Looking at 2012, experts from the Brookings Africa Growth Initiative (AGI) and colleagues from think tanks based in the region have come together to produce this year’s issue of Foresight Africa, where they outline the top priorities for the continent for 2012 and beyond. AGI scholars assess what they see as the major challenges for Africa in the coming year and provide policy recommendations on how to manage these challenges and leverage opportunities to catalyze and reignite growth in 2012. Similarly, AGI and its partner think tanks identify country-specific challenges in Nigeria, South Africa, Senegal and Kenya.

United Nations Photo / flickr

The resource curse is a tragic phenomenon that countries well-endowed with natural resources tend to have slower economic growth and poorer development than those without. This theory has been demonstrated very strongly in quantitative terms. According to an analysis of developing countries by Jeffrey Sachs and Andrew Warner, the more an economy relies on mineral wealth, the lower its growth rate. Countries with significant natural resource endowments also tend to have an increased likelihood of experiencing war and violence and a decreased likelihood of having a democratic system of governance.

In January of 2011 the people of Southern Sudan—this also included expatriates and those living in the north—voted overwhelmingly in favor of independence from their northern neighbors. Their vote led to formal independence on July 9^th, 2011, when South Sudan became the world’s newest nation. Given its declaration of independence has followed decades of conflict with the north—in which an estimated 1.5 million people have been killed—the secession itself was relatively painless. In a move emblematic of this relative ease, Sudan was the first nation to officially recognize its new Southern neighbor.

But now that South Sudan has officially asserted its independence, it faces numerous other obstacles. One of the most poignant is its vulnerability to the resource curse, which Secretary of State Hilary Clinton has already strongly cautioned the new nation to beware. South Sudan holds over 75% of what was the united country’s 500,000 barrels per day of oil output. Of the oil, Clinton noted: “We know that it will either help your country finance its own path out of poverty or you will fall prey to the natural resource curse which will enrich a small elite, outside interests, corporations and countries and leave your people hardly better off than when you started.”

As Clinton suggests, there are several external factors which drive this phenomenon: a resource endowment alone is not enough to reduce economic growth. South Sudan faces many of these predispositions. The resource curse is often the result of the decline in the competitiveness of other sectors precipitated and volatility of revenues caused by natural market fluctuations in the prices of these goods. Oil prices face impressive magnitudes of fluctuations most as a result of supply and demand, but also of speculation and South Sudan has few other mature economic industries. As a new nation coming from 50 years of conflict and marginalization, South Sudan is exposed to a variety of other exacerbating factors, including weak, ineffectual institutions and government inefficiency and mismanagement. The country derives nearly 98% of its budget from oil, which is another red flag. A government which is dependent on oil revenue has little accountability to its citizens through taxation.

The consequences of the resource curse are grave. As we see in countries like Angola and Sierra Leona, endowments in natural resources like oil and diamonds can lead to decades of conflict as different groups fight for their share. In other countries—Libya is an example—a leader (or, at times, leaders) uses profits from the resource to govern and so do not need to be held accountable to the population through taxation. Other countries fall victim to excessive borrowing internationally, corruption, revenue volatility, and a tug-of-war between the people and the government. The list goes on.

But the resource curse is not inevitable. There are tools governments can use to reduce their exposure to the damaging effects of mineral extraction. One of the most useful is transparency.

To this end, South Sudan has joined the Extractive Industries Transparency Initiative (EITI), a voluntary framework under which governments publicly disclose their revenues from oil, gas, and mining assets. Likewise companies make parallel disclosures regarding payments they are making to obtain access to these resources. This data provides an important point of comparison and fosters integrity and accountability. The head of the United Nations Mission in South Sudan welcomed the commitment, noting “This step is one of the important measures to improve governance announced by the government.”

While this step is certainly not sufficient to avoid the resource curse, it certainly is necessary. I am heartened both this action and by South Sudan President Salva Kiir’s pledge to improve transparency and accountability, particularly in the oil sector. Of course, as Clinton has said, “the proof is in the pudding.” But the nation has taken one important step forward in proving a good-intentioned government can change the fate of a nation predisposed to the resource curse. And maybe South Sudan will be just that nation.

Image License:  Some rights reserved by United Nations Photo

Global Financial Integrity

WASHINGTON, DC – Corruption, kickbacks and bribery are on the rise in Ethiopia, according to a forthcoming report from Global Financial Integrity, a Washington-based research and advocacy organization.  According to the study, illicit financial flows out of the African nation nearly doubled to US$3.26 Billion in 2009 over the previous year, with corruption, kickbacks and bribery accounting for the vast majority of that increase.

