A leaking ship: The role of debt, aid and trade

2005 was supposed to be a year of action for Africa, with demands for “more and better aid, debt cancellation and more just trade policies”. What happened? Charles Abugre from Christian Aid offers some insights into the demands of the last year and provides pointers on where African civil society should focus their energies in the related areas of aid, debt and trade.

The rationale behind the “more and better aid, debt cancellation and more just trade policies” is that these will create the conditions to ensure adequate resources to finance Africa’s development. Undoubtedly, if fully addressed, these will put more money in the hands of governments and people and ease the resource constraint. We will argue however that on their own – never mind the quality of aid, the speed of debt cancellation, the degree of market opening in the north and the end of export subsidies - these demands will not provide the resources adequate for Africa’s development.

These demands, though relevant, are slightly misplaced in their singular focus on sources of “inflows” to the total denial of the mechanisms of “outflows”. It is the balance of inflows and outflows that create the net resources for development. We will also argue that the singular focus on “inflows” entrenches the sense of Africa’s dependence and perpetuates the myth of Africa’s resource poverty and powerlessness. In addition, in focussing on trade policy per se at the exclusion of what underlies trade, we miss a fundamental explanation for government’s persistence on liberalisation – beyond the view that they are reckless, ignorant, powerless or uncaring.

More and Better Aid

Our demand that governments in the north fulfil their obligation to deliver 0.7% of the gross national products for international development is right. It is indeed a right of African countries in particular, to demand it in view of the fact this promise has been used repeatedly in the past as a bait to secure economic and social reforms in Africa. But realistically, we know it won’t be delivered. The slow pace and low volume of aid increases committed at the 2005 G8 meeting in spite of all the noise, and the subsequent threat by the US to undermine the 0.7% target itself, shows how difficult and risky it is to rely on increasing volumes of aid for Africa’s development. The explanation is simple, to the extent that traditional aid continues to depend on taxpayers in the north, its ebbs and flows will depend on the political temperature and economic performance in the north, especially Europe.

But the key problems of aid are its purpose, its governance and its impact on the psychology and accountability of our governments and elite. Official development aid is hardly ever completely altruistic or single-purpose or hardly ever completely divorced from foreign policy. Consequently, we are constantly going from opposition to one thing or the other associated with the provision of aid, e.g. tied aid, policy conditioning; human rights conditioning, policy leveraging and more recently the increasing link with the war on terror.

Regardless of the rhetoric, aid cannot be separated from foreign policy objectives and to the extent that these shift, the purpose of aid will shift. In any case why not? Why shouldn’t taxpayers in the north demand that their taxes serve values and goals they hold as dear to them? Why shouldn’t they expect their governments to account for the impact of aid, therefore put in place measures to ensure that their money delivers the purpose for which it is given.

Conditionality is an important issue for Africa largely because aid forms too large a share of budgets, therefore risks associated with aid policy are more significant for African than other continents where aid forms a minuscule proportion. Whilst it is proper to keep ensuring that the conditions associated with the provision and management of aid do not exacerbate Africa’s development problems, the real challenge is to reduce its importance to Africa’s development.

The more debilitating impact of development aid is what it does to the mentality of the African elite and to the democratisation and accountable governance process. Governments have developed the myth that their economies cannot survive without aid. In reality it is their governments and the patronage systems that maintain them which are under threat without the aid machinery.

The competition among African governments for inclusion in the club of favoured nations leads to wilful abandonment, to donors, of sovereignty won at the cost of lives in the anti-colonial struggle. The multi-donor budget support arrangement is one manifestation of this loss of sovereignty. Without a break in the aid dependency mentality Africa stands no chance of building democracy based on accountability to citizens. Worst still, the imagery that aid agencies – private and official – find necessary to deploy in order to sustain domestic political interest for aid is often an affront to the African personality and spirit, diminishes the African self-worth and perpetuates negative stereotypes. Whilst we cannot ignore aid, we should not be glorifying it.

