ATTAC-Yash Tandon - The Role of Foreign Direct Investments in Africa's Human Development

The Role of Foreign Direct Investments in Africa's Human Development

Yash Tandon

The paper was commissioned under a project funded by UNCTAD.

The reigning orthodoxy about Foreign Direct Investments (FDIs), as it applies to Africa, can be simply stated in four inter-related premises.

FDIs are necessary for the development of Africa. Without FDIS there will be no real growth in Africa. Besides the much needed capital, FDIs bring inter alia efficient management of resources, technology, a culture of competition and access to global markets.

However, FDIs can create some difficulties, especially if they take the form of short-term or speculative investments. For example, the volatility of much of short-term capital can create serious balance of payments and other problems.

Hence, it is necessary to work out correct “policy” strategies that minimize the negative effects of FDI flows while maximizing their positive contribution.

It is in terms of this orthodoxy that the Terms of Reference of this particular study were defined (see appendix).

Indeed, the study started with the above assumptions. Therefore, the first task was to present data on the scale and composition of private capital flows to Africa and to ask some empirical questions: does the data confirm that FDIs are increasing in relation to Africa? Are they large relative to Africa’s economies, and therefore of critical concern in formulating economic and Sustainable Human Development (SHD) policy? This was the empirical, or data, part of the study. The rest of the study was to be analytical and evaluative, ending in a set of recommendations on how “good” FDIs may be attracted, and bad ones kept out.

Collecting hard data on capital flows into and out of Africa is, however, a mammoth task. Few individual researchers have the capacity to provide that kind of data for an individual country, let alone for the whole of Africa. Within the UN system it is UNCTAD that is mandated to monitor the movement of global capital and the activities of transnational corporations. This data is collected painfully over the years. They are presented in the annual World Investment Reports (WIRs) and constitute an impressive time-series data that should enable comparisons to be made both in time and in space.

With this ready data on hand, the task of the researcher appeared to be relatively easy. All that was needed, it seemed, was to consult some of the earlier and some later WIRs, draw out the necessary tables of information of which there was no shortage, and get into the more exciting policy issues. Therefore, it came as an unexpected shock to this author that UNCTAD’s data was so seriously flawed. It was not so much the statistical errors that any study of this nature is naturally prone to; it was the whole conceptual and methodological basis of the data that was problematic.

To be sure, when one collects data on the movement of investment capital at a global level covering more than hundred-and-fifty countries, and on the activities of a hundred and more Transnational Corporations (TNCs), one is bound to make mistakes. Or, failing to get reliable data, one may have to resort to making “estimates”. One makes allowances. This is nothing novel in the economics profession or the business world. But if the reliability of the data is put to doubt as a result of serious conceptual flaws, then it is another matter altogether. The point is elaborated later.

Going further into the subject of FDIs and the manner UNCTAD handled the concept it was discovered that the problem lay even deeper. Statistics at best of times are a servant of theory and guided by theory. What theory guided UNCTAD’s WIRs was the question that posed itself once it became clear that the conceptual basis of the data was itself a problem. Were the conceptual flaws of data purely accidental? Were the problems more in the design of WIRs than in data collection as such? If that were indeed the case, what were the design faults, and did they point to a larger picture about the theory of FDIs as the centerpiece of development of the developing countries?

To raise the question was to arouse a hornet’s nest. Too many other questions followed in quick succession. The matter went deeper into the heart of development theory. It became clear that the problem did not lie in UNCTAD itself or in some Stiglitzian problem of “second rate minds from first rate Universities” making policies in intergovernmental agencies.[i] It was not a bureaucratic problem, nor one of lack of intelligence (in the sense of brains or grey matter as opposed to information) on the part of UNCTAD bureaucrats or professionals. Even intelligent minds can be deployed to service faulty designs if the designs are made elsewhere, or by somebody else, or at some other time that is long outdated. It was not simply a “technical” question. It was also a question of power, especially the power to produce and/or legitimize certain kind of knowledge. It led to questions like, what are the power structures of the bodies that design the policies of UNCTAD? Who really made policies in UNCTAD, as indeed who made policies in the World Bank and the IMF? And what body of thought rationalized those decisions?

As this researcher went deeper into the issue, it became clear that the very assumption that FDIs are necessary for development of Africa (or for the developing countries generally) was itself at best an untested theory, and at worst a plain inversion of the truth; that it was growth that attracted FDIs, and not FDIs that brought growth. Indeed, the assumption that FDIs brought growth had become so axiomatic in mainstream economic literature that it became doctrinal heresy even to question it. Everybody seemed to be swearing by FDIs. Nothing seemed enough to attract FDIs into one’s economy. More and more incentives were needed to seduce FDIs, in terms of both inducements and abstinences. For example, workers were expected to abstain from strikes, for if they did in order, for example, to demand higher wages or better working conditions, these were seen to be sending “wrong signals” to foreign direct investors. Similarly, if the strictures of the World Bank or the IMF were not followed to the letter, these too were sending “wrong signals” to foreign investors.[ii] These days one cannot cough in the privacy of one’s home without sending “wrong signals” to private foreign investors! Everybody has to bend backwards to entice the fickle FDI and to keep it at home and prevent it from flying away to greener pastures.

And yet, there was no evidence that FDIs brought development, just as there was no evidence that liberalization, in general, brought development. Both were part of the same axiomatic paradigm.

Some countries in the third world had indeed managed to grow, especially in East Asia, but whether this was an outcome of FDI flows remained at best an open-ended question. The growth of these economies was a function of a complex of factors, and a matter of continuing debate among the more narrowly focused neo-classical economists (who said FDIs played a key role) and the more broadly aligned political economists (who said, inter alia, that the state played the key role). There is no final word on the subject. Even an earlier assumption that the East Asian miracle was a vindication of the market principle was, by late 1990s, seriously challenged from within the World Bank itself (among them, its then chief economist, Joseph Stiglitz).[iii] Many economists made a sudden “discovery” that contrary to market principles the states in these countries were strongly interventionist in the market; that indeed, their economies grew directly as a result of systematic creation of “market distortions”, i.e. deviation from, not conforming to, the market principle.

