Africa: corruption

The continent’s high levels of graft are at the root of its lack of development, and mostly affect the poor

By William Gumede

What is the extent of corruption in Africa? The recent Global Corruption Barometer shows that 12 of the 13 countries with the worst record of bribery are in Africa. The African Union estimates that 25% of the GDP of African states, or some $148 billion, is lost to corruption every year on the continent. The African Development Bank (AfDB) estimates corruption costs Africa up to 50% in lost tax revenues and over $30 billion in aid, annually. As a comparison, Africa receives around $22.5 billion in development aid from industrial countries (pre-2007/2008 global financial crisis figures), according to the Organization for European Economic Cooperation and Development (OECD). In 2014, Kenya sold government bonds to European and US investors to raise $2.82 billion for infrastructure projects and to pay off outstanding debts. However, $1 billion of that amount cannot be accounted for. Recently, Samuel Ukura, Nigeria’s auditor-general, reported that $16 billion in proceeds was missing from the state-owned Nigerian National Petroleum Corporation (NNPC)—income from oil revenue that was supposed to be paid into the treasury.

A report by Global Witness has shown that between 2010 and 2012, major mining concessions were sold by the Democratic Republic of Congo (DRC) in secret and at knockdown prices to offshore companies, which sold it on to international mining companies. It is estimated that the DRC lost $1.36 billion, the equivalent of the country’s combined education and health budgets, in the process. Most African countries at independence started their development with relatively low-economic development foundations. In most instances they inherited no significant private sector, an underdeveloped state sector, and little infrastructure. In order to expand on these rudimentary economic foundations and create wealth, African countries needed to build capable public services, create new private industries and expand infrastructure.

To achieve this, they needed to allocate scarce public resources efficiently to foster equitable development, foster efficient state-owned enterprises and develop quality long-term economic policies, and specifically industrial policies, which are instruments by which government stimulates the economy to create new industries. Furthermore, in the post-independence era, most African countries have continued to export raw materials without adding value, which would provide wealth, bricks-and-mortar investments and jobs. Africa’s economic challenge is to diversify its industrial base on the back of its raw materials and agricultural products—that is, spinning off new industries from these or developing news ones from scratch. Corruption is one of the reasons that Africa has not done so. In fact, since independence from colonialism and white-minority regimes many African countries have de-industrialised—either producing at the same level as independence or at even lower levels.

Corrupt elements in many African countries have often captured the areas of policy intervention which could reverse Africa’s de-industrialisation, causing a vicious cycle of underdevelopment in many African countries. Because the state is captured by corrupt elements, scarce resources are not distributed optimally to boost development. According to the OECD, as a result of corruption, “investments are not allocated to sectors and programmes which present the best value for money or where needs are highest, but to those which offer the best prospects for personal enrichment of corrupt politicians”. Public resources are often distributed where “kickbacks are high”, and tenders are given to the company or individual that pays the highest bribe—not the company that can deliver the best quality products and services and or make the best investment.

Because of corruption, state-owned companies become a drag on public finances rather than a catalyst for growth. Because of corruption, the quality of economic development policies is poor. Because of corruption, very few new dynamic industries are created because resources are channeled to corrupt individuals or unproductive investments. In a corrupt environment, long-term investments—so crucial for Africa’s development—are not a priority. In fact, dominant leaders, groups and factions try to “eat” as much as quickly as possible, and amass wealth, before they are pushed from the feeding trough by the next incumbents.

Alternatively, some dominant leaders, supported by their minions, try to remain in power in perpetuity. This is the phenomenon of leaders in Africa who change constitutions to stay in power for life. They always argue that the people want them or they are the only leaders that can deliver change, or that they want to finish what they started. Because it is so easy for the politically connected to live off “rents”, they lack incentives to build bricks-and-mortar companies. This means that African economies cannot expand productive capacities, because the corrupt milk the existing capacity and kill off new productive capacity by choking off not-so-politically connected innovators, entrepreneurs and new ideas, even before they get to start-up, whether in finance, mining or trading.