Sometimes we in civil society contribute unconsciously to the erosion of sovereignty and the loss of self-worth. We are sometimes quick to demand or endorse “governance conditionality” where aid and debt relief is made conditional to progress in these areas. To monitor compliance often requires even greater involvement and power of donors in domestic governance. It is like saying that new forms of colonisation are acceptable on human rights grounds. This is dangerous. Yet, there are cases where human rights abuses, dictatorship and corruption are at such a level that the impact of debt relief and aid will be to strengthen repression and enrich a few than promote development. What do we do under this situation?

A solution could be based on the principle that regional political bodies are better placed to manage political problems in member states. This is the principle applied by ECOWAS, SADC and the AU in conflict resolution and peace building/keeping. This is also the principle underlying the Africa Peer Review Mechanism (APRM). We propose a Peer Trust Fund to be managed by the AU and used as the financial muscle behind the APRM. Debt relief and humanitarian funds meant for countries abusing the citizens will be paid into this Fund, to be held in trust for the country and be released by the AU as the country makes progress in the governance areas of concern. Such a mechanism will:

- Strengthen and give teeth to the AU’s desire and capacity to promote accountable and democratic governance in the region;

- Act as a muscle and an incentive for the APRM;

- Take away the excuse of creditors not to write off debts owed to Africa or withhold aid needed for humanitarian purposes but which, for reasons outlined above, cannot be channelled directly to an abusing country or to NGOs;

- Allow Africans and their political institutions to drive their own political reforms;

- End the arbitrary and selective means by which donors apply governance conditionality.
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So what should we do about aid:

- Support our northern partners’ efforts to make their governments fulfil their part of the global compact but scale down its importance in Africa’s plan of action;

- Support the establishment of a Peer Trust Fund to assist the AU to deal with the governance issue;

- Increase domestic CSO interests and involvement in budget processes so as reduce the influence of donors on budget governance and steer budgets to deliver public services and fight corruption;

- Oppose donor-driven budget management arrangements that undermine parliamentary oversight and propose parliamentary oversight procedures that are transparent and inclusive of civil society.

Whilst these actions are necessary to improve the quality of aid and reduce its damage, they do not address the resource deficit problem per se.

Debt

The issue of debt is not so much what we demand but whom we address with what messages. First the message of ending the debt burden has been directed largely at one direction – the creditors. The message itself has been one of appealing for understanding whether based on justice or empathy. There is nothing wrong with this in as far as this appeal is coming from our northern partners directed at their publics and governments. Whatever strategies they find as feasible to exert pressure for action should be welcomed by us as long us these strategies neither diminish the African dignity nor undermines the messages coming from Africans.

But directing our energies at appealing to northern creditors suggests our lack of belief in the power of the debtor. However, the Nigerian debt relief effort, no matter how unsatisfactory, and the Argentinean debt restructuring initiative suggest that debtors do have power and can force change. In the Nigerian case, it was the threat by Parliament to withhold appropriation for debt servicing and the subsequent road show that the joint committees of parliament undertook in Europe and America to drum home their threat that forced the Paris Club to rush through a debt relief package. In Argentina’s case, an economic and political meltdown resulting from years of faithful compliance with the IMF’s conditions and faithful debt servicing, forced Argentina to impose a unilateral moratorium on debt servicing and then subsequently unilaterally discounted its debt instruments by 75%. After heaving and puffing both the IMF and the private creditors accepted their lot and Argentina’s economy rebounded.

Africa’s debt overhang of over $200bn provides the muscle for a successful collective African threat. This is the task for the African Union and we should make that forcefully clear. The cancellation of $200bn poses no threat to the global financial system but can save millions of lives. Even a threat of a collective moratorium will send the message clear and loud, especially if this threat were accompanied by an enforceable commitment to transparency and anti-corruption and the channelling of the money so saved into revamping public services. We should not celebrate divisive debt relief initiatives like the one delivered at Gleneagles although we can celebrate the victory in terms of the comprehensive principle, i.e. that all debts, including the debt stock owed to the IFIs must be cancelled.

So where do we go from here in relation to debt:

- Welcome the principle of debt stock cancellation agreed at Gleneagles and at the annual meeting of the IMF/Bank but condemn the selectivity and divisive approach;

- Develop a strategy to pressurise the AU and its member states to adopt a debtor-led strategy;

- Campaign for an International Law to regulate international debt.