The problem with UNCTAD’s WIRs, it was discovered, was that it took the market principle too seriously. It also assumed that there was a necessary positive correlation between FDIs and development. As stated earlier, this is a problem not with UNCTAD’s officials as such but with the way development theory has evolved over time and where it rests today. The problem is epistemological not conspiratorial. And therefore in order to explain matters, it is necessary, as we shall briefly do in this paper, to go into the evolution of contemporary development theory and to explore its basic fallacies.

Arising out of the flaws in WIR’s conceptual design of FDI data, and following from its assumed premise that FDIs bring development comes a third difficulty with UNCTAD’s WIR reports. And this comes from it assuming the role of an advocate for FDIs and their principal carriers, the Transnational Corporations (TNCs). At a time when there is considerable skepticism among large sections of world’s population about the role that TNCs play in human society, UNCTAD comes out as a champion of TNCs. This too is problematic. UNCTAD’s advocacy role compromises its role as an agency to gather information on FDIs and TNCs and transmit it to its constituencies in an unbiased manner. By championing the cause of FDIs, and of the TNCs, as the central element in the development strategy of third world countries, UNCTAD (or at least some parts of it) has gratuitously taken upon itself the weight of a theory that is hard to sustain either in logic or in history.

This paper puts to question contemporary wisdom enshrined in the theory that makes FDI flows into developing countries as the central pillar of their development. Development itself is a complex phenomenon. Its reduction to an economic phenomenon has been one of the most egregious faults of neo-classical economics. And further narrowing down of the narrow economic doctrine into FDIs as a source of development is reductionism pushed to its absurdity. Indeed, what is FDI? What is capital? That itself is a question full of snares and pitfalls. The paper tries to finds its way through the misty clouds of FDIs.

The clouds thicken as analysis moves away from the concreteness of extant reality and historical facts rooted in time and place to abstract generalities. Neo-liberal economics as a profession is peculiarly addictive to the habit of creating a “theory”, isolated from a particular reality of time and space, and then applying it to other regions of the world in general. Thus, for example, the much-extolled “flying geese” investment phenomenon of Japan and East Asian economies in the 1970s and 1980s had specific features arising out of the history and political economy of the region at a particular point in time. That “theory” is not only not applicable to other regions of the world, but it is also not applicable to East Asia itself at all time. Theory must flow from and explain reality, but if reality changes or is at variance with theory, then theory must change.

Take the “flying geese theory”, for instance. The infrastructure of East Asian economies were built during the cold war years when their strategic integration into the US economic and strategic umbrella was pivotal to US policy in the far East. After the end of the cold war, their strategic value declined, and so, parri passu, the objective need for the US to make compromises to these economies in terms of their access to American technology, markets and goodwill. In the late 1990s, following the financial meltdown starting with Thailand in July 1997, Japan was precluded, through combined pressure of the USA and the IMF, from baling out the economies by means of a regional fund. This action, more than any other, forced these countries (except Malaysia, because it refused to conform to the strictures of the IMF) to become hostages to IMF policies, which in effect led to asset stripping of these economies, and the sale of these assets to foreign companies. The FDIs that then came to the region from Japan as well as from the US and Europe came in the form of essentially predatory capital that simply acquired assets on the cheap. The vaunted “flying geese” lay prostrate on the ground. They were no longer flying.

Thus the theory of the “flying geese” was based on a phenomenon that was rooted in specific time and space (the cold war period in the context of South East Asia), and yet many economic theorists tried to make this into a general theory that was applicable to all time and all space. South Africa, for example, is often suggested as the lead goose that would take the rest of the Southern Africa into a trajectory of self-sustaining growth in the manner of the East Asian “model”. That model, however, lies today in tatters. The much-advertised “recovery” of these economies since then, as depicted in certain Western media, is clouding the picture even further. Why? Because these economies, and even more so their social and political structures, are still in tatters.

Why this should have resulted in the way it did, is not something that can be explained by any general economic theory, even less by any general decontexualised theorising about FDIs. And this is exactly what certain genre of professional economists tend to do. They put oranges and pineapples in the same timeless and spaceless basket, and try to conjure up “general” theories about the behaviour of FDIs and their putative benefits. This is not to devalue the importance of theory qua theory, but theory must obey certain basic rules of theory-making which a certain kind of professional economists systematically flaunt.

It is in the context of these critical remarks that the paper then addresses the issue of policy. Obviously, it is not simply a question of “sequencing” FDIs so that they are more manageable than in a free market environment. It is also not simply a question of distilling the good from the bad of FDIs, of letting into the country the “good” of FDIs and keeping out the “bad”. The matter is not so simple as that. Many professional economists (with best minds), within the UN and Bretton Woods system and outside, have devoted an inordinate amount of time and energy in separating the inseparable, the good from the bad, the beautiful from the ugly, and in trying to provide a human mask to a tendency that is inherently iniquitous. The successive reports of the Human Development Reports of the UN testify to this inherent tendency of capitalism to polarize richness and poverty.

How this tendency is often ignored or obfuscated is underlined by the following story. In early July 2000, at the time of the “Social Summit plus Five” in Geneva, in the British television series “Hard Talk”, Tim Sebabstian asked the World Health Organisation Supremo, Gro Harlem Brundtland, what she thought about the fact that 20% of the world’s people consume 80% of its resources and that the bulk of the world’s population continues to remain poor. In response she said, yes that was true, but, she confided, “we are moving in the right direction.” And yet the direction is unmistakably that of widening the gap between the rich and the poor countries and between the rich and the poor within countries. How can that be the “right direction”? According to the UNDP, “The gap per capita income between the industrial and developing worlds tripled from $5,700 in 1960 to $15,400 in 1993.”[iv] No amount of theorizing about the allegedly beneficent effects of FDIs on development can mask this reality. The basic law of political economy is to shift the burden of global crisis from rich nations to poor nations, and that of national crisis from the rich to the poor.

