James K. Boyce and Léonce Ndikumana
Political Economy Research Institute
November 22, 2002
…An alternative strategy is for African
countries to selectively repudiate past loans, invoking the doctrine of
“odious debt” in international law as well as historical precedents…
1. Sub-Saharan Africa’s debt burden
Sub-Saharan Africa includes 34 of the 42 countries classified as
“Heavily Indebted Poor Countries” by the World Bank. The debt burden
forces these countries to divert scarce resources from basic
necessities, such as health and education, into debt service. Despite
bearing these heavy social costs, African countries cannot keep up with
the payments, and so they become ever more indebted.
The total debt of sub-Saharan African countries reached a staggering
$209 billion in 2001. In that year, the sub-continent borrowed $11.4
billion, but paid $14.5 billion in debt service – $9.8 billion as
principal repayment and $4.7 billion as interest. As a result, the
region recorded a negative ‘net transfer’ (new borrowing minus debt
service) of -$3.1 billion. This continued a trend of negative net
transfers in the previous decade.
In Sub-Saharan Africa (SSA) as a whole, debt service amounted to 3.8%
of gross domestic product (GDP) in 2000. By comparison, SSA countries
spent 2.4% of GDP on health. The World Bank estimates that only 55% of
the people in SSA have access to clean drinking water, compared to an
average of 76% for low-income countries worldwide (World Development
Indicators 2002). Illiteracy rates and infant mortality rates in SSA
are among the highest in the world.
The inability of many SSA countries to meet their social needs and
escape from debt is, to a large extent, a result of the fact that the
borrowed funds have not been used productively. In theory, borrowing
decisions are motivated by expectations of positive returns to
investment financed by loans, and by expectations of higher future
income to repay loans that financed consumption. In the case of most
African countries, however, it appears that past borrowing was not
justified by either the investment motive or the consumption-smoothing
rationale. Where, then, did the borrowed money go?
2. Debt and capital flight: Africa’s revolving door
Instead of financing domestic investment or consumption, a substantial
fraction of the borrowed funds was captured by African political elites
and channeled abroad in the form of capital flight. Through this
‘revolving door,’ public external debts (contracted via borrowing by
African governments or by private firms with government guarantees)
were transformed into private external assets.
Estimates of capital flight from SSA indicate that the sub-continent
experienced dramatic financial hemorrhage over the past three decades.
In a study of 30 SSA countries, we estimate total capital flight for
the period 1970-1996 to have been about $187 billion in 1996 dollars
(Ndikumana and Boyce 2002; see also Boyce and Ndikumana 2001).
Including interest earnings, the stock of capital flight for the sample
stood $274 billion, equivalent to 145% of the total debt owed by the
same group of countries in 1996. In other words, we find that SSA is a
net creditor to the rest of the world in the sense that external
assets, as measured by the stock of capital flight, exceed external
liabilities, as measured by the stock of external debt. The difference
is that while the assets are in private hands, the liabilities are the
public debts of African governments.
Statistical evidence reveals that external borrowing was the single
most important determinant of both the timing and magnitude of capital
flight from SSA. Over the 1970- 1996 period, roughly 80 cents on every
dollar borrowed by SSA countries flowed back out as capital flight in
the same year (Ndikumana and Boyce 2002). This suggests that external
borrowing directly financed capital flight. Moreover, every dollar
added to a country’s total debt generated roughly 3.5 cents of capital
flight per year in subsequent years, suggesting that capital flight was
also a response to the deteriorating economic environment associated
with rising debt burdens.
The mechanisms by which national resources are channeled abroad as
capital flight include embezzlement of borrowed funds, kickbacks on
government contracts, trade misinvoicing, misappropriation of revenues
from state-owned enterprises, and smuggling of natural resources.
Countries with rich endowments of natural resources, especially when
headed by corrupt regimes, have experienced large-scale capital flight.
