manage political problems in member
states. This is the principle applied by ECOWAS, SADC and the AU in
conflict resolution and peace building/keeping. This is also the
principle underlying the Africa Peer Review Mechanism (APRM). We
propose a Peer Trust Fund to be managed by the AU and used as the
financial muscle behind the APRM. Debt relief and humanitarian
funds meant for countries abusing the citizens will be paid into
this Fund, to be held in trust for the country and be released by
the AU as the country makes progress in the governance areas of
concern. Such a mechanism will:
- Strengthen and give teeth to the AU's desire and capacity to
promote accountable and democratic governance in the region;
- Act as a muscle and an incentive for the APRM;
- Take away the excuse of creditors not to write off debts owed to
Africa or withhold aid needed for humanitarian purposes but which,
for reasons outlined above, cannot be channelled directly to an
abusing country or to NGOs;
- Allow Africans and their political institutions to drive their
own political reforms;
- End the arbitrary and selective means by which donors apply
governance conditionality.
So what should we do about aid:
- Support our northern partners' efforts to make their governments
fulfil their part of the global compact but scale down its
importance in Africa's plan of action;
- Support the establishment of a Peer Trust Fund to assist the AU
to deal with the governance issue;
- Increase domestic CSO interests and involvement in budget
processes so as reduce the influence of donors on budget governance
and steer budgets to deliver public services and fight corruption;
- Oppose donor-driven budget management arrangements that undermine
parliamentary oversight and propose parliamentary oversight
procedures that are transparent and inclusive of civil society.
Whilst these actions are necessary to improve the quality of aid
and reduce its damage, they do not address the resource deficit
problem per se.
Debt
The issue of debt is not so much what we demand but whom we address
with what messages. First the message of ending the debt burden has
been directed largely at one direction - the creditors. The message
itself has been one of appealing for understanding whether based on
justice or empathy. There is nothing wrong with this in as far as
this appeal is coming from our northern partners directed at their
publics and governments. Whatever strategies they find as feasible
to exert pressure for action should be welcomed by us as long us
these strategies neither diminish the African dignity nor
undermines the messages coming from Africans.
But directing our energies at appealing to northern creditors
suggests our lack of belief in the power of the debtor. However,
the Nigerian debt relief effort, no matter how unsatisfactory, and
the Argentinean debt restructuring initiative suggest that debtors
do have power and can force change. In the Nigerian case, it was
the threat by Parliament to withhold appropriation for debt
servicing and the subsequent road show that the joint committees of
parliament undertook in Europe and America to drum home their
threat that forced the Paris Club to rush through a debt relief
package. In Argentina's case, an economic and political meltdown
resulting from years of faithful compliance with the IMF's
conditions and faithful debt servicing, forced Argentina to impose
a unilateral moratorium on debt servicing and then subsequently
unilaterally discounted its debt instruments by 75%. After heaving
and puffing both the IMF and the private creditors accepted their
lot and Argentina's economy rebounded.
Africa's debt overhang of over $200bn provides the muscle for a
successful collective African threat. This is the task for the
African Union and we should make that forcefully clear. The
cancellation of $200bn poses no threat to the global financial
system but can save millions of lives. Even a threat of a
collective moratorium will send the message clear and loud,
especially if this threat were accompanied by an enforceable
commitment to transparency and anti-corruption and the channelling
of the money so saved into revamping public services. We should not
celebrate divisive debt relief initiatives like the one delivered
at Gleneagles although we can celebrate the victory in terms of the
comprehensive principle, i.e. that all debts, including the debt
stock owed to the IFIs must be cancelled.
So where do we go from here in relation to debt:
- Welcome the principle of debt stock cancellation agreed at
Gleneagles and at the annual meeting of the IMF/Bank but condemn
the selectivity and divisive approach;
- Develop a strategy to pressurise the AU and its member states to
adopt a debtor-led strategy;
- Campaign for an International Law to regulate international debt.