The rest of the paper is distributed as follows. The next section draws out the threads of the argument that questions WIR’s figures on FDI flows at both conceptual and methodological levels. The section after that briefly summarises the evolution of the development theory to its present state of continuing mystification. After that the question of “what is capital?” is briefly discussed, followed by the question as to whether transnational capital can be relied upon to serve social goals. The final section then makes some recommendations.

As indicated earlier, it is UNCTAD’s WIRs that carries the mandate within the UN system to prove or disprove the truth of the statement that FDIs bring development to the developing countries. But if the WIRs start with this statement as axiomatic, without having to prove it first, then there are only three ways in which the claimed role of FDIs can be challenged.

One is an alternative empirical approach. Here one tries to show that FDIs do not bring, for example, an effective transfer of technology, or that despite claims, it does not lead to a more efficient allocation of resources, or to an internal integration of the domestic economy. This approach thus seeks to identify all those claims that are made on behalf of FDIs and to disprove those by an empirical approach. This requires the setting up of an alternative database from that provided by the WIRs, and probably a whole new institute generously funded to undertake the empirical research.

A second approach is to question the conceptual basis of the proposition that FDIs bring growth and development to developing countries. If an empirical proposition is based on false conceptual premises then clearly the proposition is hard to uphold, and the conceptual problems need to be addressed and rectified. For example, if by a conceptual twist the capital outflows from a country are somehow shown not to be outflows but something else (as we shall show later in the case with WIRs), then the whole reality of flows of capital can be shown to be opposite of what it is. To give an instance, it can be shown that more capital exited South Africa since 1990 than came in.[v] However, it is possible to define “outflows” of capital in such manner that they are classified as not outflows, but something else, for example, as “dividends” or as “interest” on loans, or as “debt payments”. South Africa can then be shown (as WIRS do) as the largest net recipient of capital in sub-Saharan Africa. But in doing so the WIRs have tried to present day as night and night as day, i.e. an inverse of the truth. In this kind of situation, it is necessary to show that the empirical proposition itself is based on false conceptual foundations.

A third approach is to analyse the theory that informs the premises deemed to be axiomatic. A theory is more than concepts. It is a set of interconnected concepts, propositions and empirical observations that describe or explain a phenomenon. The “modern” theory of development is such a theory. It is a set of propositions of the kind described in the opening sentences of this paper. It starts with some axiomatic propositions, builds certain definitions (e.g. of outflow of capital, or nationality of enterprises) that ensure the internal consistency of these propositions, and then develops an empirical database that “prove” the theory. The theory thus makes a full circle, ending where it started. From the premise that FDIs are good for growth it ends through a circuitous route to “prove” that FDIs are good from growth. To break into the internal consistency of the theory, one has to break the circle, and question the logic and premises of the theory itself.

At the heart of WIR’s fatal weakness lies its theory of development. It is such a fundamental issue that we tackle it later in the paper in the context of examining the evolution of the theory of development in the mainstream economistic thinking. In what follows, we look at two of the many major conceptual fallacies in the WIRs’ theoretical-conceptual baggage. One is the question of nationality of enterprises. The second is the way it defines what constitute “inflows” and “outflows” of FDIs. A lengthier paper would have sought to expose all the inconsistencies of the WIR’s theory on FDIs, but in a short paper this is not necessary once it is shown that two of its critical concepts are seriously flawed.

The WIR’s determination of the nationality of enterprises is seriously problematic. On what basis does it confer nationality on enterprises? It is a hazardous exercise to try to determine the nationality of global or “transnational” corporations, especially those that are registered in the developing countries, or in tax havens. Worse still it is to try to derive conclusions about ownership and control of these enterprises from their official/legal nationality identification. It is necessary to tear down the mask of legality, for, like ships, companies too have “flags of convenience”.

One might probably get away with describing Microsoft as “American” or Toyota as “Japanese” but is one justified in describing Anglo-American as “South African” just because it is registered there and its major owners have South African nationality? The US Administration can haul Microsoft before the court for a ruling on the basis of State anti-trust legislation, and the court may even decide that Microsoft be split in two. In the case of the Anglo-American, if the South African Government were to contemplate similar action in relation to it, there would be immediate outcry from those in the capital centers of New York and London (and other centers) who really own the Anglo-American. It is not South Africa who owns Anglo-American in any real sense. Beneath all ownership issues lies the simple, but often ignored, matter of power.[vi]

TNCs as a genre may have similar “structural” features, but each one has a history of its own, and one needs to go deep into the subterranean levels with respect to them to know who really owns or controls them. In the case of the so-called TNCs “belonging” to the third world, one has to be extra careful for many of them were colonial creations and remain steadfastly colonial both in their ownership and control and in the kinds of investment decisions they make. In one case, for example, it was discovered that whilst a “Malaysian” enterprise secured a tender for the supply of power equipment to Zimbabwe, behind the Malaysian enterprise was German capital and German equipment; the Malaysians were acting mainly as middlemen. So what is one to make of such repeated statements in WIRs that “third world TNCs” are increasingly investing in each other’s countries? The third world, in reality, does not have much of “TNCs” to brag about.

Or what is one to make of the following table in a study undertaken by UNCTAD on Uganda?

Apart from the curious phenomenon that Kenya, whilst supposedly itself in dire need of FDI, is the second biggest outside investor in Uganda, there is also the problem of the nationality of the enterprises that are deemed to have originated from Kenya. Are they really Kenyan? Might they not be Ugandans living in Kenya bringing some of their capital back home? Might not they be, indeed, British or German firms masquerading as Kenyan?

The point of this discussion is that the definition of nationality and ownership of enterprises in the WIRs is seriously problematic. The source and quantities of FDI flows into African countries are based on the most spurious data based on the most indulgent definition of terms. In other words, “analytical” statements, such as country comparisons based on the putative nationalities of the TNCs that are presumed to “belong” to those countries are statements that must be seriously questioned.

If this is true of the definition of one critical concept in the WIRs, how many more such concepts must be put to critical examination? Should the data or the analytical generalizations in WIRs be given the kind of authoritative credence that UNCTAD seeks to secure for them simply because they appear to be “concrete” figures? Numbers acquire some mystical quality in much economic writings, and often succeed in numbing the critical conceptual and analytical sense of readers. Should numbers be allowed to numb our senses, and confuse our perception of reality?