During his 32-year reign in the Congo, former president Mobutu
accumulated massive wealth through the diversion of borrowed funds,
foreign aid, and revenues from the state-owned mineral companies
(Ndikumana and Boyce 1998). His personal assets reportedly peaked in
the mid-1980s at $4 billion (Burns et al. 1997). In Nigeria, the
leaders of successive military regimes systematically embezzled oil
revenues for their personal enrichment, often with the complicity of
multinational corporations. In April 2002, an out-of-court settlement
in Switzerland ordered the return to Nigeria of more than $1 billion in
frozen assets of former dictator Sani Abacha and his family
(International Herald Tribune, 2002). A recent IMF investigation
reveals that in the past five years up to $4 billion is unaccounted for
in government finances in Angola (Pearce 2002).
Responsibility for the diversion of borrowed funds falls not only on
past African governments, but also on their creditors, including
private bankers as well as bilateral and multilateral institutions.
Knowingly or unknowingly, these creditors financed the accumulation of
private assets with their loans. In many cases, creditors continued to
pour loans in the hands of corrupt regimes, despite ample evidence that
these funds were not being used for legitimate purposes. Sound banking
practice would have dictated a moratorium on lending to such
governments. Failure to halt lending suggests either that creditors
were shielded from losses or that they were pursuing other objectives.
On the one hand, private lenders were shielded from risk by guarantees
provided by governments and international institutions. All too often,
these guarantees encouraged irresponsible lending. On the other hand,
official creditors continued to lend to client regimes for political
and strategic reasons. The Mobutu regime and the military regimes in
Nigeria are examples of instances where lending supported dictatorships
in the region.
3. What is to be done?
African countries must not only overcome the debt payment crisis, but
also design strategies to prevent borrowed funds from being squandered
in the future.
Since the early 1980s, a series of strategies have been proposed to
alleviate the external debt burden in developing countries. Traditional
mechanisms of rescheduling debt payments have failed, as these only
amount to postponing the debt burden and actually result in an increase
in future debt stocks. The debt forgiveness initiatives that were
initiated in 1988 at the G-7 meetings in Toronto, which provided for
various arrangements aimed at reducing the present value of debt
outstanding, also failed to resolve the debt problem. The
Highly-Indebted Poor Countries (HIPC) debt-relief initiative launched
in 1996 by the World Bank and other donors is a step in the right
direction, in that it provides for larger reductions in the present
value of debt. Yet this strategy too has proven to be insufficient for
reducing the debt burden, due to the slow pace of delivery of relief by
donors and the slow progress of debtor countries in meeting the
often-stringent conditions for qualification. The volume of debt relief
remains low compared to total liabilities of African countries and
their development needs.
One effective strategy for ending the debt crisis in African countries
would be the complete cancellation of all debts. This would release
resources now drained by debt service for reallocation to socially
productive investment programs. While debt cancellation has been
advocated by a number of non-governmental organizations, it 6 seems
unlikely to happen in the foreseeable future. Creditors are unwilling
to set a precedent for across-the-board write-offs, and SSA governments
are unwilling to risk the reprisals that might follow from outright
repudiation of debt. Moreover, even if the debt slate could be wiped
clean at a single stroke and lending were then to resume, in the
absence of systematic changes in the practices of borrowers and lenders
this would simply clear the way for another spin of the revolving door,
setting the stage for a new debt crisis in years to come.
An alternative strategy is for African countries to selectively
repudiate past loans, invoking the doctrine of “odious debt” in
international law as well as historical precedents. At the end of the
19th century, the United States government repudiated the external debt
owed by Cuba after seizing the island in the Spanish-American war. The
U. S. authorities did so on the grounds that Cuba’s debt had not been
incurred for the benefit of the Cuban people, that it had been
contracted without their consent, and that the loans had helped to
finance their oppression by the Spanish colonial government. For
similar reasons, much of the debt of SSA can today be termed ‘odious’.
