Fulfilling Africa’s Economic Dreams Part One

 AFRICA MUST ACHIEVE POLITICAL STABILITY FIRST BEFORE ECONOMIC                                                                                    DEVELOPMENT

The greatest threat to the economic development of Africa is political instability. Political stability is the magnet that holds all other activities in its rightful place. However, Africa is one of the few places noted for its political instabilities. It scores badly among investors as a place where the risk of investment is high and where businesses are done different from the normal rules of engagement. Such concerns are largely informed by the anarchy in Somalia, Democratic Republic of Congo, Sudan, Northern Uganda, Guinea and many other places. It is also informed by the violence in Kenya, Zimbabwe, Nigeria and the tensions in Ivory Coast. Such instabilities, wars and election violence seen in Africa do not auger well for economic and social development and are major reasons why investors are repelled, capital flight is high and the confidence of those with investment continue to wane. At the moment about $150b leave the continent annually due in part to the political stalemate in Sudan, Chad, DRC, Niger Delta, Northern Uganda, and the Great Lake Region. The chaos, confusion and violence that always characterise elections create an atmosphere that only work to isolate the continent as attractive destination for investment and are the reasons why the continent is seen as the most expensive place in the world to do business.

To ensure investor confidence, promote and sustain economic development and growth, there should be a complete political stability in the whole of the continent. Without political stability it is impossible to achieve any economic development and progress. It is a fact that you cannot rebuild your house while it is still in flames and so African countries must ensure they get stability first before talking about economic development. How do you construct roads in war zones or build a factory in militarised territories? Political stability is the homework African countries must do to achieve economic development. Establishing political stability through a democratic process should not be an idea to toy with.

To achieve political stability there area a number of tough decisions Africans must make. First the leadership in the continent must realise that instability anywhere is a threat to stability everywhere. Therefore they must work together to eliminate all those factors that act as magnet to engineer and fuel the instabilities.

Tyrannical rule, civil wars, and military adventurism must give way to democratic governance. It is the only way that can bring stability to the continent and prepare her for the economic development that has eluded her peoples for decades. Political stability is highly compatible with economic development; a disruption of one is a disruption of the other. Democratic governance is the political path Africa must chart if it is to prepare itself for economic development and social progress in this 21^st Century and beyond.

This therefore calls for an end to dictatorial rule in all parts of the continent especially in Gabon, Equatorial Guinea, Angola, Congo, Libya, Egypt and Zimbabwe where few people, their families and cronies have hijacked their countries and taken the people ransom. All undemocratic leaders and tyrants must be made to understand that the days of unchecked power and despotic rule are over. The current situation where Gaddafi, a dictator is calling for a federal Africa is totally unacceptable. The only acceptable way is for all leaders including Gaddafi, Obiang Nguema, and Blaise Campore to make themselves available for elections if they wish to serve the people and I mean serve the people not to be served by the people. All leaders in the continent must be reminded that they do not own their countries and the resources in them. The claim by Mugabe that “Zimbabwe is mine” should be condemned unequivocally.

The stability also calls for an end to all civil conflicts, military interventions and armed rebellious currently seen in Sudan, Uganda, DRC, Guinea, Mauritania, Chad, Nigeria and Ivory Coast. Use must be made of the few Africa role models in the continent like Joachim Chissano, Kofi Annan and Desmond Tutu to mediate to bring an end to the conflicts in Darfur, Somalia, Northern Uganda, DRC and all the troubled parts of the continent. All parties including individuals and groups with grievances must be encouraged to seek redress from the court instead of rushing to take up arms.

The current state of political unrest in Africa is in nobody’s interest not governments, opposition parties or the people and that is the more reason why democratic reforms must be undertaken in countries where people have fewer political rights and cannot democratically change their leaders. People must be given the chance to elect their own leaders. There should be a level playing field for the ruling governments and opposition parties so as to avoid allegations of vote rigging that are major cause of instabilities and violence in Ivory Coast, Kenya, Zimbabwe and Somalia among others. To ensure this there should be financial support to political parties and all must have unrestricted access the state media. Again election observers must be allowed without any restriction to observe elections and make their own assessments without pressure from any quarters.

The AU and the sub regional bodies such as ECOWAS, SADC, EADC, COMESA, AMU and ECCA have a major role to play in ensuring the stability. The AU leaders must be reminded that instability anywhere is a threat to stability everywhere. Therefore, the Charters of AU and sub regional bodies should be implemented to the letter and all those who violate the charters should be punished severely. All clauses that limit the bodies from criticising or having greater role to play in times of crisis should be removed. The democratic countries in the continent should work closely together and encourage the less democratic ones to adopt reforms with the aim that Africa stands to gain more from being democratic than being under dictatorships. Therefore all nations must be encouraged to ratify and implement the New Partnership for Africa Development (NEPAD) charter.

