NONTOBEKO HLELA – Memo to the Global South: It is time to restart the Non-Aligned Movement
On the trail of capital flight from Africa continues pioneering work started much earlier. The editors – Leonce Ndikumana and James Boyce – estimate that sub-Saharan Africa (SSA) has lost more than $2 trillion to capital flight over the past half century. SSA currently loses US$65 billion annually – more than annual official development assistance (ODA) inflows. The book’s studies carefully examine the exploitation of natural resources – of South African minerals, Ivorian cocoa and Angolan oil and diamonds.
Such forensic country analyzes are crucial to better control capital flight. Outflows from the three countries have been massive since the 1980s: US$103 billion from Angola, US$55 billion from Ivory Coast and US$329 billion from South Africa in 2018 dollars.
Capital flight was much more than cumulative foreign debt. Annual outflows ranged from 3.3% to 5.3% of national income. Nigeria, South Africa and Angola account for the largest outflows from SSA, with Côte d’Ivoire in seventh place.
As governments derive more revenue from natural resources, the fiscal “social contract” is being eroded. When people pay taxes, they expect government spending to benefit the community. But with more revenue from resources — via state monopolies, royalties, and taxes — governments become less accountable to their own citizens.
Obtaining and maintaining access to foreign credit has similar implications. Developing country governments then focus on insinuating themselves with friendly foreign donor governments to receive ODA and improve their credit ratings.
Hence, such regimes have less political need to provide “public goods” including services, let alone accelerate social progress. Thus, the erosion of the fiscal “social contract” undermines not only the public good but also state legitimacy.
To secure power, ruling cliques often rely on “clientelism”—patronage, or patron-client relationships—typically at the regional, ethnic, tribal, religious, or sectarian level. Their regimes inevitably provoke dissent – including oppositional ethnopopulism and civil unrest, even armed insurrection.
Not surprisingly, such regimes believe their choices are limited. Another option is repression – which typically increases when the status quo is threatened. The resulting sense of insecurity spreads from the public to the elite, exacerbating capital flight.
The exploitation of valuable natural resources not only generates export revenue but also attracts foreign investment. One result is ‘Dutch disease’ as the national currency appreciates – reducing other exports and jobs and inevitably hurting development prospects.
Huge private fortunes were thus made and illegally transferred abroad. Ruling elites and their allies rarely rely solely on the state or the market to get richer. The book shows how the state and the market strengthen private and personal power and influence.
plunder of Africa
The book’s case studies show how resource extraction was at the heart of capital flight. In all three countries, the effectiveness of fiscal policy tools, particularly those used to encourage investment in development, has been undermined.
Outflows have increased with economic liberalization as unrecorded financial outflows – via the checking account – increase with freer trade. Thus, trade-related financial transactions enable corruption and capital flight.
In Côte d’Ivoire – the world’s largest cocoa producer – rents originally came from supply chains linking farmers to consumers. Corrupt partnerships—connections between domestic elites and foreign corporations—were crucial to such arrangements.
Thus, exports of natural resource commodities have enabled illicit capital flows. Ivorian cocoa exports have been consistently underreported – with trade statistics from major importers showing massive under-accounting by exporters.
Postcolonial political settlements have given a few privileged access to resource rents. With capital flight thus enabled, successive Ivorian regimes have been less compelled to spend more on development or public welfare.
Due to the cocoa boom, the post-colonial “Ivorian miracle” ended with falling prices. The bankruptcy triggered a political crisis that culminated in civil war. However, the crisis also meant that the country was no longer able to service its foreign debt.
In Angola, too, natural resources aggravated the protracted civil wars. After these ruinous conflicts, oil rents enriched the triumphant crony regime. This allowed control to gain control of more, even as most Angolans continued to live in poverty.
The small elite of cronies around the president benefited most from Angola’s massive oil exports. They failed to develop economies or improve most lives. All of this has been made possible by “helpful” professionals who have benefited from it.
While Angola’s “oil curse” benefits its elite and foreign transnationals, it has blocked balanced and sustainable development of its economy. Despite the rapid depletion of its oil reserves, Angola and most Angolans have benefited little.
South Africa – the second largest economy in SSA after Nigeria – appears to be less dependent on natural resources. Post-apartheid economic liberalization has enabled capital flight as private corporate interests – notably the influential mineral-energy complex – quickly benefited from the new exemption.
By under-invoicing their exports, mineral interests have been involved in massive capital flight and tax evasion. Meanwhile, business cronies have enriched themselves in new ways, such as in the state electricity sector. Such abuses were exposed by the Gupta family scandal that led to the ousting of then-President Jacob Zuma.
curb capital flight
State capture by politically influential nationals has undermined the government’s regulatory capacity with the help of transnational enablers. Alleged ‘good governance’ reforms have enabled capital flight and tax evasion – by undermining ‘development governance’, including prudential regulation.
Institutional environments, mechanisms and enablers facilitate capital flight, tax evasion and wealth accumulation abroad. With often complex, varied, and changing facilitations, capital flight has shifted massive wealth abroad for elites.
Transnational financial networks have facilitated capital outflows – at the expense of productive investment, good jobs and social welfare. Capital flight has worsened financing, including fiscal shortfalls – exacerbating associated social disadvantages.
Wealth creation enriches the economic pie, but distribution depends on who appropriates it. A better understanding of these diverse and ever-changing appropriation relationships is critical to effectively stemming this bleeding.
Greater awareness should inspire and inform better policies to curb capital flight from the Global South. Instead of the Washington Consensus mantra of “good governance”, a development governance agenda is needed.
Therefore, curbing capital flight is crucial to financing sustainable development. Tackling capital flight and related abuses – such as trade misbilling, money laundering, tax evasion and the acquisition of public assets by elites – requires well-coordinated efforts at the national and international levels.
All researchers, policymakers, and regulators will benefit from the book’s forensic analysis of financial, tax, and other abuses. International financial institutions now have little excuse to continue facilitating the capital flight and tax evasion that still bleeds the global South dry.