Capital flight continues to plague poor nations

According to the Center for International Policy:

“Exactly 10 times the $100bn spent on aid and debt write-offs by rich countries is siphoned out of developing countries, with corporations responsible for 60 per cent of that figure through a web of trusts, nominee accounts and the flagrant mispricing of goods to escape tax………

Cracking down on tax havens and the evasion of taxes by some of the world’s biggest companies is seen as the ‘missing link’ in the poverty alleviation agenda.”

This got me thinking, perhaps naively, why it is that rulers (i.e. presidents and their entourage, most of whom fuel capital flight) in the Global South cannot secure their own property rights.

It makes sense that Mobutu and Co. (perhaps the worst pilferers ever) did not invest in Zaire (presently the moribund DRC) and so siphoned (or allowed allied firms to do so) billions abroad because the country lacked attractive investment options, mostly because of weak property rights. But it is also true that throughout his over three decades in power he and his buddies were perhaps the best placed Zaireans to secure their own property rights. Why didn’t they do it?

The quick answer might be that they had a very limited subjective time horizon and lived in constant fear of coups.

Most of the arguments out there stop here. Time horizon is king. Limited time horizons are bad for long-term investment. Yada yada yada.

But shouldn’t we also expect that after say 10 years in power a leader or elite group updates and realizes that may be they are there to stay, and start laying the foundation for local use of stolen wealth? Some certainly have – Kenya’s Moi and his henchmen come to mind.

The reasons for these leaders to invest locally are legion. The state of the roads, hospitals (think of say Ugandan elites who have to fly to Kenya or South Africa for medical care), insecurity (in Kenya MPs have been attacked by armed robbers), schools, etc etc in these places make it such that an average person in say Palo Alto enjoys a much higher standard of living than some of the wealthier people in the Global South.

What is the point of living in Kinshasa with billions in Europe, and with only one life to live? At what point does it make sense to use some of the money to improve the living standards (even in the most selfish way) in the place where one actually lives?

At the very least, don’t these guys mind the very dusty roads to their residences?

PS: The local use of wealth is, of course, relative. Even Chinese leaders, despite their massive domestic investments, still stash money abroad where property rights are more secure.

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william ruto suspended from cabinet

The road to Rule of Law in Kenya is just beginning to take shape. For sure, politicians will continue to flout the constitution but things are no longer the same. Today, as required by law, President Kibaki suspended higher education minister Hon. William Ruto because of the latter’s pending criminal trial over a fraudulent land deal. Section 62 of the Anti-corruption and Economic Crimes Act states: “a public office charged with corruption or economic crime shall be suspended at half pay, with effect from the date of the charge.”

Given the stature of Mr. Ruto as the ethnic chief de facto political leader of the vast Rift Valley Province, this is a big deal.

The next big test for how committed the ruling class in Kenya is committed to the Rule of Law will be when Ocampo and the ICC come calling with arrest warrants later in the year or early next year. Bigwigs in cabinet and close confidants of both the president and his prime minister are expected to be among those indicted.