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History

Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent

JAMES K. BOYCE, DEVELOPMENT, PEACEKEEPING AND ENVIRONMENT PROGRAM, PERI Institute

LEONCE NDIKUMANA, PROF. ECONOMICS, UMASS AMHERST

A new book titled Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent begins its conclusion with the following. During the past four decades, sub-Saharan Africa has experienced a financial hemorrhage. We estimate that from the thirty-three countries for which we have data, capital flight between 1970 and 2008 amounted to $735 billion in 2008 currency. Including imputed interest earnings, the drain of resources amounted to $944 billion. These sums far surpass the same countries’ combined external debts, which stood at $177 billion in 2008. This means that sub-Saharan Africa is a net creditor to the rest of the world. If this is true, why are so many of Africa’s people so poor? The answer, of course, is that the subcontinent’s external assets are private and in the hands of a narrow and wealthy stratum of its population, whereas its external debts are public and therefore borne by the people as a whole through their governments.

By the early 1980s it was very, very well known in the international community and in the banking community that the Mobutu regime in Zaire was thoroughly corrupt. In response to the problems of corruption there, the International Monetary Fund, or IMF, took the very unusual step of installing its own team of experts in the Central Bank of Zaire to try to clean things up. By 1982, the team had written its report and gone home in disgust. And in its report, Erwin Blumenthal, who headed that team, said that there was no chance at all that the creditors would ever be able to recover their loans to the government of Zaire. The money was down the drain. Despite that, creditors continued to lend money. Although the private bankers were getting increasingly nervous, the official creditors, the governments of the West, the international financial institutions, continued to lend money to Zaire. And by 1989, the debt had grown, and the Mobutu regime was facing a financial crisis, because the interest and debt service payments that were due on past loans were no longer fundable with the money that was continuing to come from the increasingly nervous creditors. In ’89, Mobutu flew on the Concorde jet, the supersonic jetliner (he had build a runway for that jet in his home village in the northern part of the country), flew to Washington DC, where he was the first African head of state received by President George Bush in the White House. Mobutu was coming basically in order to tap his old friend, Mr. Bush, who he’d known for a number of years, in hopes that more financial assistance would be forthcoming for his corrupt regime. Bush accommodated. At the meeting in the White House, he announced that the IMF would be making a new loan to Zaire. The World Bank followed shortly with additional money as well. This is years after the Blumenthal report had thoroughly exposed the corruption of the regime, at a stage where nobody, no private creditor in their right mind would have been lending money to this particular government. Why did they do it? Well, it’s very hard not to see the geopolitical motives here. Mobutu was often praised in Washington by President Reagan before President Bush as one of America’s great friends in Africa. And what that meant was that in the Cold War contest between the US the Soviet Union, Mobutu was considered a reliable ally, and all of his financial crimes were overlooked in the name of supporting that alliance.

 

So if you put these pieces of the puzzle together and look at the total amount of money flowing out in debt service, the fraction of that that fueled capital flight, the resulting diminution of public health expenditure, and the resulting loss of lives through infant mortality linked to that reduced health expenditure, we estimate that about 75,000 infant deaths a year in sub-Saharan Africa can be explained by the debt service payments on borrowing that fueled capital flight. So this gives a new meaning to the phrase “blood money”

 

…back in 1898, over 100 years ago, the US and Spain fought a war. The US won the war pretty quickly. And as a result of that, control over Cuba, among other Spanish possessions, was transferred to the United States. One of the most contentious–indeed the most contentious issue in the subsequent negotiations in Paris that were conducted to conclude a formal peace was over what would happen to the debts that had been accrued by the Spanish-Cuban government. The position of the Spanish and of the creditors, who were mostly European banks, was that the debts went with the territory, so that now that the US had Cuba, the debts were debts of the new US-Cuban colonial government. The position of the US commissioners was that that was ridiculous. They took the stance that the loans were acquired without the consent of the Cuban people, that the debts were not incurred for their benefit, indeed in many cases were incurred for their oppression, and that the creditors knew or should have known that these facts held, and that they took the full risks of their investment by making such loans to that prior regime. So they refused to accept responsibility for these debts, categorically. And that marks the beginning or one of the beginnings of what in international law is called the doctrine of odious debt.

The Costa Rican precedent, which is an important one in international law in terms of the assignation of the burden of proof. What happened was that there was a dictator–this was in the early part of the 20th century–who stole some borrowed money, and he fell, and then the creditors–the government of the United Kingdom on behalf of the creditor, the Royal Bank of Canada, demanded that the successor government repay the loan, and the successor government refused, saying that our people didn’t benefit from this loan; if you want the money, go ask the dictator where he put it. That case was ultimately adjudicated in the United States, and the adjudicator was Chief Justice Taft (also at one point in his career President Taft), chief justice, at the time, of the US Supreme Court. And Justice Taft made the following ruling. He said that the debt was illegitimate, that it had not been used to benefit the people of Costa Rica, and that if the creditor wanted to establish the legitimacy of the debt, they were the ones that needed to show where the money went. It wasn’t up to the government, the new government of Costa Rica, to show where in the bank accounts of the former dictator (whose name was Tinoco) the money was sitting. It was up to the creditor to demonstrate that the money had been used for legitimate purposes in the country.

Notes:

http://therealnews.com/t2/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=796

 

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About elpidiovaldes

Human, All Too Human.

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