Africa is a continent stocked with an abundance of natural resources and a massive labor force consisting of over one billion people. Remarkably Africa remains a region starving, both literally and figuratively, for assistance from wealthy, developed nations in order to escape its state of distress even with these powerful economic factors. Inequality, debt, and poverty have remained synonyms for the lives of many within the continent. Nevertheless with the concluding UN Millennial Development Goals pushing the global community to find ways to end global poverty, increase education and healthcare, and improve equality, Africa has gained momentum to allow itself to progress towards achieving these goals. However in order for this trend to continue it is vital to expose what remains in the way of this continent’s ability to aggressively grow and develop its economy. Recent reports from multiple financial, non-governmental, and watchdog organizations (such as Health Poverty Action, Global Financial Integrity, African Progress Panel , Copenhagen Consensus, and Organization for Economic Cooperation and Development) have revealed that our focus on aid to Africa has distracted us from the factors which constrict the continent’s financial growth and suggest multiple approaches to end the pillaging of its wealth and resources. What has been coined as an “aid smokescreen” by Health Poverty Action seems to be one of the greatest factors contributing to the persisting state of restricted African growth. “Repairing with the right hand what we ruined with the left” as sociologist and cultural critic Slavoj Žižek puts it, has been the common policy for many corporations and nations working within Africa. While these private and state entities provide multiple streams of financial support for the region it seems these same bodies have been looting vast amounts of Africa’s valuable resources. Removing the misleading view is the first step in finding genuine solutions to help the African nations develop.
Drains in African Economy
Though the exact figures are debatable, and currently quite difficult to trace, by looking at financial inflows and outflows in Africa one report assessed that the region has a net loss of $58 billion a year, or almost $526 million per day. Considering solely support provided by OECD nations, $29 billion, the amount of aid contributed by developed nations compared to resources leaving Africa is insignificant. Despite the fact that aid, grants, loans, and other private contributions provide $134 billion in financial support to Africa, systematic losses in the form of debt repayments, profits funneled by multinational corporations, mandatory low-carbon development plans and climate adaption, illicit financial flows, illegal fishing and logging, and the cost of “brain drain” from the labor force removes an estimated $192 billion from this disadvantaged region. To understand the depth and effects of these troubling systematic losses in Africa it is helpful to look deeper into the details of some of these negative economic factors.
Looming debt repayments have shackled Africa in a position of difficulty for decades. Despite the reforms that came after the debt crises of the 1980’s and 1990’s, African nations remain in a struggle to return the loans given to them by developed nations, international financial institutions, and private banks. In total, $21 billion a year is spent on paying back their debts (Health Poverty Action). At current rates this number is only expected to grow as foreign loans to the region have doubled, increasing from $9.9 billion in 2006 to $23.4 billion in 2012. Much of this lending is fuelled by institutions that borrow at lower rates from developed nations in the EU and the United States which are then offered to African nations at a much higher rate. Consistent borrowing at rates in which many nations cannot repay in total may create a “debt bubble”, having devastating effects on the region and beyond. Sadly the popular response to this inability to return loan debts by nations and institutions has been to lend even more, similar to the processes which ravaged the economies of Greece, Ireland, and Portugal in recent years.Multinational companies (MNCs) have moved swiftly into voids within the African economy. The global economy has dictated that Africa needs to aim towards an export-oriented market while remaining open to foreign trade and investments. In outflows of profits, the Health Poverty Action reports that $46.3 billion is taken from Africa every year as a result of the extensive presence of MNCs. This figure is not including the extra profits a company makes on products bought in Africa for a low price which are then resold at much higher rates. Even with the shocking levels of profit that MNCs remove from the region annually, they remain welcomed by African nations with open arms as MNCs typically stimulate economic growth for a nation through job creation and new investments. Yet the tax incentives which persuade MNCs to invest in these nations also take away money from important development sources and allow these corporations to achieve extravagant amounts of profit. As well a process known as “underpricing” takes advantage of these desperate African economies. In order to increase their desirability even further, state entities and national corporations often undervalue their assets then trade them to foreign enterprises at a price that is considerably less than their true value.