Well-functioning credit markets require that creditors bear the
consequences of imprudent lending. The notion that creditors should
always be repaid, regardless of how and to whom they lend, is
indefensible. The logic of sound banking suggests that current and
future African governments should accept liability for only those
portions of public debts incurred by past regimes that were used to
finance bona fide domestic investment or public consumption. By
invoking the doctrine of odious debt, they could selectively repudiate
liability for those portions of the debt for which no such uses can be
Application of this strategy of selective repudiation faces two
potential practical problems. The first problem is to determine who
should bear the burden of proof in identifying which portions of past
debts are “odious”. The second is the risk of credit rationing against
African countries that choose to repudiate debt, even if they do so
selectively. Given the evidence of widespread capital flight fueled by
external borrowing, African governments can insist that creditors have
the responsibility of establishing that their loans were used for bona
fide purposes. Following this logic, SSA governments could inform their
creditors that outstanding debts will be treated as legitimate if, and
only if, the real counterparts of the borrowing can be identified. If
the creditors can document where the money went, and show that it
benefited the citizens of the borrowing country via investment or
consumption, then the debt will be accepted as a bona fide external
obligation of the government. If, however, the fate of the borrowed
money cannot be traced, then the present African governments must infer
that it was diverted into private pockets, and quite possibly into
capital flight. In such cases, the liability for the debt should lie
not with the government, but with the private individuals whose
personal fortunes are the real counterpart of the debt.
Some may worry that even selective repudiation is risky, because
“Africa can ill afford to incur the wrath of the hand that feeds it”
(Donnelly 2002). But the question today is: Whose hand is feeding whom?
In recent years, resources flowed from Africa to Western countries,
rather than the reverse, as indicated by the negative net transfers and
massive capital flight. Africa has been ‘feeding’ its creditors. In the
short run, the savings from halting service payments on odious debts
therefore are likely to outweigh any losses from credit rationing. And
in the long run, selective debt repudiation will benefit lenders as
well as African countries. By inducing more responsible lending
practices, the threat of selective repudiation ultimately will result
in fewer losses due to default and greater efficiency in the allocation
of resources by the international financial system. Indeed, if lenders
apply stricter criteria with respect to the uses to which their loans
are put, this will be a desirable change from the standpoint of most
citizens in the borrower countries. Whatever the short-run costs of
selective repudiation, it is a win-win solution for both lenders and
borrowers in the long run.
In addition to greater accountability on the creditor side, it is
equally important that debtor countries establish mechanisms of
transparency and accountability in their own decision-making processes
with regard to foreign borrowing and the management of borrowed funds.
In the absence of debt cancellation or repudiation, the burden of debt
repayment ultimately lies with the population of the debtor countries.
It is appropriate, therefore, to require debtor governments to provide
full information to the public as well as to their creditors, and to
ensure public representation in the management of public debt. In
future years, greater accountability on the part of both borrowers and
creditors will be needed to prevent repeated cycles of external
borrowing, capital flight, and financial distress.
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flight: A Philippine case study,” World Development, 20 (3), 335-345.
Boyce, James K. and Léonce Ndikumana (2001). “Is Africa a net creditor?
New estimates of capital flight from severely indebted Sub-Saharan
African countries, 1970-1996,” Journal of Development Studies, 38(2),
Burns, Jimmy, Michael Homan, and Mark Huband (1997) “How Mobutu build
up to $4 bn fortune: Zaire’s dictator plundered IMF loans,” Financial
Times 12 May 1997.
Donnelly, John (2002) “A bold proposal for poor African nations: Forget the debt,” Boston Globe, 4 August 2002.
International Herald Tribune (2002) “Ex-dicator’s family to pay back Nigeria,” 18 April 2002, p. 3.
Ndikumana, Léonce and James K. Boyce (1998) “Congo’s odious debt:
External borrowing and capital flight in Zaire,” Development and
Change, 29(2), 195-217.
Ndikumana, Léonce and James K. Boyce (2002) “Public debts and private
assets: explaining capital flight from sub-Saharan African Countries,”
University of Massachusetts, Department of Economics and Political
Economy Research Institute, Working Paper 32
Pearce, Justin (2002) “Angola’s ‘missing millions’,” BBC News, 18 October 2002.
World Bank, Global Development Finance, CDROM edition, 2002.
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