Perhaps the most obscurantist, and in their implications the most hazardous, definitions within the WIR repertoire are those of “inflows” and “outflows” of capital.

The WIR seems to have accepted the definition of “inflows” of FDIs worked out by the conventional usage of the term by transnational corporations. Thus, the WIR, following TNC convention, puts FDIs into three categories - equity investment, reinvested earnings, and intra- company loans. These are legitimate TNC-oriented categories, useful to them for their own purposes. But are they also legitimate from the “recipient” country’s point of view?

From a national rather than TNC point of view, should not “reinvested earnings” be considered as “domestic savings” rather than as fresh FDI? It is no wonder that the savings rate of African countries is always described, in neo-liberal economic literature, as “too low”. It has to be, purely from a definitional logic, if the bulk of it is reclassified by an accounting convention as “fresh FDIs” (as if they are from outside the country) rather than as part of domestic savings. The more Africans save (and the more of it appears as “fresh FDIs”), the less Africans are deemed to have saved, and the more dependent they are on fresh inflows of FDIs. By this definition of “inflows” and “outflows” of capital, Africans are shown to have a very low propensity to save, and correspondingly, to use Keynsian terms, very high propensity to consume. And yet does this square with reality? May be a 0.01 percent (one in 10,000) of the African population do “over consume”; but the bulk of them do not have much of an income to consume. And yet, it is possible (indeed it is a fact) for foreign owned corporations to make huge profits in Africa. These super profits are part of the added value from Africa's cheap labour and local resources, but they are described as “fresh FDIs” by certain accounting convention, and this then serves to confirm the persistent myth that Africans are “low savers” and need further injection of FDIs for their own good. The circularity of this logic would surprise even Alice in the Wonderland.

Furthermore, how does one describe “intra-company” loans as FDIs when these are transactions from within the company? These loans finally retire to the parent companies, with interest added on to them. What obligation does UNCTAD have to uncritically accept TNC’s definition of intra-company loans as fresh FDIs? Why would it want to do that? Is it a case of accepting an accounting convention simply because it would be too much effort to construct an alternative one that puts the interest of the receiving country in the center of the calculations?

Do we not need a new definition of capital inflows than those offered to us by TNCs and accepted uncritically by UNCTAD?

As for the outflows, for the WIR an “outflow” of FDI is when a national company of a country exports capital outside the country. If a Kenyan company brings capital into Uganda, it is an “outflow” from Kenya and is defined as “FDI”. But then how would one describe it when a foreign enterprise exports capital outside the country? What happens when a British company based in Kenya takes capital out of the country? Well, that, according to WIR, is only remittance of profits or dividends or under whatever other label such capital is exported. Thus Kenya may be generating a lot of capital internally for potential domestic accumulation, but if it leaves the country as “dividends” or “interest” on loans or “debt service payments” then that capital is simply taken out of the country and adds nothing to domestic capital formation.

Any reasonable accounting of capital flows must take into account what flows in and what flows out of a country, whether these are definitionally obscured by certain conventional usage as “FDIs”, portfolio investments, dividend payments, debt payments, or whatever. At the end of the day, from a national point of view what is significant is domestic capital accumulation, and if there are channels through which capital is spirited away (under whatever justification), then clearly some of these have to be checked from seeping value out of the country. Or else the country is perpetually starved of capital. And instead of creating development such massive transfer of net capital out of the country can only create “underdevelopment”. [vii]

One does not need to resurrect the theory of underdevelopment in order to argue that any accounting of capital flows in and out of a country must take into account at least the following kinds of “outflows” that are the cause of capital starvation in much of Africa and the rest of the third world.

Increased payments on account of rise of interest rates in industrialized countries

The question of whether these payments are legitimate or not is not the issue at this point. For example, it could be argued that payments in the form of reasonable profits or dividends are legitimate, but that outflows of capital resulting from illegitimate intra-TNC transfer pricing are not. At this point the argument is that, legitimate or not, all these forms constitute effective “outflows” of capital, not in the limited meaning of WIR’s FDI flows, but in real, tangible terms. They are, simply stated, capital leaving the country irrespective of who takes them out and for what reason, or loss of capital earnings for one reason or another.

The following figures are mainly illustrative, with the implied recommendation that the UNCTAD should incorporate the above categories in its definition of “outflow” of capital, and provide a methodological guidance on how reasonably reliable data might be collected on these.

Probably in billions of dollars from the South to the North by Northern corporations and banks operating in the South. These are figures that are possible to collect, at least indicative figures.

According to UNDP sources, the debt of developing countries has increased from $567 billion in 1980, to $1,419 billion in 1992, to $1,940 billion (or 1.9 trillion) in 1995. Between 1980 and 1992 interest payments totalled $771.3 billion, plus $890.9 b. in repayment of principal. So in 12 years (1980-1992), the developing countries made $1.7 trillion in debt repayments, i.e. they paid three times more than their 1980 debt, only to find themselves three times more in debt by 1995. If this is not “outflow” what is?

3. Increased payments on account to rise of interest rates in industrialized countries.

During the 1980s, while interest rates were 4 per cent in the industrialized countries, the effective interest rate paid by developing countries was 17 per cent. A total debt worth more than $1000 billion, this meant a special interest premium of $120 billion annually. This merely aggravated a situation in which net transfers to pay totalled $50 b. in 1989. (UNDP, 1992)

The 1997-98, for example, East Asian crisis provoked sharp increase in risk premiums. In June 1997 Thailand was paying 7 per cent to its lenders, by December 1997, 11 per cent. By late 1997, Brazil and Russia had to double the yield on their debt issue in order to remain attractive to foreign investors.

In 1995, for example, the World Bank wanted Mozambique to lower tariffs on processed cashew nuts to 14%. Mozambique said it needed 20% to survive, so it refused. In 1996, WB imposed its will on Mozambique as part of HIPC (Highly Indebted xxx) initiative, and forced tariff reduction. Local factories had to face competition from Indian companies, factories closed down, and 10,000 people lost their job. The loss of income and local savings has yet to be calculated.

