Africa can win the fight against poverty if it can keep its resources onshore

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] ^[5]
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] ^[6] 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] ^[7]
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] ^[8]
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] ^[9]
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] ^[10]

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] ^[11]
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 ^[12][10] ^[13] 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] ^[14]
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] ^[15] World Bank (2011) Yes Africa can: success stories from a dynamic continent, editors: Punam Chuhan-Pole, Manka Angwafo. Washington DC: The World Bank.

[2] ^[16] Source: World Bank, POVCALNET (online).

[3] ^[17] 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] ^[18]
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] ^[19]
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] ^[20] The data cited here are from the World Bank’s World Development Indicators.

[7] ^[21] Ndikumana, L. and J.K. Boyce (2011) Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent. London: Zed Books.

[8] ^[22] Ndikumana and Boyce (2011), ibid.

[9] ^[23] Kar, D. & D. Cartwright-Smith (2010) “Illicit Financial Flows from Africa: Hidden Resource for Development”. Global Financial Integrity (March).

[10] ^[24]
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 4^th Joint Annual Meetings of the ECA/AU Ministers of Finance, Planning and Economic Development in Africa in March 2011.

[11] ^[25]
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.