A study by the African Progress Panel discovered that underpricing practices within only five deals in Democratic Republic of Congo between 2010 and 2012 resulted in $1.36 billion worth of resources lost, double the annual budget for health and education in the nation. This means more resources being repatriated and less money going back into the African communities.The production of greenhouse gases from industrialized nations alongside natural causes of climate change has determined that Africa must find an alternative route on its path of development.
Africa is now forced to find new methods of adaption and take on costly low-carbon development plans in its efforts to increase its economic capabilities. Surprisingly, climate change has and will continue to have some of its most dramatic effects on this region. A few of the impacts of these conditions include water shortages, numerous heat waves, soil contamination, displacement of persons, extreme weather conditions and less land suitable for agriculture. Adaption to these conditions is estimated by UNEP to cost between $14-15 billion in Sub-Saharan Africa and about $2.5 billion in the Middle East and North Africa region a year, with a large potential of increased financial need after the next ten years as the environment continues to change. These funds would provide Africa with disaster relief resources, better water irrigation and drainage, improved food storage, stronger infrastructure, and allow for sustainable lifestyles to develop, all of which are crucial for future African prosperity.
To develop the proper technology and infrastructure to support the electrical needs of a growing Africa and to resist carbon based development the African Progress Panel estimates upwards of $55 billion per year will be required until 2030. Without this funding the needs demanded by economic growth, increases in population, and urbanization will remain unanswered, drastically slowing the achievement of their development objectives. Yet with proper subsidies, credible taxation, and increased aid throughout the continent this number would be achievable fairly quickly.Of all financial outflows in Africa, the most elusive to track and understand objectively are illicit financial flows (IFFs). IFFs are both illegal and morally questionable financial exploitations. Finding exact data on IFFs is difficult to gather as a “global shadow financial system” facilitates IFFs capabilities. The use of tax havens which have low or no tax rates and high financial secrecy allows corporations and corrupt officials to move money secretly with minimal charges.
Additionally trade mispricing practices are used to distort the true cost of goods, reducing the taxes collected on these goods, which are then resold in more lucrative markets, giving users vastly higher profits. Lastly utilizing systems which disguise the real owners of corporations protects themselves from any liability for their exploitatory practices. The use of this hidden system has seemed to increase since recent economic liberalization policies have created weaker regulations within the African economy. The amount of funds that IFFs funnel out of the continent varies based on which report one explores, with Global Financial Integrity projecting numbers as high as $1.8 trillion over a 39-year period (1970-2008) or almost $46.2 billion a year and African Union high-level panel with support of UNECA and African Progress Panel reporting that IFFs account for up to $50 billion in losses annually since 2000, this is more than the entire economy of Ethiopia. These lost funds account for 5.7% of GDP in the entire Sub-Saharan Africa region. Furthermore IFFs have had other dramatically negative effects on Africa’s development including its drain of hard currency reserves, impairment of long-term economic growth, contributions to heightened levels of inflation, reduction of income from taxes, weakening of domestic investments, and diminishment of free trade values. The startling results of these reports go against the popular narrative about African economic deficiencies as presented by the media. Typically the aid given to this and other poverty stricken regions has been the focal point of most stories. Aid is framed as a duty and moral high ground for developed nations which makes the public feel confident in the proactivity of their nations in the issue. But by solely focusing on the aid that a nation provides, the reality that billions of dollars are taken from Africa every year remains unnoticed. Furthermore research conducted by Andrew Darnton and Martin Kirk shows that by framing aid to Africa as a “powerful giver, grateful receiver” dynamic a notion of superiority is created. This narrative makes African people out to be poor, corrupt, and helplessly in need of intervention from wealthy nations which constructs power structures and perpetuates the status quo.