In the aftermath of 1982 Mexican crisis, the then US Secretary to the Treasury, Nicholas Brandy, authored a plan (called the Brady Plan) to improve the “credit worthiness” of the debtor countries. While he was still at the Treasury, his associate, Hollis Mcloughling, created a private company, Darby Overseas in the tax haven, Cayman Islands, to avoid paying taxes to US Treasury. Brady on retirement formed his own company, International Financial Holding (IFH) which, soon after its creation, purchased (for a song) the fourth largest Peruvian bank, Interbank, which was privatized, “coincidentally”, under the Brady plan. This was no conspiracy; it was simply “smart business”. This is only one example, multiplied a hundred times for practically each of the countries, especially in Africa, where “forced” privatizations have taken place. The Zambian government, for instance, now claims that it has made grievous capital losses in its privatization programme.

These are often arbitrarily determined in terms of intra-enterprise agreements between affiliates of TNCs operating in developing countries. Some of these (especially copyrights) do not transfer any technology whatsoever. Loss to the developing countries can be calculated or estimated, and could run into billions of dollars.

Much of the value of official “aid” to developing countries is vitiated on account of enormous fees that are paid out to management and technical consultants from the “donor” countries. This is a figure that UNCTAD could collect through monitoring the terms and disbursement of “aid” from the North to the South.

Loss of capital through corruption and externalization of funds by residents

Stories of African dictators with plush Swiss bank accounts are legendary. The former dictator Mobutu Sese Seko spirited away billions of dollars leaving his country in an impoverished mess. Similarly, vast quantities of oil revenue from Nigeria now lie in personal external bank accounts of corrupt officials, politicians and businessmen. In South Africa, just before the end of apartheid, residents externalized vast amounts of money, with official connivance.[viii] As with all corruption, one must, however, always ask the biblical question: “Who's greater to blame? She who sins for pay or he who pays for sin?”

This is a widely practiced, and silently condoned, method by which foreign enterprises take capital out of the country through overpricing their imports (thus exporting capital more than required), and underpricing their exports (thus robbing the country of export revenue). The global accounting companies (now reduced, by mergers and acquisitions to the “big five”) have professionally trained staff whose task is to help their global clients in the techniques of transfer pricing as well as of avoiding taxes. Africa could be losing billions of dollars each year through this route. UNCTAD could work out a method of measuring this kind of outflow from the third world. According to Agustin Papic, former member of the UN’s North-South Commission, the pharmaceutical TNCs make internal sales to their Latin American subsidiaries at prices between 33% and 314% above world market levels. Other examples are: Rubber Industry, 40%; Chemicals, 26%; Electronics, 1,100%

In 1992, a basket of goods from the South could buy 52% less than it could in 1980, i.e. they had to export twice to obtain the same goods. Between 1986 and 1989 (4 years), Sub-Saharan Africa lost $55.9 billion in earnings through falling Terms of Trade. 90% of exports of SSA are raw materials. According to Augustine Papic, the invisible transfer of wealth from South to North due to deterioration in terms of trade could total some $200 b. per year, that is more than paid out annually in debt-service payments.

12. Loss of export revenue on account of protectionism in industrialized countries

According to the UNDP, the developing countries have lost $35 billion annually accounted for as follows:

According to UNDP figures, the cumulative loss of hard currency remittances for countries in the South in the 1980s was in the range of $250 billion.

American and European Companies have harnessed developing countries’ biological diversity to make millions of dollars in profit without returning a single $ to the original owners of the seeds. According to Vandana Shiva, wild seed varieties have contributed some $66 b. annually to the US economy.

In conclusion, UNCTAD needs to seriously revise its definition of “outflows” and suggest methodologies for computing the net outflow of capital that must surely be from the South to the North, or losses of capital revenues by the South for one reason or another. UNCTAD’s current definitions of inflows and outflows are erroneous and invalid; they serve to obscure the reality of capital movements and present these in the reverse order from what they really are. It may be argued that it is difficult to compute these figures, for example those of transfer pricing. That may be so in the case of some of the above categories. But even so, it is important, and necessary, for UNCTAD to make the effort to secure at least indicative figures. A second answer to this objection is that the present figures of WIR flows as computed by UNCTAD experts are, by their own admission, no better than “estimates”, as the following shows.

The manner in which UNCTAD collects its data on FDI flows is not only conceptually flawed (as shown above) but it is also based on extremely questionable data and methods of collecting them.

According to Annex B (Statistical Annex) of WIRs where the method of collecting data is explained, “The most reliable and comprehensive data on FDI flows that are readily available from international sources …are reported by the IMF …obtained directly from IMF’s computer tapes containing balance-of-payments statistics and international financial statistics.” Other sources mentioned are: “UNCTAD, FDI/TNC database, which contains published or unpublished national official FDI data obtained from central banks, statistical offices, or national authorities.”

There are several conceptual problems here. First there is no definition of FDI provided. It appears to be a hybrid category that combines “genuine” FDIs (or “greenfield” investments) and portfolio and even speculative capital movements. In fact, the distinction between “greenfield” and speculative investment is extremely difficult to make, especially if capital passes through the intermediation of banks. For example, short-term and speculative capital went to Thailand during the 1990s through the banking system, with some virtually as “call money” or as weekly or monthly turnovers. The banks on-lent these for investment to local enterprises based, as it turned out, on weak (property or land) collaterals. When the financial crisis was forced on the country by foreign exchange speculators, foreign short-term bank capital left the country in a hurry. Thus, for this kind of capital it is impossible to say ex ante whether it is for investment or for speculation only; the matter becomes clear only ex post. And the truth of the matter is that the bulk of capital movement these days (and this means as much as 90% or 95%) is of speculative character.

Hence, the importance that UNCTAD gives to FDIs, through its WIRs, is wildly exaggerated. By not clarifying how much of the “FDI” figures are “genuine” FDIs, UNCTAD creates yet another obscurity for, despite the eclectic nature of its presentation (where it sometimes criticizes speculative capital), it leaves the overall perception (and often, in influencing behaviour, perceptions of reality count more than reality itself) that all the figures that it provides for FDIs are indeed “genuine” FDIs, and play a “significant” role in the development of third world countries. This is, to say the least, highly improper, some may say even unethical.