In addition each country should have a constitution that caps or stipulates a fixed term of office for political office holders and that fixed term should be adhered to even if a candidate is a messiah. The current situation in Algeria and Tunisia where both presidents have changed the constitution in order to run for a third term of office and in Nigeria where Olusegun Obasanjo tried unsuccessfully to run for a third term is very unfortunate for and must be discouraged at all a cost for it is such actions by African rulers that have brought wars, coups and mayhem to however a peaceful people. Such actions only fuel corruption, nepotism, cronyism, abuse of power and mistrust between the ruling and opposition parties and serve as breeding ground for coups, civil unrest and political instabilities.

Even though the number of armed conflicts has gone down compared to a decade ago, the continent is still prone to instabilities and giving such a political climate, it is obvious that political stability will not be possible without an African Military High Command with powers to crisis, emergencies and crash any rebellion, arms insurgence that may show its ugly head in the Africa political scene.  The establishment of AMHC should be done on condition that all leaders will submit themselves to the rigour of elections and allow their people to choose whoever they want to lead them without intimidation, threats or whatsoever. Tyrannical rule and military regimes are highly incompatible with the establishment AMHC and therefore all effort must be made to ensure that democracy is respected and that leaders are not forced on the people. Already the Southern Africa Development Community has created what they call SADC Brigade and it is beginning to make impact in the region.  

The Pan-Africa Parliament should be fully resourced to deal with issues affecting the continent more importantly corruption, poverty, environmental degradation and political instabilities. Laws enacted by parliament must be binding on all members and countries that frown on the laws must be severely sanctioned.

 The Africa Court of Justice must be made the highest in the continent with powers to settle disputes between and within countries. It must be a court of last resort in the continent. Africans cannot build a just society without a strong media and without contribution of civil society organisations.

The media, civil society organisations must be allowed to operate freely without fear of intimidation or attack and under no circumstances should a media house, NGO, and CBO be barred from operating in a country. Therefore in Sudan, Zimbabwe, Equatorial Guinea, Guinea and in many other countries where the media and NGOs have been banned governments must be forced by the AU to let them in.

Western political and business leaders must stop doing business with all the dictators, and coup makers the likes of Bongo, Obiang Nguema, Gaddafi, Mugabe and all those who have used undemocratic means to hold on to power. Sanctions and embargo targeting these leaders (not their people) should be enforced so as to force them to loose their grip on power. Western and Asia defence companies and contractors who illegally and irresponsibly ship arms to the continent to fuel the conflict and create instabilities for their own personal interests must be identified and barred from doing any business in the continent.

A democratic Africa is the single most important ingredient necessary for attaining economic development because it is an undisputable fact that development cannot take place in an atmosphere of hostilities and instabilities. There is no way Gaddafi who is the Chairman of AU could advice Mugabe or Mwai Kibaki to accept election defeat when he (Gaddafi) has been a dictator for 39 years. There is no way Omar Bongo could advice Obiang Nguema when Bongo is the longest ruling head of state in the world. For Gaddafi and Bongo to offer any genuine advice they must relinquish power and allow free and fair elections to take place.

Tyrannical rule, civil wars, and military adventurism must give way to democratic governance. It is the only way that can bring stability to the continent and prepare her for the economic development that has eluded her peoples for decades. Political stability is highly compatible with economic development; a disruption of one is a disruption of the other. This is the political path Africa must chart if it is to prepare itself for economic development and social progress in this 21^st Century and beyond.

By Lord Aikins Adusei

Political Activist and Anti Corruption Campaigner. He blogs at www.iloveafrica2.blogspot.com

Please Note: This is the first of a three part write up that seeks to offer alternative ideas as to the requirements Africa must fulfil in order to achieve economic development. 

$600 billion drained from Africa

New research has just emergedfrom the University of Massachusets, Amherst, about the astonishing scale of capital flight from Africa. As the research on 40 African countries estimates:

Real capital flight over the 35-year period amounted to about $420 billion (in 2004 dollars) for the 40 countries as a whole. Including imputed interest earnings, the accumulated stock of capital flight was about $607 billion as of end-2004.

(At the bottom of this blog, we link this to an important but often forgotten piece of world history, using the proposals of two wise men to offer pointers for the future.)

Money that flows out of Africa as capital flight generally stays out. The total external debt of these countries in 2004 amounted to "only" $227 billion, leading to another staggering figure. As the researchers put it:

Their net external assets (accumulated flight capital minus accumulated external debt) amounted to approximately $398 billion over the 35-year period.