Suggestions for Change
It is obvious that we need to find real, effective solutions to solve the ailments that Africa faces. Innovation and ingenuity are essential in order to assist African control of its valuable financial resources and to continue its development so the region can continue to flourish. Fortunately many of the top organizations and institutions have realized this and have begun to contribute suggestions to aid in this mission.
In order to reduce the financial constrictions that comes from debt repayments, an IMF report highlights the beneficial impacts of grants over loans to Africa, suggesting that this would assist countries develop their local economies and improve their ability to achieve debt sustainability. As well UN-NGLS proposes that an arbitration mechanism needs to be put in place which would hold leaders responsible for their bad lending practices and force lender institutions to accept reasonable repayment conditions that would end this process that harms the already marginalized people of Africa.To end the exploitation of Africa resources and cut the extraneous profits gained by MNCs, ICRICT’s report presents multiple solutions including curbing “race-to-the-bottom” tax competition, strengthening legal enforcement capabilities, and reforming tax treaties. Another solution from Health Poverty Action recommends that countries support the United Nations in developing an international agreement which would bind countries to protect human rights over MNC interests. Also this report suggests that MNCs should not be granted access to Inter State Dispute Settlement (ISDS) mechanisms which give them a special legal process not open to the everyday citizen.For solving the issues that come with developing in a time of climate change, Christian Aid highlights the importance of finding local, sustainable renewable energy, and energy efficiency in African growth projects which requires large investments in green infrastructures and technical expertise. As well Africa Progress Panel emphasizes the importance of setting ambitious climate change targets in upcoming conferences by the global community in order to slow the negative effects brought on by climate change in the continent and abroad.Lastly to close the loopholes that allow for IFFs there needs to be a strong push for financial transparency and accountability globally. OECD suggests that by developing stronger institutional abilities that can collect and share their financial information with ease is the first step in ending these illicit practices. Additionally Global Financial Integrity proposes a need for strong policy measures that curb the underlying factors of IFFs including illegal trade (narcotics, sex, and human trafficking) and tax havens, as well recommending that African nations pressure the G-20 to have tighter oversight over international banking practices.
Though the year is already halfway over there are still many opportunities for these suggestions to enter into policy conversations, alleviating the financial injustices challenging African development. The Financing for Development Conference in July, the UN summit on Sustainable Development Goals in September, and the UN Climate Change Conference at the end of November provide the perfect platforms for nations and advocates to publicize and suggest suitable strategies for alleviating the financial struggles in Africa. Yet since international diplomacy is typically a drawn out process, potentially an even more powerful method for creating change may be increasing public pressure on state and international entities in the developed world to alter their policies towards Africa and the global financial market. Escalating public awareness on the issue is as simple as sharing this information with family members, friends, and other colleagues. Once people know the realities behind African plight and its exploiters are held responsible, it will be possible for true change to be achieved.
Resources:
http://www.gfintegrity.org/storage/gfip/documents/reports/gfi_africareport_web.pdf
http://www.oecd.org/corruption/Illicit_Financial_Flows_from_Developing_Countries.pdf
http://www.copenhagenconsensus.com/publication/post-2015-consensus-iff-assessment-cobham
http://www.unep.org/pdf/AfricaAdapatationGapreport.pdf
http://www.regionalcommissions.org/hlpiffnote.pdf
https://www.imf.org/external/pubs/ft/fandd/2004/09/pdf/clements.pdf
http://www.investopedia.com/terms/b/bubble.asp
http://www.investopedia.com/terms/b/brain_drain.asp
http://www.un-ngls.org/orf/cso/cso7/africa.pdf
http://www.christianaid.org.uk/images/LowCarbonAfrica.pdf
https://www.youtube.com/watch?v=hpAMbpQ8J7g
http://www.un.org/millenniumgoals/
http://www.icrict.org/wp-content/uploads/2015/06/ICRICT_Com-Rec-Report_ENG_v1.4.pdf
http://app-cdn.acwupload.co.uk/wp-content/uploads/2015/06/APP_REPORT_2015_FINAL_low1.pdf