Trade

The trade policy focus has been in four areas:

- Defending our domestic markets from further harmful liberalisation;

- Defending our producers – especially our farmers – from demise resulting from “dumping” of subsidised imports;

- Seeking market access without reciprocal market opening obligations;

- Promoting regional integration.

These demands are relevant and we should continue to maintain a focus on them. We should prioritise, in particular:

- The defensive interests of our people: For example, our focus on agriculture should be driven by food security and rural development objectives rather than export promotion. Not only is the latter not realistically attainable in a significant way (except traditional commodities) but detracts from what Africa’s needs are at this moment. In this sense, the key policy focus is to prevent any further market opening (liberalisation) whether this is through aid and debt deals or through multilateral negotiations. Better still, the goal should be to protect the space for flexible policy whereby countries can vary tariff policy to meet development goals, starting with consumer goods and shifting to intermediary inputs of capital goods – whilst relaxing consumer good imports – as the economy develops. It is this flexible and progressive use of tariffs that is essential as an industrialisation strategy.

- Conditions for industrialisation: This intersects with the defensive interest. The key constraining factor for industrialisation is demand - the competition from foreign consumer goods which makes it impossible for local produce to carry on producing let alone innovate. Investing in infrastructure including roads and energy will contribute to reducing transaction cost but are not, at the most constraining to industrialisation. We should not be detracted by the so-called supply-side argument that suggests that investments in infrastructure will correct for competitive pressures. The policy demand is to not give any more market access through the Non Agricultural Market Access (NAMA) negotiations and others whilst securing the policy space necessary to allow for flexible use of trade policy.

- Defend public services: The aggressive push embarked on by the EU and the US at the on-going talks to open up the services sector reflects the shift in the structure of these economies into services. It also reflects the increasing importance of services for profits and services as a means of gaining control of scarce natural resources such as water. Without the universal provisions of public services by the public sector, Africa stands no chance of reducing poverty, managing inequality and conflict and growing the labour force of the future. We should put in all the energy we can marshal to campaign for the universal provision of public services by the public sector, the minimisation of commercial ethos in basic services and the avoidance of market opening commitments.

- Regional markets: The key issue here is to support the AU and sub-regional trading blocks to resist the pressure to make market opening and third-party tariff concessions before the dynamics of intra-regional trade are worked out, not least in the Singapore issues. This suggests the need to postpone the market access aspects of the Economic Partnership Agreements (EPAs) with the EU and to shift energy into campaigning for a reform of Article 24 of the Regional Trade Agreements component of the WTO in order to protect the principle of less than full-reciprocity. In the interim we should back the Stop EPAs campaign’s call for a reform of the rules of origin aspects of the Everything But Arms (EBA) to make it meaningful for African LDCs.

- The Mandate of the WTO and dispute settlement: Developing countries, and Africa in particular, stand to lose with a WTO saddled with a broad rather than a narrow agenda. This is because Africa has the least capacity to defend, let alone promote their interest in multiple negotiating forums. The continent’s heavy dependency on the IFIs for resources exposes it to unilateral liberalisation pressures. Once unilateral liberalisation has been embarked upon, there is always the risk of easily committing liberalised sectors to the lock-in mechanism of the WTO. In addition, making commitments at several fronts imposes an implementation burden, the cost of which is relatively higher for poorer countries than richer ones. It is therefore in the interest of Africa to see a slimmer WTO.

However, the decision to focus on trade to the exclusion of investments is a serious limitation. In the first place, the Services Agreement and the Singapore agenda are essentially about investment. It is important to note also that underlying the market access concessions that African governments give to the north, especially in services, is an expectation of foreign direct investments and its mythical value as the solution to underdevelopment. Similarly, FDI expectations underlie the anti-inflationary macroeconomic policies of governments and debt servicing compliance.

The belief in FDI is so strong that governments have happily adopted negative taxation policies to attract foreign companies. To have a chance of developing trade and macroeconomic policies that promote development, restrain our governments from giving away market access concessions recklessly and channel attention towards domestic resources for investments, we must first effectively champion a more realistic and less jingoistic expectations associated with FDI.