The same authors, Léonce Ndikumana and James Boyce, very recently presented a brief summary of their research in the latest edition of Tax Justice Focus; this is the full research document. It also updates earlier research by the authors looking at the period 1970-1996. The new report continues:

Over the past decades, African countries have been forced by external debt burdens to undertake painful economic adjustments while devoting scarce foreign exchange to debt-service payments. On the other hand, African countries have experienced massive outflows of private capital towards Western financial centers. Indeed, these private assets surpass the continent’s foreign liabilities, ironically making sub-Saharan Africa a “net creditor” to the rest of the world.

But there is one absolutely crucial difference between the assets and the liabilities:

The subcontinent’s private external assets belong to a narrow, relatively wealthy stratum of its population, while public external debts are borne by the people through their governments.

It continues:

Some of the private assets held abroad by Africans may well be legally acquired. But the legitimacy of a significant part of these assets is questionable. This is especially the case for the wealth held by African political and economic élites in international financial centers that provide the coveted secrecy of banking operations. Recently, international pressure on Swiss banks has uncovered large sums of money belonging to former African rulers including Sani Abacha of Nigeria and Mobutu of the Congo. (former Zaïre). These may be only the tip of the iceberg of looted African national resources. 

Capital flight is notoriously hard to define, but it generally means an outflow of capital that is not part of normal commercial transactions from a country where capital is relatively scarce (seethis for more details). There are several reasons for capital flight, but tax evasion and a desire to grow rich secretly are among the most powerful incentives. This is a massive blight on the continent. Capital flight diverts scarce resources away from domestic investment and other productive activities; and it results in lost taxes for African governments - which are important not only from the point of view of lost revenue, but in terms of the institution-building imperative that we have already remarked upon (the Economist recently noted this point: "the well-off have less incentive to lobby for reforms at home if they are free to store their wealth overseas".) Capital flight accelerates the outflow of human capital too; it has pronounced negative effects on the distribution of wealth within countries; it compounds the debt crises. (By 2000, the report says, debt service amounted to 3.8% of GDP for sub-Saharan Africa as a whole, while they spent just 2.4% of GDP on health in that year.)

The authors rightly conclude that this research underlines the need for greater debt repatriation and forgiveness, but add:

Repatriation of illicit capital and the prevention of future illicit outflows will require a concerted effort by the international political and financial community to increase transparency and accountability in international banking practice.

This report contains many other important things, including country-by-country tables of their estimates; new econometric evidence on the links between external borrowing and capital flight ("out of every dollar of new borrowing, as much as 60 cents left the country in the form of capital flight the same year"); indications that capital flight from Africa constitutes a heavier burden than on other developing regions, even if the absolute volumes are lower; and more.

The authors also contributed to a 2005 book on capital flightwhich includes some fascinating history:

The neglect of capital flight in current debates is striking given the attention it received at the 1944 Bretton Woods conference, (which) is said to have laid the foundations for today's financial order and many reformers today talk of the need for a 'renewed Bretton Woods vision' The Bretton Woods architects saw the regulation of capital flight as a key pillar of the international financial order they hoped to construct. 

The two principal Bretton Woods architects, Harry Dexter White and John Maynard Keynes, were principally worried about large-scale capital flight from war-devastated European countries to the US, destabilising them and turning some of them towards the Soviet bloc. They recognised the difficulties in exerting capital controls, and they addressed these with a further proposal, as the book explains:

They argued that controls on capital would be much more effective if the countries receiving that flight capital assisted in their enforcement. In their initial drafts of the Bretton Woods agreement, both Keynes and White required the governments of receiving countries to share information with the governments of countries using capital controls about foreign holdings of the latter's citizens. White went further in his draft to suggest also that receiving countries should refuse to accept capital flight altogether without the agreement of the sending country's government.

Both of these proposals were strongly opposed by the U.S. financial community which had profited from the handling of flight capital in the 1930s . . . in the face of this opposition, the final IMF Articles of Agreement contained watered-down versions of Keynes' and White's roposals. Co-operation between countries to control capital movements was now merely permitted, rather than required.

The replacement of one word with another has had nothing less than catastrophic consequences for the world's poor. As TJN's John Christensen and David Spencer argued in their recentFinancial Times comment piece, referring to the fact that information on tax matters is only exchanged between countries on request:

In other words, you must know what you are looking for before you request it. This is shockingly inadequate. We need the automatic exchange of tax information between jurisdictions and all developing countries must be included.

The UN Report by the High-Level Panel on Financing for Development of June 2001 (also known as the Zedillo Report, after Chairman Ernesto Zedillo, former President of Mexico) also called for a mechanism for multilateral sharing of tax information. The report said "developing countries would stand to benefit especially from technical assistance in tax administration and tax information sharing that permits the taxation of flight capital."

This shift alone would likely do more good for Africa than all foreign aid combined. The time has come to resuscitate the proposals of the two grand old men of global finance.

ISS Tody: Will The Tax Havens Of This World Survive The Global Recession?

