Foreign investments may replace aid to Africa, but they have hidden costs

What you need to know:

  • It is possible that African countries may end up giving more than they receive.
  • It is very likely that generations of Africans will remain poor

In the early 1990s, Graham Hancock published Lords of Poverty, a book that showed that far from helping countries in need, aid agencies, including international NGOs, were not only providing the wrong kind to poor countries, but that aid was actually impoverishing the poor even further.

He debunked the myth that Africa was a net recipient of cash flows from rich countries by showing that, in fact, African countries were sending more money in the form of debt repayment and other costs to rich countries than they were receiving.

More than a decade later, Zambian economist Dambisa Moyo published Dead Aid, which urged African countries to shun aid and adopt more self-reliant forms of economic development.

These books — and China’s increasing presence on the continent — helped to shift the conversation about Africa from aid to trade. This is why, at a summit of African leaders hosted by President Barack Obama this month, there was increasing talk about America’s desire to invest in Africa, not give it more aid.

LOOK INWARDS

I am afraid, however, that in the clamour for more foreign investments, African countries may end up in the same trap they found themselves in when they visited Western countries with begging bowl in hand.

First, apart from shifting alliances — from West to East — there is little evidence that African countries are willing to turn off the aid tap completely and look inwards to find a solution to poverty and under-development.

African countries, Kenya included, are still receiving massive amounts of aid each year. Indeed, the African Union itself is among the most aid-dependent entities on the continent, and makes little or no efforts to get member African states to pay for their own organisation’s upkeep.

Yet these same African states have no problems servicing large loans from institutions such as the World Bank.

NET LOSS

Secondly, in situations where the bargaining power lies mainly with the investor, it is possible that African countries may end up giving more than they receive.

“The True Story of Africa’s billion dollar losses”, a recent report published by a group of UK and Africa-based NGOs, shows that while $134 billion flows into Africa each year, predominantly in the form of loans, foreign investment and aid, $192 billion is taken out, mainly in profits made by multinational companies, tax dodging and loan repayments.

This means Africa suffers a net loss of $58 billion a year, which is nearly double the amount of aid it receives annually.

The report shows that multinational companies make $46 billion profits each year, while African countries repay $21 billion, often following irresponsible or dodgy loans.

A further $35.3 billion is lost in illicit financial flows facilitated by a global network of tax havens. Wealth is thus concentrated in a network of elites — both local and foreign.

“Africa is not poor, but a combination of inequitable policies, huge disparities in power and criminal activities perpetrated and sustained by wealthy elites both inside and outside the continent are keeping its people in poverty. The UK and other wealthy governments are at the heart of this theft,” says the report.

'MILITARISE' COUNTRIES

It further notes that aid is a political tool used by rich nations to gain contracts. For example, the UK and the United States have often used aid to “militarise” countries; they have been using it to generate military investments, by pegging aid to a contract for military supplies and equipment from the donor country.

The report’s authors urge countries such as the UK to close down tax havens that have not only facilitated illegal financial flows, but also fostered corruption amongst Africa’s leaders. They also call on multinationals to stop plundering Africa’s resources and demand greater transparency in loan agreements.

It is unlikely, however, that the report’s recommendations will be taken seriously by either African countries or donors.

With increasing interest in Africa’s oil reserves, and ever-increasing loans from other donors such as China, it is very likely that generations of Africans will remain poor — and continue to service rising debts, thus ensuring that countries outside the continent continue to benefit from Africa’s wealth.