GFI Economist Sarah Freitas, who co-authored the upcoming report with GFI Lead Economist Dev Kar, revealed the data in a blog post today on the website of the Task Force on Financial Integrity & Economic Development (financialtaskforce.org).

Ms. Freitas wrote:

An upcoming report by Global Financial Integrity finds that Ethiopia, which has a per-capita GDP of just US$365, lost US$11.7 billion to illicit financial outflows between 2000 and 2009.  More worrying is that the study shows Ethiopia’s losses due to illicit capital flows are on the rise.  In 2009, illicit money leaving the economy totaled US$3.26 billion, which is double the amount in each of the two previous years.

The report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, shows that the vast majority of the rise in illicit financial flows is a result of increased corruption, kickbacks, and bribery while the remainder stems from trade mispricing.

Ethiopia is one of the poorest countries on earth.  Plagued by famine, war, and political oppression, 38.9% of Ethiopians live in poverty, and life expectancy in 2009 was just 58 years.   In 2008, Ethiopia received US$829 million in official development assistance, but this was swamped by the massive illicit outflows.  The scope of Ethiopia’s capital flight is so severe that our conservative US$3.26 billion estimate greatly exceeds the US$2 billion value of Ethiopia’s total exports in 2009.

The people of Ethiopia are being bled dry.  No matter how hard they try to fight their way out of absolute destitution and poverty, they will be swimming upstream against the current of illicit capital leakage.  The global shadow financial system happily absorbs money that corrupt public officials, tax evaders, and abusive multi-national corporations siphon away from the Ethiopian people.

The full article can be read here.

Ethiopia is not the only country to be highlighted in the organization’s upcoming study.  Indeed, in a similar blog post published last week, Ms. Freitas revealed that the report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, found that Syria had lost US$23.6 billion in illegal capital flight from 2000-2009.  The report is the annual update to GFI’s previous studies measuring the illicit financial flows out of 160 different developing nations.  This will be the first of GFI’s studies to include data for the year 2009.

To schedule an interview with Ms. Freitas or Dr. Kar, or to receive an embargoed copy of the report, contact Clark Gascoigne at cgascoigne@gfintegrity.org or +1 202 293 0740 ext.222.

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Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext. 222.

________________

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org. 

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A Market in Harar, Ethiopia. flickr / A. Davey

An upcoming report by Global Financial Integrity finds that Ethiopia, which has a per-capita GDP of just US$365,lost US$11.7 billion to illicit financial outflows between 2000 and 2009.  More worrying is that the study shows Ethiopia’s losses due to illicit capital flows are on the rise.  In 2009, illicit money leaving the economy totaled US$3.26 billion, which is double the amount in each of the two previous years.

The report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, shows that the vast majority of the rise in illicit financial flows is a result of increased corruption, kickbacks, and bribery while the remainder stems from trade mispricing.

Ethiopia is one of the poorest countries on earth.  Plagued by famine, war, and political oppression, 38.9% of Ethiopians live in poverty, and life expectancy in 2009 was just 58 years.   In 2008, Ethiopia received US$829 million in official development assistance, but this was swamped by the massive illicit outflows.  The scope of Ethiopia’s capital flight is so severe that our conservative US$3.26 billion estimate greatly exceeds the US$2 billion value of Ethiopia’s total exports in 2009.

The people of Ethiopia are being bled dry.  No matter how hard they try to fight their way out of absolute destitution and poverty, they will be swimming upstream against the current of illicit capital leakage.  The global shadow financial system happily absorbs money that corrupt public officials, tax evaders, and abusive multi-national corporations siphon away from the Ethiopian people.

What can be done?  The first step the international community should take is to hamper the ability of corrupt and tax-evading Ethiopians to launder their money in the global financial system.  This could be accomplished by establishing a global system of automatic exchange of tax information. In this way, Ethiopian authorities could much more easily track the bank accounts their tax evaders have established around the world. Furthermore, the G20 governments could push for an end to shell companies by calling for beneficial owners of all companies, trusts and foundations to be known to government authorities.  This would make it far more difficult for the corrupt and the criminal to hide their ill-gotten gains behind a wall of corporate secrecy.

These two measures would immediately curtail the flow of billions of dollars leaving the country each year.  And, by preventing the flow of so much money, countless lives will benefit.

Editorial Note: Later this month, Global Financial Integrity will release its new report, Illicit Financial Flows from Developing Countries over the Decade Ending 2009, measuring illicit financial flows out of 160 different developing countries.  Revealing more data from the upcoming report, Ms. Freitas wrote last week that Syria lost US$23.6 billion in illicit financial outflows from 2000-2009. Sign up here to receive notices when new GFI reports are released.

