Africa’s Odious Debts: How Foreign Loans And Capital Flight Bled A Continent

Described by John Christensen, director of the Tax Justice Network, as “probably the most important book on Africa in recent years”, Africa’s Odious Debts exposes the dirty underbelly of the global banking industry, and the connivance of Western powers, which allows so many Africans to endure poverty. Unlike others who have described a thoroughly rotten […]


Described by John Christensen, director of the Tax Justice Network, as “probably the most important book on Africa in recent years”, Africa’s Odious Debts exposes the dirty underbelly of the global banking industry, and the connivance of Western powers, which allows so many Africans to endure poverty. Unlike others who have described a thoroughly rotten system of usury, much of it linked to criminal enterprise, authors Léonce Ndikumana and James K Boyce not only discuss the mechanisms that underpin the misappropriation and flight of capital from Africa but provide data on the extent of this problem. It makes for sobering reading.

Fellow professors of economics at the University of Massachusetts in the US, Ndikumana and Boyce draw upon over a decade of research and update the relationship between foreign loans, official development assistance and capital flight. They begin, in chapter one, by providing examples that illustrate the role of major foreign commercial banks both, on the one hand, as lenders of funds that are subsequently misappropriated and, with the other hand, serving as deposit takers and safe havens for those loans.

This is called the ‘revolving door’ of capital flight. But amazingly, sometimes there is no need of even of a door! James Henry, the former chief economist at the international consulting firm McKinsey & Co is quoted by the authors as observing that in some cases “borrowed funds were deposited directly into private accounts in the same foreign banks that initiated the loan, the entire cycle completed with a few bookkeeping entries”.

Ndikumana and Boyce also draw on an interesting parallel between foreign loans to Africa and in the US mortgage markets that led to the sub-prime credit crisis and financial meltdown. For just as there is ample evidence that many US banks lent irresponsibly to ‘sub-prime’ clients, perhaps knowing that the debt would be sold on to other institutions, so to did many bankers lend to Africa recklessly. These lenders to Africa were only intent on earning the upfront fees and commissions that accompanied such transactions, not the likelihood of repayment.

Chapter two is perhaps this book’s greatest strength. Others may have described the revolving door of capital flight, but here for the first time is laid out in comprehensible and professional detail the statistical detective work that the authors carried out to actually measure the amount of the loss to Africa. This measurement is, of course, highly challenging.

Calculating the outflows

As Ndikumana and Boyce point out: “Funds that are acquired illicitly or funnelled abroad illegally, or both, are not entered in the official accounts of African countries”. Furthermore, the authors add, “the identities of asset holders are often concealed through proxies and by taking advantage of legal screens available in bank secrecy jurisdictions”.

They begin with what they term as the residual measures of capital flight. Conventionally, this takes the net sum of a country’s current account and capital account to arrive at a balance of payments (BoP) position that should, in theory, correspond to the country’s official reserves of foreign exchange. However, that is rarely the case.

In addition to incomplete recording of debt inflows, trade misinvoicing is a significant factor in distorting BoP data. An exporter might collude with a foreign importer by under-invoicing to evade tax while an importer might also collude to inflate the price or quantity of goods to increase the amount of the foreign exchange they can obtain, at favourable rates, from the central bank. Both are important aspects of capital flight.

Ndikumana and Boyce also suggest that, with regard workers’ remittances to the continent from the Diaspora, “the true magnitude of remittance inflows to Africa is significantly underestimated in BoP data”. But by referring to the World Bank’s Global Development Finance database and changes to debt stocks, substituting this for BoP, and recalculating net errors and omissions, the author’s claim they can “obtain a residual estimate of capital flight”.

Using the example of Angola in 2008, Ndikumana and Boyce guide us through their methodology. In that year, Angola had a current account surplus of $6,408m. It received $3,655m in new borrowing, plus a net inflow of $1,679m in FDI, making a total of $11,742m. From these capital inflows are subtracted the uses of foreign exchange recorded in the official BoP statistics. The foreign exchange reserves of Angola were $5,610m. The unadjusted residual measure of capital flight is therefore $6,132m. Adding adjustments for misinvoicing and unrecorded remittances brings total capital fight from Angola, for that year, to a staggering $7,645m.

The authors also estimate the amount of capital flight from 33 sub-Saharan countries, where there is sufficient raw data, to arrive at a figure of $735bn (in 2008 dollar terms) in the 1970–2008 period – roughly 80% of of the combined GDP of these countries in 2008. And Ndikumana and Boyce go further by calculating that if the funds that left these African countries had instead been invested in, say, short-term US Treasury bills, the imputed interest would raise that $735bn figure to nearer one trillion dollars – $944bn to be exact.

Africa as a net creditor

“It is,” the authors note, “time to balance the books.” They explain that, “a comparison between the stock of capital flight and the external debt can provide a reasonable indicator of Africa’s wealth [and] by this measure, sub-Saharan Africa is a net creditor to the rest of the world by a substantial margin.” The problem is that the continent is bleeding money as its capital disappears into the private accounts of African elites and their accomplices in Western financial centres. Meanwhile, the prospect of Africa attaining the UN’s Millennium Development Goal of halving extreme poverty by 2015 remains a distant dream.

The following chapter, chapter three, examines the revolving door syndrome in more detail. In effect, Ndikumana and Boyce demonstrate the extent to which capital flight from sub-Saharan Africa has been fuelled by foreign borrowing by presenting the statistical relationship between the two.

Ndikumana and Boyce also explain the practice of ‘round-tripping’ or back-to-back loans’. This was a technique perfected by organised crime in the US that involved the movement of illicit funds to offshore accounts to be ‘loaned’ back as a means to launder money.

The authors accept that not all capital flight involves illicitly acquired funds and so they examine the possibility that some is actually legitimate investor portfolio choice. But, they note, if returns on capital are better in financial centres abroad or risk-adjusted returns are lower in Africa, it begs an important question. The authors leave it to economist Manual Pastor, who phrased it in this way: “If the investment climate in a country is negative enough to push out local capital, why would savvy international bankers extend their own capital in the form of loans?” It boils down to asymmetric risk – in other words, domestic capital enjoys less protection that foreign capital that is usually guaranteed by the government.

This book’s penultimate chapter concerns the human cost of capital flight; how, to provide just one example, across sub-Saharan Africa, many governments spend more on debt service than on health for their own people. And healthcare, as Ndikumana and Boyce point out, is only one among many possible alternative uses for money currently spent on foreign debt.

Finally, the authors in the final chapter examine the way forward. There central argument draws on historical precedent, when the US took control of Cuba from Spain in 1898. When the US and Spain met for peace talks in Paris, the Spanish argued that the $400m in debts owed by Cuba to foreign creditors was the responsibility of the new government.

Not so, argued the US, saying the debts had been ‘imposed’ on, rather than agreed by, the public. Legal traditions in both the US and UK now require that the very power of making a binding commitment for another person carries with it the special responsibility of acting in the interest of that person. Applying this legal strategy, Ndikumana and Boyce argue, sub-Saharan governments could inform their creditors that outstanding debts will be treated as legitimate if, and only if, the real counterparts of the debt can be identified and shown to have benefited the people of the country, or at least shown to have had a reasonable prospect of benefiting them.

Subscribe for full access

You've reached the maximum number of free articles for this month.

Digital Monthly

£8.00 / month

Receive full unlimited access to our articles, opinions, podcasts and more.

Digital Yearly

£70.00 / year

Receive full unlimited access to our articles, opinions, podcasts and more.