Public procurement in Africa, where companies have to bid to deliver services on behalf of government, is especially vulnerable to corruption. The World Economic Forum estimates that 25% of the cost of procurement contracts is lost to corruption, which also undermines the delivery by the state of basic public services. The poor suffer disproportionally more from corruption because they depend on basic public services the most.

Most African countries receive development aid. In many cases such development aid is also captured by corruption and misdirected to the bank account of individuals or to unproductive projects. Ultimately, corruption shatters the confidence of citizens, organisations and investors in the government. When government loses confidence it cannot enforce rules aimed at increasing productive capacity, economic growth and per capita income. Where political leaders, public representatives and government are perceived to be corrupt, private sector organisations and investors also try to shirk their responsibilities.

They may find ways to avoid tax, or to move income offshore, or bribe officials to secure trading licences. The result is that the state is deprived of income. In many cases Western governments and companies have been complicit in encouraging African corruption. Former World Bank chief economist Joseph Stiglitz says: “Every bribe that is taken has a payer, and too often the bribe payer is a corporation from an advanced industrial country or someone acting on its behalf.”

Many African countries with one dominant commodity often experience a “natural resource curse”. This well recognised phenomenon occurs when the export of the commodity does not benefit the country as a whole, but only a privileged few. Stiglitz says one reason for the “natural resource curse” is the prevalence of corruption, whereby Western companies often abet the siphoning off the income from resources to African leaders, governments and elites in return for selling the natural resources at discount prices in global markets. Foreign investment is often also impacted by corruption. In many cases foreign investors are asked to pay bribes to secure tenders, licences and “protection” to operate without interference.

China, for example, has been accused in some cases of targeting African political leaders and governing parties, providing them with patronage, and so securing trading licences, favourable investment terms and the freedom to shirk its duties in terms of local laws on labour market conditions, rights, wages and the environment. In many African countries local and foreign private donors fund governing parties in return for favourable policies, subverting regulations and the drive toward efficient privatisation. This stymies development. Developed countries also contribute to the situation by harbouring the proceeds of corruption in Africa in secret bank accounts.

Africa is losing $50 billion every year in illicit financial outflows because of fraudulent schemes to avoid or evade taxes by governments and companies, according to the UN Economic Commission for Africa (UNECA). According to the report, the continent lost $850 billion between 1978 and 2008. Some $217.7 billion was illegally transferred out of Nigeria, $105.2 billion out of Egypt and $81.8 billion out of South Africa. Separate data provided by Global Financial Integrity has shown that South Africa loses annually about $12.2 billion in illicit outflows. That loss could easily plug South Africa’s fiscal deficit. Former South African President Thabo Mbeki, who chairs UNECA said: “The information available to us has convinced our panel that large commercial corporations are by far the biggest culprits of illicit outflows, followed by organised crime”.

Illicit flows out of Africa come in the form of trade mispricing, payments between parent companies and their subsidiaries, and profit-shifting strategies aimed at hiding income. The UNECA report implicates both African governments and the local and global private sectors invested in Africa, including mining, oil and banking, as well legal and accounting firms. The Nigerian government has successfully lobbied Switzerland to return part of the $380 million looted by former military dictator Sani Abacha and stored in European bank accounts. The World Bank will supervise the transfer. It is estimated that Abacha stole $4.3 billion while in office. Clearly, African countries must put pressure on Western countries to return money looted from the continent by dictators and businesses. Unchecked corruption also leads to a brain drain of Africa’s best talents—its entrepreneurs, professionals and businessmen and women—to industrial countries, robbing African countries of wealth, job creation potential and ideas.

Corruption “distorts market mechanisms like fair competition and deters domestic and foreign investments, thus stifling growth and future business opportunities for all stakeholders”, according to the OECD. Investment flows to countries perceived to be corrupt are at least 5% lower than those to countries perceived to be relatively less corrupt, says the IMF. Corruption also undermines economic policies, the allocation of resources and long-term development planning and fosters business uncertainty. Companies that pay bribes to secure trading, business or mining licences will often find that they are withdrawn in the expectation of more bribes. World Economic Forum figures show that corruption increases the cost of doing business by up to 10%. A percentage point improvement in a country’s corruption score translates into an economic productivity increase equal to 4% of gross domestic product, says Transparency International.