Secondly, UNCTAD has no source of collecting FDI data on its own. It depends on mainly the IMF figures, supplemented by national figures and TNC database. This is interesting for it raises several problems, some of which are described above.

The figures WIRs put out (with all their conceptual shortcomings) are even statistically speaking, neither reliable nor, possibly, calculable. Thus, WIRs regularly give a long list of countries for which at least one component of FDI inflows is not available. Thus, the WIR 99 lists a number of countries (among them Zimbabwe and Uganda for example) for which one, two or even all three categories of “FDI” - equity investment, reinvested earnings, and intra- company loans - were not available. [ix] This vacuum seriously erodes the veracity of the figures for capital inflows provided for these countries, especially since the absence of these figures is not infrequent but almost a regular pattern for several of the countries, especially from Africa.

How, then, do the UNCTAD experts compute these figures? Presumably using “national” statistics as supplementary data. But these too are extremely unreliable. Consider the following table on FDIs that an UNCTAD study on Zimbabwe (Globalization and Zimbabwe, 2000) secured from various sources.

Notes and Sources: ZIC = ‘Approvals’ : Zimbabwe Investment Centre, personal communication

If UNCTAD in its WI Reports attempts to “supplement” IMF or TNC derived data on FDI flows with “national” figures, the question is which of the above six very different figures would it want to use? It is obvious that the six were looking at the same phenomenon but from different subjective perspectives. Their difficulties might be definitional or empirical or both.

It is no wonder, therefore, that the WIRs admit that “For those countries for which FDI data were not available throughout the period (up to 1997), data have been estimated by UNCTAD.” Now, of course, a resort to estimates is not uncommon when statistical certitude is difficult to determine. But when the figures of FDIs are given such authoritative interpretation trying to “prove” a point, which turns out to be an ideological point, then these “estimates” are hazardous. This is a new kind of “moral hazard” that one must add to one’s list of growing hazards in the area of international financing. Key concepts such as nationality of enterprise, and “inflows” and “outflows” are defined in such manner as to support pre-determined conclusions, with profound policy implications. Inter-Agency use of the data (with UNCTAD quoting the World Bank, and the latter quoting the IMF) gives the data spurious collective authority that serves to “confirm” inter-agency “consensus” on how matters stand, and how developing countries must adjust their policies. Until, that is, some one comes along with the integrity and moral conscience of a Joseph Stiglitz to show the nudity of the Emperor.

WIR experts constantly walk in definitional and statistical quagmire, and yet, to the outside world, they present a face of veracity and authority, and derive conclusions and “policy recommendations” for developing countries that are, to say the least questionable, even hazardous.

Empirical observations, as was indicated earlier, do not just drop from heaven. They come as part of a theoretical paradigm. They are part of a package. There is no inductive logic that informs economic theory. Theory precedes empirical verification, especially in the economic “sciences”. No doubt theory must change if reality does not conform to it. But if theory is grounded in strategic political and economic interests of those who propound those theories, and especially if the power of big states lies behind those theories, then it is the reality that must change, not the theory.

Thus, for example, radical political economists have been saying for decades what Joseph Stiglitz now says. But they were not part of the hegemonious institutions that “produce” and “certify” knowledge and hence they were either ignored or dismissed as “communist ideology” by the mainstream theoreticians. It is when Stiglitz presented his contrarian views within the citadel of power, the World Bank itself, that those view began to make ripples. When such others as Jeffrey Sachs, Paul Krugman and Dani Rodrik joined the “dissidents” that the theory based on “the Washington Consensus” began to lose its hold over at least a part of the international academic community. But because the power of the United States, Europe and Japan is still behind the World Bank, the IMF and the WTO, and because the “Washington Consensus” continues to serve their interests, the theory is still in the mainstream, and it continues to inform “policy” prescriptions for the developing countries. [x]

It would be a fascinating study for a student of ideas to make an analysis of the evolution of “development theory” and to link it with the evolution of power political relations within the international community. Suffice to say here that the mainstream development theory has been constructed not for the benefit of the developing countries, as it purports, but for integrating them into a global economy for the benefit of those who dominate the global economy. If in the process some of the developing countries have “grown” then this growth has to be explained in concrete historical terms (such as the effects of the cold war on, for example, Taiwan and South Korea on the one hand, and Vietnam and China on the other) rather than in terms of a theoretical “model”. The world is primarily a battlefield of concrete interests of peoples, social classes and nations for the control over the world’s (and national) resources, and, alternatively, for their liberation from poverty, domination, and exploitation, and “theories” are constructed as essentially additional tools for their battles.

The theories of Adam Smith, not to make too fine or subtle a point of it, for example, were theories to liberate the emerging capitalist classes in England from the shackles of a decaying feudal system. Those of Ricardo, a couple of generations later, were theories to further liberate a now much stronger capitalist class from the landlord rentier class whose ground rents ate into the profits of the capitalist class. Those of Marx and Engels, in turn, were theories to liberate the working classes from the exploitation of the capitalist classes. And so on.

When we come to our own time, all the reigning theories in the economic “sciences” have been variations and refinements of the Smith-Ricardo paradigms, especially after the demise of the “Marxist-Leninist” paradigm in the former Soviet bloc countries. Refinements of the kind that the British economist, Maynard Keynes, introduced came out of a specific political conjuncture of crisis within the capitalist system, following the 1929 crash. Overall, Keynes’ theories legitimated direct state intervention in the economic system in order to address serious problems that the imperfections of the “free market” had created. Keynesian economics had a powerful influence on policy in the years before and after the Second World War. However, following the crisis in the capitalist system around the middle of the 1970s, Keynesian economics could no longer serve the interest of the dominant section of the global capitalist class, led by American corporations. And so “free market” economics made a triumphal return under the theories propounded by Milton Friedman and the Chicago school of thought. Today, as we turn into the new millennium, the “free market” theories are in crisis for whilst they continue to serve the interests of those (especially TNCs, the dominant section of the capitalist hierarchy), they are failing to address the problem of increasing poverty in the greater part of the world. In some parts of the world, therefore, there is a tentative return, once again, to Keynesian economics in favour of some kind of interventionist role for the state.

