Elites Loot Africa While Foreign Debt Mounts

By James Boyce & Leonce Ndikumana

It was an African equivalent of stealing the Brooklyn Bridge, and for four years, nobody noticed. From 2007 to 2010, $32 billion in public funds went missing from Angola. The unexplained money outflow from sub-Saharan Africa's second largest oil exporter was revealed in a December International Monetary Fund report, which pegged the loss as equivalent to one-quarter of the country's GDP.

This financial hemorrhage comes at a staggering human toll. Despite its great oil wealth, Angola is home to some of the world's poorest people. Human Rights Watch, which reports periodically on corruption and mismanagement of the country's oil revenues, notes that 'social indicators remain low in Angola and the population has limited access to social services.' Of every 1,000 children born in Angola, 160 die before reaching their fifth birthday, according to World Bank data.

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Angola's missing billions are only the latest example of a perverse phenomenon that operates in the shadows of the international financial system: massive outflows of capital from some of the most impoverished countries in the world. As documented in Africa's Odious Debts, sub-Saharan Africa has experienced more than $700 billion in capital flight since 1970. This far surpasses the region's total external debts, which amount to roughly $175 billion. Some capital flight is motivated by a search for higher returns and lower risks, but in Africa much has been driven by the aim of hiding illicitly acquired wealth in safe havens abroad.

Far from being heavily indebted, Africa is in this sense a net creditor to the rest of the world. But there is a fundamental difference between the continent's external assets and its external debts. The assets are privately held by a small stratum of wealthy individuals: Capgemini and Merrill Lynch estimate in their latest World Wealth Report that Africa has about 100,000 'high net worth individuals' with a total of $1.2 trillion in liquid assets. The debts, on the other hand, are owed by the African people as a whole through their governments.

Capital flight does not disappear from the face of the Earth: Every dollar that leaves Africa lands somewhere else. The favored destinations are bank secrecy jurisdictions – euphemistically called 'tax havens' – where a cloak of anonymity protects wealth holders not only from the taxman but also the rule of law. In 2002, the non-governmental organization Global Witness traced $1.1 billion from Angolan oil revenues to a single private bank account in the British Virgin Islands.

Bank secrecy jurisdictions are not confined to treasure islands. The United States itself is a major destination for illicit funds. U.S. Treasury Department officials concede that banks routinely accept deposits of money that enters the country in violation of existing laws. Moreover, under current law U.S. banks are not prohibited from handling proceeds from many activities, including tax evasion, that would be considered crimes if committed within the United States.

The complicity of banks in African capital flight goes beyond the provision of safe havens. Banks also provide loans to African governments. Some of the borrowed money has wound up in private accounts at the same banks that made the loans. In 2007, for example, a French police investigation identified multiple bank accounts held by Gabonese president Omar Bongo at BNP Paribas and Crédit Lyonnais, both of which had also provided loans to Gabon's government.

Africa's Odious Debts traces links between foreign borrowing and capital flight. There is a strong correlation between the two: For every dollar of foreign borrowing in sub-Saharan Africa, on average more than 50 cents leaves the borrower country in the same year. This tight statistical relationship suggests that Africa's public external debts and private external assets are connected by a financial revolving door. Common mechanisms for diversion of borrowed money into private pockets include inflated procurement contracts for goods and services, kickbacks to government officials, and direct deposits of public funds into the bank accounts of politically influential individuals.

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James K. Boyce and Léonce Ndikumana are the authors of Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, published in October 2011 by Zed Books in association with the Royal African Society, the International African Institute and the Social Science Research Council.

© 2012 Yale Center for the Study of Globalization

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