Some African countries have managed to combat corruption, and seen business thrive, investment flowing in and economic growth spiking. The three least corrupt countries in Africa—Botswana, Mauritius and Cabo Verde—also have been the most economically successful. More recently, Seychelles and Rwanda have made dramatic efforts in reducing corruption. The Seychelles has steadily climbed up the rankings of Transparency International’s annual Corruption Perception Index, and is now one of the least corrupt countries in Africa. In 2014 the gross national income (GNI) per capita (the average income per citizen) of the Seychelles was calculated at $13 990. The World Bank calculates a GNI of $12 736 as the upper limit for the upper middle-income classification for a country. In 2015, the World Bank denoted the Seychelles as a high-income country for the first time.

In the Transparency International Corruption Perception Index, more than 50% of respondents in Rwanda believed corruption had declined in their country. Not surprisingly, in the past few years, Rwanda has been one of the few countries to have created a manufacturing sector from scratch. Between 2007 and 2012, almost a million Rwandans were lifted out of poverty. Clearly, African countries need greater political will to deal with corruption, as Rwanda and Seychelles have recently proven. Nigerian President Muhammadu Buhari, elected in March 2015 as the first opposition leader to win a democratic election against a sitting president in that country, is currently showing the resolve to tackle rampant corruption. Mr Buhari has launched corruption investigations into several high-profile figures, including the former petroleum minister, Diezani Alison-Madueke. More recently the Nigerian government removed more than 20,000 non-existent workers from its payroll following an audit, leading to savings of 2.29 billion naira ($11.53 million) from its monthly wage bill.

Nigeria—described as “fantastically corrupt” by British Prime Minister David Cameron—is planning to establish a register of foreign companies bidding for public contracts and blacklisting corrupt ones. Nevertheless, Africa’s civil society, media and individual whistleblowers must continue to point out corrupt practices. They need to be supported by continental institutions such as the African Union, as well as multilateral organisations and the media and civil society groups in industrial countries. Many African countries have established corruption-fighting authorities. However, these need teeth and independence. Many African corruption busters have been put under pressure by their own governments when they uncover corruption. Thuli Madonsela, the Public Protector in South Africa, has been under constant attack by the governing African National Congress. John Githongo, when he was Kenya’s ethics secretary, was hounded by political leaders implicated in wrongdoing. Former Nigerian central bank governor, Lamido Sanusi, was fired by former Nigerian President Goodluck Jonathan after he accused the NNPC of failing to account for $49.8 billion.

African countries need better anti-corruption policies, including competitive procurement procedures or tax systems that discourage corruption, and they need to enforce them. In 2014, the US technology company Hewlett Packard pleaded guilty to bribery charges involving its Russian, Polish and Mexican subsidiaries. They were snared by the US Foreign Corrupt Practices Act (FCPA). US companies engaging in corrupt practices in Africa should similarly be prosecuted under the FCPA. African governments must compel private companies tendering for government contracts to adhere to a set of standards of integrity that require them to foreswear corrupt activities. Civil society and the media should monitor whether such companies adhere to these standards. Western-based civil society groups such as Transparency International, Global Witness and Action Aid have done sterling work in partnership with local African civil society to expose African corruption. Corrupt companies must be named and shamed by civil society, the media and governments. Unless the individuals concerned have to pay a heavy price for it, corruption will continue unabated.

William Gumede is an associate professor at the School of Governance, University of the Witwatersrand, Johannesburg. His latest book is South Africa in BRICS: Salvation or Ruination (Tafelberg).

William Gumede is an associate professor at the School of Governance, University of the Witwatersrand, Johannesburg. His latest book is South Africa in BRICS: Salvation or Ruination (Tafelberg).