The above “distillation” of economic thought that has dominated the world over the last 400 years is, of course, a simplistic rendering of a complex reality, given that it is abstracted from major “wars” fought over those ideas in the heat of wars between classes and nations. The essential point, however, remains. Economic theories are not like “laws” of nature; they are produced by men and women in the throes of battle for survival and domination, and they serve as additional tools of battle between classes and nations.

It is necessary to say this in order to put in their proper historical and political context the so-called “development” theories of our own time. These, too, have been primarily variations of the major lines of thought following from Smith and Ricardo to, in our epoch, Keynes and Friedman, among others. They serve primarily as additional tools in the hands of the dominant section of the capitalist oligarchy, the TNCs. Development theories are not liberatory theories; they are theories propounding the integration of the developing economies into the global economy dominated by transnationals and a few major players. These theories are churned out and refined in the institutions of higher learning in Western universities and replicated in the universities of the South. This is done through “peer” group certification of “knowledge” that is admissible in “scientific” discourse and publishable in books and journals which carry mainstream ideas that support the real, that is material, processes of Globalization and centralization of capital. Any expression of thought that is contrarian, or that supports a libertarian process, that is as real as the Globalisation process, is quickly dismissed as “going back to the old days of outdated and defeated Soviet thought.” By this dual process of reaffirmation of the dominant paradigm and the rejection of the liberatory theories, the process of centralization of capital proceeds unabated. Hence, it is necessary to go briefly into the next question.

This is not the time or the place to go into a deep discussion of this peripatetic phenomenon. Nonetheless, the question “what is capital?” needs to be asked if only in order to demystify this “god” (which everybody so dearly desires), and to bring it down from its high pedestal to the ground level. FDIs are one form of capital, among other forms that Capital takes. It is the sanitized form of capital in “development” literature. It had to be sanitized specially after the Mexican, East Asian and Russian crises, which everybody now agrees, was a result of flighty, speculative capital that entered these countries. Part of the blame is now placed on the “policies” of these countries, but there is no question that volatile, speculative capital is the main culprit. In order to distinguish “real” capital from this “flighty” capital, and in order to restore the credibility of Capital itself, it was necessary to give the concept of FDIs a “clean look”. Everybody now swears by FDIs, and policy recommendations from both inter-Agencies (such as the WTO, IMF, WTO and UNCTAD) as well as mainstream theorists of “development” now focus on FDIs, as opposed to speculative or portfolio capital. In the process some people have forgotten that FDIs are still part of Capital. And hence the question “What is capital” needs, once again, to be posed.

Simply stated, capital takes two basic forms, one is as money-capital, and the other as productive-capital. As money-capital it is used as a means of exchange, as a standard of value, and as a store of value (as wealth). As productive capital, it brings the various factors of production (land, labour, natural resources, management, machinery, know-how, etc.) into production in order to produce commodities and services for sale. There is nothing complicated or mysterious about this. Marx resolved the one mystery that there was about capital that eluded political economists of the time. He showed how although all commodities (including labour) were purchased in the market in terms of their value, there was “surplus value” that came out of production, which the owner of capital appropriated. He also showed how in an incessant search for profits, the capitalist seeks to replace labour with capital (mainly in the form of machinery or technology), thus increasing what he called the “organic composition of capital”, i.e. more and more capital used for decreasing proportions of labour. Inherent in this process is the tendency for the rate of profit, measured in terms of returns to a unit of labour-power, to decline. To compensate for this decline and to maintain profitability, the capitalist seeks to reduce the cost of production by means such as depressing wages, bringing into production cheaper resources, conquering new markets, taking more risks, and creating new financial instruments, such as derivatives. It is in these terms that Marx sought to explain colonialism. Lenin took the argument further from Marx and described “imperialism” towards the turn of the 19^th century in what he stated was “the highest form of capitalism”, which took the form essentially of the export of “finance capital”.

This is all well known. One does not have to agree with Marx or Lenin for one to recognize the phenomenon of imperialism, or that of the tendency for the rate of profit to decline.[xi] Also, one does not have be a Marxist to recognize fundamental changes that have occurred in the character of capital itself in the globalized political economy of today. For example, it is now a well-recognized fact that up to 95 percent of the flow of capital is speculative in character and has little to do either with production or with trad However, the one advantage in taking a political-economy approach is that it helpfully gets us away from a purely economistic perspective that is wont of present-day neo-liberal economists, and put the theme of power at the center of discourse. For without power, as Karl Polanyi reminded us, markets cannot operate.[xii]

Markets need the regulating hand of power, just as they in turn become the basis for extending the power of the countries that control them. Without this elementary logic behind the reason of state (raison detat) and its link with the market, it would be impossible, for example, to comprehend the dog-eat-dog fights that go on between countries (especially the bigger countries) in the World Trade Organisation (WTO). Countries battle it out in the WTO as if it is a “war of all against all” (to use the term coined by the 17^th century British thinker, Thomas Hobbes). The “banana war”, the “beef battle”, etc. are indeed real wars for markets between major TNCs backed by the Big Powers. They talk about market access and subsidies and sanitary and phytosanitary standards, but beneath all this trade jargon is a veritable struggle for power between the chief players, with the small to middle countries of the South pleading for “special and differential treatment” in the (vain) hope that this would save them from getting crushed as the giants fight.

Hence much of the economistic discussion about third world countries “badly” in need of FDIs for their growth is obscurantist in that it seeks to obscure the role of power. “Development” theory seeks to take power out of the equation. It seeks to hide the power that lies behind the underlying forces of concentration of capital. Might it be that those who argue that Africa, and the South generally, “needs” capital from the developed countries are arguing, wittingly or unwittingly, for increasing the power hold of the powerful countries over the countries of the South? Might it be that it is not the South that needs the capital as much as the North that needs fresh sources of cheap raw materials and cheap labour in order to counter the inherent tendency for the rate of profit to decline? Is it not all a struggle for markets and control over resources camouflaged as “development” theory?