So what do we do in relation to trade and investment?

- Encourage national governments to be more proactive in protecting their markets especially in the area of consumer goods, agriculture and essential public services. They will not necessarily suffer punitive action. Even if they did, their economies may still come out better-off.

- Drum home to national governments that opening markets will not necessarily bring FDI and even if it did, FDI will not necessarily bring about development. Encourage the AU to promote a critical debate on the role of FDI in Africa’s development.

- Continue the campaign for policy flexibility and an end to coerced liberalisation. This is crucial for defending Africa’s producers.

- Scale down the export focus of agriculture (market access in the north) and emphasise its food security and rural development objectives.

- Support the Stop EPAs campaign

Financing Development: Beyond aid debt relief and trade

What matters for ensuring that governments have adequate resources to finance development are net flows. This means factoring in not just inflows such as earnings from trade, or aid or remittances but also what is lost to the rest if the world. Debt servicing is one outflow. But there are several other ways in which resources are lost to the continent. Indeed, the reality of Africa is that the resources that leak out far exceed those that flow in. This is why Africa is a net exporter of capital.

And the sums are staggering. Njukumana et al estimate that between 1970 and 2000, whereas Africa received about $100bn id aid (including loans) it lost $274bn in capital flight induced by debt, trade mis-invoicing and imputed interests. Add cumulative losses due to terms of trade of non-oil producing Sub-Saharan African countries, estimated by the World Bank to be in the area of $400bn or 120% of combined GDP. Add also losses that African countries have incurred simply by opening up their markets.

Africa was made to reduce their rates of protection at a pace three times as fast the countries of the OECD. This has left the continent ridiculously open, relative to its stage of development. Christian Aid recently calculated that over the past two decades, Africa lost in income terms the equivalent of over $270bn from the negative growth effects alone of trade liberalization. This amount alone more than matches the accumulated value of grants, loans and net FDI channelled into the continent.

Add losses due to tax competition, tax evasion and tax avoidance. Taxation which has served developed countries well as a means of redistribution and source of investment capital but which has been undermined through the enforced deregulation which has promoted tax competition, tax avoidance and tax havens. As a result, whereas government revenue from taxation in developed countries average 30% of GDP between 1990 and 2000, in sub-Saharan Africa this has declined over the years to an average of 17.9% of GDP.

Losses from tax competition have largely benefited multinational corporations whilst the tax burden has been transferred to wage earners and small businesses. Some analysts suggest that African oil producers command less than 20% of the profits. The rest are lost to a complicated network of unfair trade practices. The transfer of revenues to tax havens by these corporations and rich individuals further exacerbates the revenue loss. It is estimated that at least $11.5 trillion is currently held in about 74 tax heavens – lost to tax authorities – by wealthy individuals. This does not include laundered profits of businesses which operate through tax havens to avoid tax, nor does it include money illicitly transferred abroad through corruption, drugs and money laundering. These latter elements in any case comprise a much smaller share of resources losses than is generally believed.

As is obvious from above, Africa is not as poor or as helpless as is often presented. Instead, it is a continent that leaks heavily. The task is to plug these leaks. To do so, African civil society must turn attention to addressing:

- Support for campaigns aimed at corporate transparency;

- Campaigns against tax concessions and for progressive tax policies;

- Work with relevant networks to campaign for the end to banking secrecy and tax havens;

- Follow-up on the recommendation of Africa Commission report to pursue and return stolen wealth from Africa and to put in place measures to discourage illicit transfers abroad.

Incidentally, taxation and reliance on domestic sources for financing development also provide a more conducive environment for promoting democratic accountability than the dependence on aid. We have an obligation to plug the leaks.

* Charles Abugre is currently the head of policy and advocacy at Christian Aid. He has been a development activist in Ghana and many parts of Africa and Asia. This is a shortened version of a paper presented to an Africa consultation of the Global Call to Action Against Poverty, held in Harare, Zimbabwe from 7-10 November, 2005.

* Please send comments to [email protected]