Image License: This photo has Some Rights Reserved by A. Davey

The Tax Justice Network promotes transparency in international finance and opposes secrecy. TJN was initiated at in 2002, and is dedicated to high-level research, analysis and advocacy in the field of tax and regulation. Tax Justice Network Africa was launched in 2007 with the aim of bringing tax issues to the foreground of the broader development agenda. We work to map, analyse and explain the role of taxation and the harmful impacts of tax evasion, tax avoidance, tax competition and tax havens.

The Budget Advocacy Network (BAN) is a network of CSOs who believe in rights-based approaches to development, promoting pro-poor, inclusive, gender-sensitive and equitable generation and use of national resources through research, analysis, social mobilization and advocacy. BAN has conducted an analysis of policies and financial statements of the 2008-09 Budgets, completed a study on District Budget Oversight Committees, developed the ability to track the flow of resources in the health sector, and cultivated strategic relationship with oversight bodies.

The National Advocacy Coalition on Extractives (NACE) is a coalition of leading national and international non-governmental organisations . NACE envisions a Sierra Leone society where there is a maximum return and benefits from natural resources endowments (mining, forestry, marine). NACE advocates for the implementation of the extractive industry transparency initiative (EITI), empowering CSOs and building a critical mass of local activists to engage on government and mining companies policies and practices. As a national platform for policy dialogue on extractive issues, NACE has established a solid reputation on engaging with mining contracts reviews, influencing mining legislations and policies and publishes evidence-based research report to inform mining policies reviews for change.

The report itself draws on months of research conducted in June- July 2010 by Wilson Prichard and Samuel Jibao. The report was written by Wilson with enormous contributions from Samuel Jibao, Amadu Sidi Bah and Kadi Julia Jumu. We owe a debt of gratitude to all those who contributed their time and knowledge to this report. Finally special thanks are due to former Coordinator of BAN, Mr. Patrick Zombo, NACE coordinator, Cecilia Christiana Mattia for their valuable contributions and ideas that enriched the contents of the report. Our thanks also go to the Mr. Tijani Hamza, Ibis Country programme director and to Mr. Mark Curtis whose work on the mining sector provided significant data for the report. We would like to acknowledge the support provided by the Integrated Public Financial Management Reform Project Unit, the National Revenue Authority, the Ministry of Finance and the host of civil society organisations that participated actively during the validation exercise of the report. We also acknowledge with thanks that this report is produced with funding support from Christian Aid UK, Ibis, UK Department for International Development (DfID) and Tax Justice Network- Africa and Trust Africa.

This video is the second of three parts. Part one, “Should Africa Repay Its Odious Debts?” is available here and part three, “The Legal Basis to Reject Africa’s Odious Debts” is available here.

You can also read their blog post, “How Capital Flight Drains Africa: Stolen Money And Lost Lives” on the Financial Task Force blog here.

Dr. Boyce and Dr. Ndikumana are members of the Task Force’s Economist Advisory Panel.

This video is the first of three parts. Part two, “The Human Cost of Africa’s Odious Debts” is available here and Part three, “The Legal Basis to Reject Africa’s Odious Debts” is available here.

You can also read their blog post, “How Capital Flight Drains Africa: Stolen Money And Lost Lives” on the Financial Task Force blog here.

Dr. Boyce and Dr. Ndikumana are members of the Task Force’s Economist Advisory Panel.

flickr / PlanetObserver

In most financial scams, the victims simply lose their money. In Africa, some lose their lives.

Sub-Saharan Africa experienced an exodus of more than $700 billion in capital flight since 1970, a sum that far surpasses the region’s external debt outstanding of roughly $175 billion. Some of the money wound up in private accounts at the same banks that were making loans to African governments.

Inflows of foreign borrowing and outflows of capital flight are closely intertwined. As we document in Africa’s Odious Debts,there is a strong correlation between the two. For every dollar of foreign borrowing, on average more than 50 cents leaves the borrower country in the same year. This tight relationship suggests that Africa’s public external debts and private external assets are connected by a financial revolving door.

How does it work? Common mechanisms include inflated procurement contracts for goods and services, kickbacks to government officials, and diversion of public funds into the bank accounts of politically influential individuals. Some of Africa’s flight capital comes from other sources, too, such as earnings from oil and mineral exports. But foreign loans make an exceptionally easy mark in that there is no need to bother with the messy business of extracting natural resources to convert them into cash.