Trade
The trade policy focus has been in four areas:
- Defending our domestic markets from further harmful
liberalisation;
- Defending our producers - especially our farmers - from demise
resulting from "dumping" of subsidised imports;
- Seeking market access without reciprocal market opening
obligations;
- Promoting regional integration.
These demands are relevant and we should continue to maintain a
focus on them. We should prioritise, in particular:
- The defensive interests of our people: For example, our focus on
agriculture should be driven by food security and rural development
objectives rather than export promotion. Not only is the latter not
realistically attainable in a significant way (except traditional
commodities) but detracts from what Africa's needs are at this
moment. In this sense, the key policy focus is to prevent any
further market opening (liberalisation) whether this is through aid
and debt deals or through multilateral negotiations. Better still,
the goal should be to protect the space for flexible policy whereby
countries can vary tariff policy to meet development goals,
starting with consumer goods and shifting to intermediary inputs of
capital goods - whilst relaxing consumer good imports - as the
economy develops. It is this flexible and progressive use of
tariffs that is essential as an industrialisation strategy.
- Conditions for industrialisation: This intersects with the
defensive interest. The key constraining factor for
industrialisation is demand - the competition from foreign consumer
goods which makes it impossible for local produce to carry on
producing let alone innovate. Investing in infrastructure including
roads and energy will contribute to reducing transaction cost but
are not, at the most constraining to industrialisation. We should
not be detracted by the so-called supply-side argument that
suggests that investments in infrastructure will correct for
competitive pressures. The policy demand is to not give any more
market access through the Non Agricultural Market Access (NAMA)
negotiations and others whilst securing the policy space necessary
to allow for flexible use of trade policy.
- Defend public services: The aggressive push embarked on by the EU
and the US at the on-going talks to open up the services sector
reflects the shift in the structure of these economies into
services. It also reflects the increasing importance of services
for profits and services as a means of gaining control of scarce
natural resources such as water. Without the universal provisions
of public services by the public sector, Africa stands no chance of
reducing poverty, managing inequality and conflict and growing the
labour force of the future. We should put in all the energy we can
marshal to campaign for the universal provision of public services
by the public sector, the minimisation of commercial ethos in basic
services and the avoidance of market opening commitments.
- Regional markets: The key issue here is to support the AU and
sub-regional trading blocks to resist the pressure to make market
opening and third-party tariff concessions before the dynamics of
intra-regional trade are worked out, not least in the Singapore
issues. This suggests the need to postpone the market access
aspects of the Economic Partnership Agreements (EPAs) with the EU
and to shift energy into campaigning for a reform of Article 24 of
the Regional Trade Agreements component of the WTO in order to
protect the principle of less than full-reciprocity. In the interim
we should back the Stop EPAs campaign's call for a reform of the
rules of origin aspects of the Everything But Arms (EBA) to make it
meaningful for African LDCs.
- The Mandate of the WTO and dispute settlement: Developing
countries, and Africa in particular, stand to lose with a WTO
saddled with a broad rather than a narrow agenda. This is because
Africa has the least capacity to defend, let alone promote their
interest in multiple negotiating forums. The continent's heavy
dependency on the IFIs for resources exposes it to unilateral
liberalisation pressures. Once unilateral liberalisation has been
embarked upon, there is always the risk of easily committing
liberalised sectors to the lock-in mechanism of the WTO. In
addition, making commitments at several fronts imposes an
implementation burden, the cost of which is relatively higher for
poorer countries than richer ones. It is therefore in the interest
of Africa to see a slimmer WTO.
However, the decision to focus on trade to the exclusion of
investments is a serious limitation. In the first place, the
Services Agreement and the Singapore agenda are essentially about
investment. It is important to note also that underlying the market
access concessions that African governments give to the north,
especially in services, is an expectation of foreign direct
investments and its mythical value as the solution to
underdevelopment. Similarly, FDI expectations underlie the
anti-inflationary macroeconomic policies of governments and debt
servicing compliance.
