If you express concerns about the negative consequences that overdependence on aid can have for development, as I did in Mali recently, a common response is that there is no alternative. How else can vital services and infrastructure be funded?
This is entirely reasonable. If there was an obvious alternative, it would have been adopted by now. But aid is not the only option — it is just the easiest. There are myriad policies Western governments could adopt to help Africa and other poor regions finance development. They just happen to be slightly more costly and/or will run up against more powerful vested interests.
The current spotlight on North African despots points to one of these alternatives. Hosni Mubarak, Egypt’s former president, has apparently managed to accumulate $70billion over the years. Libya’s Muammar Gaddafi has something of that order as well, which makes Tunisia’s Zine el-Abidine Ben Ali the region’s presidential pauper with a feeble $3,5-billion to his name.
Since Mubarak assumed the presidency in 1981, Egypt has received $53,6-billion in official development aid (about $80-billion in today’s money), according to figures from the World Bank’s world development indicators. In other words, for every dollar Egypt has received in aid, Mubarak has managed to accrue roughly a dollar for himself, give or take a luxury yacht or two.
We are yet to find out the details of the Mubarak family fortune, how much it is in reality and how it was acquired. We probably never will. It is fair to assume that much of it came from what one expert (Amaney Jamal, a political science professor at Princeton University) describes as “stifling of public resources for personal gain”, including using exclusive access to investment deals that generate hefty profits.
There are various ways to interpret this. You could say that, given the fungibility of money (that is, the ease with which it can be moved within budget lines and bank accounts), donor countries have contributed indirectly to the Mubarak family’s multibillion-dollar fortune. Alternatively, you might argue that the money would have been stifled anyway and that Egypt would therefore have been even worse off without foreign aid.
Stabilising the region
Of course, the primary purpose of aid to Egypt wasn’t really for development, but to bolster a president playing what was seen as a stabilising role in the region — so in that sense, aid worked and Mubarak’s personal fortune was not a primary concern.
Whatever your take, the futility of seeing so much money siphoned out to offshore accounts (or onshore, in the case of London and Switzerland) must give the development finance community pause for thought. We have so far only looked at one family’s wealth; what about all the other officials in Egypt taking their piece of the pie?
Clearly, countries such as Mali have vastly fewer resources than Egypt but on some estimates, African political elites hold between $700 and $800-billion outside Africa. The fact that it is outside Africa is key. If they stole it and reinvested it in their own countries, though the impact on accountability and governance would still be severe, the economic consequences would be less so — it would still contribute to capital formation.
Government corruption is by no means the largest source of capital flight from Africa. Tens of billions of dollars (at least) are lost every year through fake and mispriced trade transactions. Global Financial Integrity, the organisation leading the fight against capital flight, estimates that up to 60% of African trade transactions are intentionally mispriced by an average of 11%.
These figures demonstrate a problem that should have the international community in a frenzy of initiatives and conferences. But in reality there is very little action taking place. Thankfully, more and more officials are waking up to the scale of the problem. A report on good financial governance in Africa, written by the African Organisation of Supreme Audit Institutions, the African Tax Administration Forum and the Collaborative Africa Budget Reform Initiative, places stemming capital flight from corruption and transfer mispricing at the top of the agenda for the next few years.
The challenge of change
The first step should be to improve data on the issue. This is not at all easy, but diverting some of the vast resources spent on trying to improve aid effectiveness to tackle what is probably a more important issue would be a good start. But the real problem will be changing policies at an international level.
Money spirited out of Africa is easy to hide in an array of eager tax havens. Although the damaging consequences of tax havens are fairly obvious (and relate to international crime and terrorism as well as to development concerns), I have yet to hear a single serious reason for their existence. Secrecy is hardly ever in the service of democracy and progress, but it is clear who does benefit from it.
There was some serious talk of tackling tax havens in the brief period after the financial crisis, when systemic change seemed possible. But now corporates and high net-worth individuals have reasserted their dubious right to hide vital information about their activities and progress seems unlikely without concerted political action, so the campaigns emerging on this issue are to be welcomed.
Apart from bringing the era of tax havens to an end, changes in accounting practices are needed to start to bring mispricing under control.
There are other ways to replace aid gradually with more beneficial sources of money for development, including debt relief, reform of local banks (to generate more confidence to lend) and putting foreign reserves to work for development. But beginning to stem illicit capital flows is a vital part of African countries’ efforts to move beyond aid.
It will not be easy. Aid is easy. This is difficult. But it is more important and should therefore be the focus of much more energy. – Guardian News & Media 2011