Principals and agents

The history of finance is littered with examples of the hazards of lending other people’s money and borrowing in other people’s names. In theory, bankers are meant to serve the interests of their depositors and shareholders by making prudent loans that will be repaid with interest. In practice, however, they often are rewarded above all for “moving the money,” getting loans out the door. In the wake of the U.S. financial crisis, this issue belatedly began to attract attention at the U.S. Fed.

An analogous principal-agent problem operates on the borrower side, where government officials negotiate and disburse loans on behalf of their citizens. Some borrow in the name of the government, line their pockets and those of their cronies, and saddle the public with the debt.

When a fraction of foreign borrowing is siphoned abroad, Africa still receives an inflow of money, albeit less than the face value of the debt. The net drain comes in subsequent years when the creditors are repaid with interest.

Using World Bank data, we estimate that each additional dollar of external debt service means that 29 fewer cents are spent on public health, and that each $40,000 reduction in health expenditure translates into one additional infant death. Putting these together, we calculate that debt-service payments on loans that fueled capital flight translate into more than 75,000 extra infant deaths annually. It is not only money that is being stolen in Africa: it is human lives.

What is to be done?

The hemorrhage of scarce resources from Africa can be curbed. Efforts by some African governments to recover wealth stolen by past officials have won international backing in theStolen Asset Recovery Initiative launched by the World Bank and United Nations Office on Drugs and Crime. More can and should be done to identify looters and their accomplices and to repatriate stolen funds.

Tougher anti-money laundering laws and enforcement are needed to staunch the illicit financial flows from Africa into safe havens abroad. In the United States, Treasury Department officials concede that banks routinely accept deposits of funds that enter the country in violation of existing laws. Moreover, the banks currently are not prohibited from handling proceeds from many activities, such as tax evasion, that would be considered crimes if committed within the U.S.

More transparent information about financial inflows to African governments would also help. Much as the Publish What You Pay campaign launched by international NGOs promotes disclosure of corporate payments for natural resource extraction, a Publish What You Lend campaign could strengthen transparency and accountability in financial markets.

Last but not least, African governments should be encouraged to selectively repudiate debts incurred by past regimes that cannot be shown to have been used for legitimate purposes. The doctrine of odious debt in international law provides a basis for repudiation of debts from which the public derived no benefit, when creditors knew or should have known this to be the case. Added legal grounds for selective repudiation are found in the principle of domestic agency in British and American law, which requires agents to act in good faith in the interest of their principals.

These steps would not only benefit Africa’s people today. They also would help to repair our dysfunctional international financial architecture, strengthening incentives for the exercise of due diligence by creditors and for responsible borrowing by governments. Without these changes, debt relief can offer only a temporary palliative. In the world of international finance, Africa needs justice, not just charity.

James K. Boyce and Léonce Ndikumana are the authors of Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, published by Zed Books in association with the Royal African Society, the International African Institute and the Social Science Research Council.

Image License:  Some rights reserved by PlanetObserver

Global Witness

International oil companies such as the U.S. giant Chevron are beginning exploration off of Liberia’s coastline. However, this new research by Global Witness and Liberian Oil and Gas Initiative (LOGI)¹ suggests that while Liberia has come a long way from the devastating set of resource-financed civil wars that claimed the lives of 250,000 people between 1989 and 2003, serious governance problems persist, and the warning signs for the emerging oil sector are stark.

Curse or Cure? How oil can boost or break Liberia’s post-war recovery shows that even before a discovery is made, there are deep-seated problems in Liberia’s oil sector: government officials and at least one company have paid bribes, contracts have been awarded illegally and companies with little experience in the oil sector have received concessions.

With a crucial election upcoming in October 2011, the new Liberian government and international donors have a choice. They can reform the country’s laws and government agencies so that Liberia’s people benefit from oil. Or they can allow Liberia to continue down its present path, undermining the country’s post-war reconstruction and risking a return to the corrupt, unstable resource management that has characterized Liberia’s history. This report sets out the problems and makes recommendations for what needs to be done.

The full report can be found on the Global Witness website.

Footnotes:

1. This report has been prepared by Global Witness and four Liberian civil society groups: Center for Transparency and Accountability in Liberia (CENTAL), Liberia Democratic Institute (LDI), Liberia Media Initiative for Peace Democracy and Development (LMI) and Sustainable Development Institute (SDI). CENTAL, LDI, LMI and SDI together form the Liberian Oil and Gas Initiative.