As the maxim goes, every cloud has a silver lining. There is growing hope that this might turn out to be the case with the fallout from the current global financial crisis. One of the defining characteristics of the crisis is the erosion of confidence in the self-regulating powers of markets. In the wake of the summit of the G20 countries in London last week, some critics believe that the deregulation process has been thrust into reverse gear. There have already been numerous company closures, massive job losses, and market collapse, prompting government bailout initiatives in several countries. These developments appear to herald a new era of greater transparency and international co-operation in combating financial crimes. Experts predict that increasing powers will be given to law enforcement agencies to work across borders to track down unlawful capital flight, especially tax evasion.

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The events of the last few weeks suggest that the predictions about greater regulation are not far fetched. On Thursday 12th March 2009, Liechtenstein and Andorra announced that they were loosening their strict bank secrecy laws. The following day, Austria, Luxembourg and Switzerland followed suit. Why are these long-standing offshore financial centres abandoning their tradition of banking confidentiality? Does this mark the demise of tax havens? If so, what will be the implications for developing countries?

 

The distinct feature of financial offshore centres over the years has been that they offered investment environments for foreign companies to either pay very little tax or no tax at all. In addition, they refused to share information on the identity of such companies or on their financial dealings with other countries. Significantly, they would not co-operate with tax authorities from the countries from which companies doing business offshore originated.

 

This protection was over the years extended to individual offshore investors. As a result, tax havens were therefore ideal for criminal elements, seeking to evade tax and to launder ill-gotten wealth. Following up and investigating corruption and tax fraud presents insurmountable challenges for law enforcement agencies if a tax haven is involved. At the heart of the problem lies the fact that tax havens insist that the inquiring agency should present full information on the identity of the account holder as well as the account details. Often this information is the subject of the inquiry, and therefore not readily available. In February 2009, the Union Bank of Switzerland (UBS), which is the world’s largest wealth management firm, admitted that it had helped some of its American customers to evade US taxes. It agreed to pay a fine of $780million and disclose the identity and account information of 250 American clients. In 2008, some banks in Liechtenstein made similar admissions in respect of high net worth German clients.

 

By facilitating tax evasion and capital flight, tax havens impacted negatively on developing countries - which lost both tax revenues and investment capital. Tax evasion erodes the domestic tax base and contributes to balance of payments deficits persistently experienced by developing countries.

 

It must be emphasized that not every individual or company that banked in these tax havens was involved in tax evasion or money laundering. Offshore investment also involves lawfully earned funds, and could be motivated by the uncertainties of economic management in some countries.

 

The global financial crisis has put pressure on tax revenues of developed countries. It also revealed that many of the most complex debt instruments were based in offshore financial centers. Some leaders in the developed world, such as British Prime Minister Gordon Brown, insist that the lifting of tax secrecy in tax havens is central to turning the economic meltdown around. It is argued that financial regulators in tax havens should be obliged to spontaneously disclose information on the identity of offshore investors. They should also disclose full account details and transactions.

 

In response, the tax havens concede their vulnerability to abuse by tax fraudsters. They are however only prepared to enter into bilateral agreements with specific tax authorities. They are firmly opposed to facilitate ‘fishing expeditions’ by tax authorities. In this regard, they are supported by Article 26 of the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD), which provides for the sharing of tax information on a case-by-case basis.

 

Article 26 falls short of the demand by Gordon Brown and others for automatic sharing foreigners’ account information. Assuming that he persuades other G20 countries to support him, Brown still has long way to go before the dear of spontaneous disclosure by tax havens becomes reality. For that to happen, much legislation will need to be passed. Secondly, the tax havens will need to renegotiate various double taxation treaties and enter into Tax Information Exchange Agreements with various States. Some of these treaties will be subject to approval in referenda.

 

What do these developments mean for developing countries? It is increasingly being recognized that steps to assist developing countries to move beyond dependence on aid and debt will require measures to tackle capital flight, tax evasion and the abuse of international trade to launder money. The lifting of the veil of banking secrecy by offshore financial centers presents an opportunity for developing countries to track down companies and individuals involved in tax evasion and laundering of proceeds of tax evasion and corruption in tax havens.

 

There are numerous hurdles still to be overcome. In addition to those raised above are the significant capacity deficits in developing countries. The investigation of tax evasion in developing countries is usually impeded by the lack of specialized training in financial investigation amongst law enforcement agencies.

 

In the final analysis, the fate of tax havens as a catalyst for tax evasion and corruption will largely depend on the determination of developed countries to tame offshore financial centres. The quality and depth of the legislation to achieve this will be critical. The devil, as they say, will lie in the detail.

 

Charles Kamba: Consultant Researcher, Organised Crime and Money Laundering Programme, ISS Cape Town