Africa being bled dry

2013-08-29 00:00

TWO months ago, Transparency International published its latest Global Corruption Barometer (GCB) based on thousands of interviews conducted in over 100 countries. It found corruption to be widespread and a general belief that individuals in state institutions were the main culprits.

In effect, states operate within states, illegally siphoning resources and services away from legitimate recipients. The GCB opened its report by noting that “ordinary people bear the cost of corruption”, acknowledging that it diminishes the possibility of socioeconomic justice. And such fraud on a continental scale is of truly massive proportions.

Why is it that Africa, with its massive stock of natural resources, is deeply in debt? In reality, if capital flight and notional interest are taken into account, it is a creditor, not a financially ruined continent. In the 35 years up to 2004, it is estimated that $607 billion left Africa, much of it illegally, which could have wiped out the then external debt of $209 billion nearly three times. The main culprits are venal leaders in politics and business and multinational companies. Of the loans to Africa, 60 cents in every dollar end up in the outflow, becoming part of the same toxic cycle.

A recent study has identified 6 000 subsidiaries attached to the world’s 10 top mining companies. The complicated, disaggregated company structures, created by lawyers and accountants, and the use of tax havens, mean that companies do business with themselves. Intra-firm transactions between subsidiaries of the same parent multinational are estimated to be responsible for 60% of international trade. Such trade is a fiction, an accountant’s sleight of hand, with pricing arranged to mutual benefit and to minimise tax in the country of operation.

On a global scale, the sums involved are staggering: each year, illicit capital flight to tax havens and the developed world exceeds aid by 10 times and is double the amount of debt repayment. Many of the destinations for this money are also the recipients of laundered money from criminal activity. One of the mechanisms is transfer mispricing, which may be engineered by any two trading partners: in Africa it involves artificially low invoicing for exports such as agricultural products and overpricing of manufactured imports. In each case, the difference is held outside the continent, while the tax systems of African countries are often too unsophisticated to detect the fraud, which averages about 10%.

The Tax Justice Network (TJN) calculates that 30% of sub-Saharan African gross domestic product resides offshore. Africa is subsidising the First World. The behaviour of some African leaders has long since attained the status of legend, with the families of Mobutu Sese Seko and Sani Abacha transferring public assets into private wealth and building up massive holdings in overseas banks. For example, during Abacha’s presidency of Nigeria, it is believed there was a daily standing order for the transfer of $15 million to his Swiss bank account. Mobutu in Zaire exported diamonds through state-owned Gecamines at depressed prices and picked up the difference overseas. This and other scams netted $5 billion. Full recovery of this looted wealth has proved impossible given the secrecy of the banking system. This, in turn, throws the spotlight on the fact that corruption focuses almost exclusively on those on the take. It rarely involves questions about those who stash away and also benefit from the loot in places such as Luxembourg and the Cayman Islands. This is the supply side, selling services to the corrupt. The consequences are dire. Africa, a continent of consistently poor social-welfare indicators, is deprived of tax revenue. The haemorrhage of capital inhibits local development, as does the cost of servicing artificially inflated debt. The outcome is a self-reinforcing cycle of looting, borrowing and mounting indebtedness. Some African countries have experienced capital outflows that exceed national debt by four times. The elites, with their externally held wealth, are insulated from the local effects. Fraud and corruption are everywhere, much of it embedded in apparently legitimate trade deals: the weapons trade is notorious for the fact that much of it exists for the purpose of kickbacks and pay-offs. Some of the irrational decisions in South Africa’s arms deal can presumably be traced to ulterior motives. We tend to judge outcomes in terms of the line between legality and illegality, but the pernicious effects might be better understood if the debate were conducted within a framework of ethics and morality.


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