Seized Funds Should be Spent on Social Schemes

January 17, 2005
Calestous Juma

Financial Times

In an unprecedented response to development needs, the Paris Club of rich lender countries has decided to freeze loan repayment by nations affected by the Indian Ocean tsunami disaster. The decision follows calls by UK government leaders to write off debt owed by poor countries.

This important gesture highlights the wider problem of how developing countries can broaden their financial base for development. Money embezzled by government officials and hidden in foreign banks is a possible additional source of funds. It should be repatriated, put in private foundations under appropriate legislation and used to support priority areas such as education, health and infrastructure. Doing so raises a number of legal and moral issues, as noted by the 2003 United Nations Convention against Corruption. But so does doing nothing.

The UN estimates that about Dollars 11bn (Pounds 5.9bn) was looted from Nigeria and Kenya by corrupt government officials in the 1990s. The estimate puts the plunder of Nigerian assets at Dollars 7.7bn, of which some Dollars 2.2bn was exported to other countries. Kenya's loss to corruption is put at more than Dollars 3bn. In addition, Mobutu Sese Seko is reported to have embezzled nearly Dollars 5bn from former Zaire during his rule, which ended in 1997. Corruption and the transfer of illicit funds have been a big factor in the flight of capital from Africa.

But Africa has no monopoly in this department. Embezzled government funds are the subject of intense debate in Haiti, Indonesia, Iran, Pakistan, Peru and the Philippines, according to Transparency International. In December 2003, the US Department of Homeland Security returned to the government of Nicaragua Dollars 2.7m embezzled by former Nicaraguan officials and illegally invested in South Florida. Such funds could be used to support development activities that are difficult to fund from state budgets.

For example, higher technical education is a critical element in long-term development, according to a UN Millennium Project taskforce on science, technology and innovation. Its report is part of a larger advisory work, Investing in Development, presented to Kofi Annan, UN secretary-general, today. But higher technical education will require increased foreign and domestic funding - and one possible source is repatriated funds channelled through a new generation of private foundations. Foreign and local banks could also be encouraged to make charitable contributions to these foundations.

Pursuing such a strategy would require a number of institutional reforms. Strict measures would need to be adopted to minimise the risk of further corruption. An amnesty on previous embezzlement should not become an incentive for future crimes. Governments will need to pass laws that allow nationals to create and manage private foundations for disbursing the funds to public interest activities. Institutions such as the Ford Foundation of the US could play an important role in supporting the creation of such laws and related institutions.

Creating laws to use looted funds in social programmes should be part of longer-term strategies to generate local revenue for development and should be written to accommodate other donors. The governments of developing countries have often been reluctant to provide tax exemptions for charitable activities. Their main argument has been the potential for loss of revenue, but this is undermined by their lack of action to prevent money going abroad. Given the pressure to attract foreign investment, government officials should see the investment of such revenue as one of the first steps in strengthening the base for local development. Such laws would not only give governments a new vehicle for contributing to development but also offer opportunities to improve governance.

African governments would need to work closely with the industrialised countries where the funds have been hidden, and with financial intelligence agencies. Information obtained through such means should help governments strengthen their capacity to negotiate with suspected looters. Exploring new avenues for funding long-term development is just as important as freezing repayment of foreign debt. The time has come to debate this option in the open.

Calestous Juma is professor of the practice of international development at Harvard University's Kennedy School of Government and co-author of Innovation: Applying Knowledge in Development.

Print print | Email email