LONDON/MONROVIA – Far-reaching reforms of Liberia’s oil sector are urgently needed if its population is to benefit from future oil discoveries, says a report released today by Global Witness (1) and the Liberian Oil and Gas Initiative (LOGI) (2). As the country heads to the polls in October, and with major oil companies such as US giant Chevron trying to find oil in Liberia, these reforms must be a priority for any new government.

Curse or Cure? How oil can boost or break Liberia’s post-war recovery provides an analysis of Liberia’s current oil sector. It finds that government officials and at least one company have paid bribes to ensure contracts were ratified in breach of Liberian laws, while companies with little experience in the oil sector have also received concessions. The report sets out what needs to be done to reform the sector, so that it can be used to generate funds for much-needed development.

“The decisions taken by the new government and international donors in the coming months could define our future: they must reform the sector now or risk continuing the corruption and instability of Liberia’s past,” said Jonathan Yiah of Sustainable Development Institute, a member of LOGI. “The warning signs are stark – this report shows at least one company, and even government officials, bribing Liberian legislators. This must change or we will again waste our resources and lose one of the best chances we have to build a sustainable economy.”

The report raises a number of specific concerns over the governance of Liberia’s oil sector:

• The government agency responsible for managing the oil sector – the National Oil Company (NOCAL) – is also a profit-making enterprise, which regulates the same companies it does business with. This conflict of interest has brought predictable results, with NOCAL paying members of the Liberian Legislature to ratify oil contracts between 2006 and 2008.
• In 2007, Nigeria’s Oranto Petroleum authorized a bribe to be paid to the Legislature in connection with the passage of at least one of its contracts. In 2010, US company Chevron purchased a 70 % share of the same contracts, despite information about how they were obtained being in the public domain.
• Liberia’s oil laws contain wholly inadequate provisions for the impact of oil extraction on Liberia’s people and environment, and the country lacks the financial safeguards to protect its economy from being destabilized by, or over reliant on, oil revenues.

“The Liberian Government has made some promising improvements in the resource sector, promoting transparency through the Liberian Extractive Industries Transparency Initiative and developing a National Energy Policy that outlines oil industry reforms,” said Global Witness campaigner Natalie Ashworth. “However, this reformist spirit has been undermined by poor implementation and a tendency of government officials to break their own laws in the pursuit of apparent quick wins.Curse or Cure shows how much more the Liberian Government and partners like the US and Norwegian governments have to do to clean up the country’s resource trade.”

Today’s report outlines a series of reforms that must be adopted to achieve this goal:

• The power to regulate oil companies should be taken away from NOCAL and given to a separate agency.
• Separately managed oil revenue savings accounts should be established to prevent Liberia’s economy from becoming over reliant on oil money.
• New oil laws should be developed that contain human rights, labour and environmental safeguards.
• The government should investigate evidence of corruption in the sector and enforce its anti-bribery and transparency laws – this includes publishing all oil contracts.

Most importantly, the Liberian Government and international donors should undertake these reforms through a transparent and inclusive process, involving all relevant government agencies and representatives of Liberian civil society.

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Footnotes:

1. Global Witness investigates and campaigns to prevent natural resource-related conflict and corruption and associated environmental and human rights abuses
2. This report has been prepared by Global Witness and four Liberian civil society groups: Center for Transparency and Accountability in Liberia (CENTAL), Liberia Democratic Institute (LDI), Liberia Media Initiative for Peace Democracy and Development (LMI) and Sustainable Development Institute (SDI). CENTAL, LDI, LMI and SDI together form the Liberian Oil and Gas Initiative.

Contact:

Global Witness:

Liberia: Natalie Ashworth, +231 (0)77 353 104, nashworth@globalwitness.org; Jonathan Gant +231 (0)77 080 651, jgant@globalwitness.org;

UK: Oliver Courtney, +44 (0)7739 324962, ocourtney@globalwitness.org

www.globalwitness.org

Centre for Transparency and Accountability in Liberia (CENTAL):

Thomas Doe Nah: +231 (0) 651 1142, tnah@cental.org

www.cental.org

Liberia Democratic Institute (LDI):

Dan T Saryee, Sr: +231 (0)651 4348, dsaryeeldi@yahoo.com, liberiadmo_institute@yahoo.com; dsaryee@brandeis.edu,

www.ldi-lbr.org

Liberia Initiative for Peace, Democracy and Development (LMI):

John O Kollie: +231 (0)651 3080, Liberia.mediainiative@gmail.com; jkollie2001@yahoo.com

Sustainable Development Institute (SDI):

Jonathan W Yiah: +231 (0)6641 355, managmentteam@sdiliberia.org; listserve@sdiliberia.org,

www.sdiliberia.org.