New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options, by Léonce Ndikumana & James K. Boyce (April 2008 )

The paper investigated the causes of capital flight and, consistent with
past studies, found strong linkages between capital flight and external
borrowing. The regression results suggest that out of every dollar of new
borrowing, as much as 60 cents left the country in the form of capital flight
the same year. Furthermore, a one-dollar increase in the stock of debt resulted
in 3 to 4 cents of capital flight in subsequent years. The evidence has clear
policy implications for addressing the challenge of heavy indebtedness for
African countries. It suggests that a solution to the problem includes a
combination of better management of debt by African governments, prevention of
capital flight, and repatriation of African assets held abroad.


The paper has advanced the strategy of challenging the legitimacy of parts
of African debts based on three crucial arguments. First, the evidence of strong
year-to-year correlations between external borrowing and capital flight implies
that a substantial proportion of the borrowed funds ended up in private assets
through debt-fueled capital flight. Thus, past borrowing practices failed the
test of benefiting to the people. Second, historical evidence gives strong
indications for complicity of the lenders, who in many instances were aware (or
should have been aware) of the embezzlement and mismanagement of borrowed funds
and the corrupt nature of the borrowing regimes. Thus, historical evidence
establishes the test of creditor awareness. Third, the debts were borrowed in
the name of the people without their consent, which is obvious in the case of
undemocratic regimes. These regimes only exercised their prerogatives of agents
of the people in committing

  the nations to binding debt obligations, while reneging on their
attendant obligation of acting in the interest of the people. Thus, borrowing
practices did not meet the condition of consent by the people. Consequently,
much of Africa’s accumulated debts may be deemed as odious and their legitimacy
challenged by the people of debtor nations.


We argue that the burden of proof of legitimacy of debts must rest on the
lenders. Indeed given the practices of secrecy in western financial centers, it
will be impossible for African governments to locate more than a very small
fraction of the stolen funds that are stashed in foreign banks or other
investments. Enforcing the doctrine of odious debt will result in a win-win
situation for borrowers and lenders in future years. By inducing responsible
lending by Western financial institutions and accountable debt management by
African governments, the strategy will both maximize the gains from external
resources for African economies and minimize the risk of default, maximizing
profits for western bankers. As the African continent searches for ways to reach
financial stability and increase resources for development financing, we believe
that the strategies outlined in this paper for addressing the problem of capital
flight must feature prominently in

  debates at the national level as well as in the international development
assistance community.


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