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Economists Say Africa’s Foreign Debt Fuels Capital Flight

South Africa's President Jacob Zuma holds up a banknote bearing the face of former president Nelson Mandela in Pretoria February 11, 2012.

New research suggests that mismanaged funds from foreign loans amount to more money than previously believed, according to the Africa Growth Initiative at The Brookings Institution in Washington.

Osita Ogbu, a Brookings visiting fellow and professor of economics at the University of Nigeria, said billions of dollars in debt that Africa has accumulated in its post-colonial era are partially a result of irresponsible foreign lenders.

“Look, it took two to tango. You knew that you were lending to a regime that was not representative,” said Ogbu. “You piled up debt knowing that the country did not have the capacity to pay. And, in some instances, you saw part of the money come back to the bank that lent the original money.”

Ogbu, who recently moderated a discussion for the book, Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent said the research by the book’s authors, Léonce Ndikumana and James K. Boyce, highlights how those loans resulted in capital flight throughout Africa.

“In 25 low-income African countries, from 1970 to 1996, capital flight was $193 billion compared to $178 billion external debt,” he said. “If one dollar came in, 80 cents left in the form of private assets, but the debt remains public.”

Ogbu added foreign lenders often knew the money was going to be converted into private assets that would leave the countries rather than go toward the projects they were intended to fund.

“In many instances, the project may not have been executed at all,” he said. “You begin to wonder how does a bank lend money for a project, and will disburse it fully, without even going to provide for that project.”

The authors of the book suggest that international law applies to some of these odious debts, as they referred to them, which means the debts could be cancelled.