The belief in FDI is so strong that governments have happily
adopted negative taxation policies to attract foreign companies. To
have a chance of developing trade and macroeconomic policies that
promote development, restrain our governments from giving away
market access concessions recklessly and channel attention towards
domestic resources for investments, we must first effectively
champion a more realistic and less jingoistic expectations
associated with FDI.
So what do we do in relation to trade and investment?
- Encourage national governments to be more proactive in protecting
their markets especially in the area of consumer goods, agriculture
and essential public services. They will not necessarily suffer
punitive action. Even if they did, their economies may still come
out better-off.
- Drum home to national governments that opening markets will not
necessarily bring FDI and even if it did, FDI will not necessarily
bring about development. Encourage the AU to promote a critical
debate on the role of FDI in Africa's development.
- Continue the campaign for policy flexibility and an end to
coerced liberalisation. This is crucial for defending Africa's
producers.
- Scale down the export focus of agriculture (market access in the
north) and emphasise its food security and rural development
objectives.
- Support the Stop EPAs campaign
Financing Development: Beyond aid debt relief and trade
What matters for ensuring that governments have adequate resources
to finance development are net flows. This means factoring in not
just inflows such as earnings from trade, or aid or remittances but
also what is lost to the rest of the world. Debt servicing is one
outflow. But there are several other ways in which resources are
lost to the continent. Indeed, the reality of Africa is that the
resources that leak out far exceed those that flow in. This is why
Africa is a net exporter of capital.
And the sums are staggering. Njukumana et al estimate that between
1970 and 2000, whereas Africa received about $100bn id aid
(including loans) it lost $274bn in capital flight induced by debt,
trade mis-invoicing and imputed interest. Add cumulative losses
due to terms of trade of non-oil producing Sub-Saharan African
countries, estimated by the World Bank to be in the area of $400bn
or 120% of combined GDP. Add also losses that African countries
have incurred simply by opening up their markets.
Africa was made to reduce their rates of protection at a pace three
times as fast the countries of the OECD. This has left the
continent ridiculously open, relative to its stage of development.
Christian Aid recently calculated that over the past two decades,
Africa lost in income terms the equivalent of over $270bn from the
negative growth effects alone of trade liberalization. This amount
alone more than matches the accumulated value of grants, loans and
net FDI channelled into the continent.
Add losses due to tax competition, tax evasion and tax avoidance.
Taxation which has served developed countries well as a means of
redistribution and source of investment capital but which has been
undermined through the enforced deregulation which has promoted tax
competition, tax avoidance and tax havens. As a result, whereas
government revenue from taxation in developed countries average 30%
of GDP between 1990 and 2000, in sub-Saharan Africa this has
declined over the years to an average of 17.9% of GDP.
Losses from tax competition have largely benefited multinational
corporations whilst the tax burden has been transferred to wage
earners and small businesses. Some analysts suggest that African
oil producers command less than 20% of the profits. The rest are
lost to a complicated network of unfair trade practices. The
transfer of revenues to tax havens by these corporations and rich
individuals further exacerbates the revenue loss. It is estimated
that at least $11.5 trillion is currently held in about 74 tax
heavens - lost to tax authorities - by wealthy individuals. This
does not include laundered profits of businesses which operate
through tax havens to avoid tax, nor does it include money
illicitly transferred abroad through corruption, drugs and money
laundering. These latter elements in any case comprise a much
smaller share of resources losses than is generally believed.
As is obvious from above, Africa is not as poor or as helpless as
is often presented. Instead, it is a continent that leaks heavily.
The task is to plug these leaks. To do so, African civil society
must turn attention to addressing:
- Support for campaigns aimed at corporate transparency;
- Campaigns against tax concessions and for progressive tax
policies;
- Work with relevant networks to campaign for the end to banking
secrecy and tax havens;
- Follow-up on the recommendation of Africa Commission report to
pursue and return stolen wealth from Africa and to put in place
measures to discourage illicit transfers abroad.
Incidentally, taxation and reliance on domestic sources for
financing development also provide a more conducive environment for
promoting democratic accountability than the dependence on aid. We
have an obligation to plug the leaks.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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