Capital thus turns out not to be just a “thing”. It does not have a “good” side or a “bad” side. Good and bad sides for whom? Capital, as it turns out, is above all an instrument of control over markets and resources. When the South Korean economy crumbled following the currency crisis of early 1998, the IMF moved in to “restructure” the economy, and Lawrence Summers (now US Secretary to the Treasury) was to remark triumphantly that what the US could not achieve in years of trade negotiations with Korea, it was now able to achieve through the IMF in a matter of weeks.[xiii] To be sure, Korea is back in the control of the Big capitalist powers, the US, Europe and Japan. Commenting on the situation in Korea, the London Economist said that the IMF had palpably acted as an instrument of US foreign policy.[xiv] Those using the Leninist terminology might describe this as evidence that the IMF is an instrument of imperialist expansion. It does not matter what terminology ones uses, for the reality is recognized for what it is even by the Economist, that champion of international corporate capital and “free” trade. Power, and the centralization of control over resources and markets, thus is at the center of all talk about markets and the “need” for developing countries to attract FDIs.

This is not an argument for wanting or not wanting “capital” or FDIs. The question is: do the countries of the South, does Africa, have any choices? Africa is in the same situation today as it was towards the turn of the 19^th century. Did Africa have choices when it became an object of colonial expansion following the 1884 Berlin Congress at which the European imperialist countries sat around a table carving Africa on a map, drawing boundaries that cut across tribes and peoples in a manner that continues today to be a source of civil and inter-state wars in Africa? Do Africans have a choice now in a fast globalising, centralizing, world? In an earlier century, the superior gun power of Europe finally conquered a divided, weak and technologically backward Africa. In those circumstances was it better, between 1884 and 1917 when Africa was finally subdued, for Africans to have resisted an inexorable force and “die in honor” whilst fighting, or to succumb to such a force and “make the best of it”? Africa is facing a similar kind of situation today. What should it do - take it and “make the best of it”, or fight it and “die in honor”? Or is there a third alternative? There is no easy answer to this question. [xv] Each person must make his/her own choice. This paper makes its choice in the final section, but before it does so one more issue needs to be resolved.

This is one of the issues assumed in the terms of reference of this paper. It is based on an imperfect understanding of what the “market” is. The “free” market, it must be stated as categorically as possible, is a myth; it has never existed, nor will it ever. This is as best a truism as one can find in real life. Virtually all markets are either “imperfect” markets, or managed, indeed manipulated, markets. 40% of global trade is among 350 largest corporations, which is part of the “managed” market.

Nonetheless, there are still hard-core believers in the market as the final arbiter of everything, including human welfare. Increasingly, however, and may be perhaps grudgingly, a part of the economic fraternity is beginning to acknowledge that the human being is more important than the market, that the market is no guarantor of human welfare, that action needs to be taken that goes beyond the market to ensure sustainable human development. But the debate goes back and forth between those who argue that the market can handle even issues related to human welfare (through, for example, proper pricing and incentives policies), and those who argue that “market failures”, by definition, are beyond the ambit of the market and therefore it is the function of the state to address them.

Hitherto it was assumed that social policy is the preserve of governments answerable to the people, that matters such as health, education, social infrastructure and the protection of the vulnerable and the marginalized are areas that require state intervention. To the state its own, to the market its own. That was the rough and ready division of labour between the state and the corporate world. But states, in much of the third world, are getting a bad name. They are perceived as corrupt, undemocratic, self-serving, and generally insensitive to the plight of the poor. And when they are not corrupt, or accused of corruption or any of those negative things, they do not have the power to deliver, since globalisation has eroded much of their power. Hence it is to the corporate capital that development theory is increasingly turning to see if Capital can be made more accountable to concerns of human welfare. Attempts such as UN Secretary-General Kofi Anan’s proposed “global compact” with transnational corporations are new initiatives that have switched responsibility for social welfare back from the state to the corporate world. It is now the state to its little corner, and the market holding the rest of the terrain.

But the market is dominated by corporate capital. The question therefore is whether corporate capital whose raison detre is to deliver profits to its owners, the shareholders, can also deliver human welfare. Can capital be made accountable to sustainable human development (SHD)? Does capital have a soul?

The answer is, it does not, and it cannot. A banker as an individual human being may have a soul and feeling for other human beings, but as manager of bank he has to leave his soul at home, and make profits for the bank he works for or lose his job. That is the nature of capital. Bill Gates as an individual may create a foundation and give charity, but when he fights the case for Microsoft in the courts, he fights on behalf of, and as part of, global capital whose inherent nature is, endlessly and unrelentingly, to conquer, to control, to centralize, to accumulate. Why do we need to remind ourselves of this well-known fact in this essay? Because, somehow it is naively assumed that African countries can devise “policies” that can attract “good” FDIs and keep out “bad” ones. There is a naïve theory going around, especially in U.N. circles, that capital can be induced to become oriented towards SHD. As well might one try to change the spots of a leopard?

Capital can only be contained, restricted, controlled … never humanized. The anti-monopoly legislation is, for example, one way of trying to control the monopolizing tendency of capital. It does not work in the long run. For a temporary period, for instance, the US State might force the de-monopolisation of a sector of industry only for that industry to centralize once again on a later date. This has happened, for example, to the telecommunications industry. In present times, the US Administration is forcing the de-monopolisation of Microsoft, and already there is speculation that instead of creating one monopoly the courts may end up creating two monopolies, not competing with one another, but safely ensconced in its own orbit of monopoly. Nonetheless, we would accept that anti-monopoly action by the state is one way of “containing” capital (even if only for short periods), capital that otherwise has a natural tendency towards centralization and monopolization.

The real counter force against Capital is the power of the people, especially the working people, but increasingly also ordinary people exercising their power as consumers. This may be dismissed as “populist” or “Marxist” rhetoric. But the social and welfare gains of the last hundred years and more are primarily an outcome of struggle from below by the people fighting against the power of capital. Democracy and popular enfrachisement, the right to education, factory legislation and the right to proper working conditions, right to health and protection in illness and old age, all these in the West are fruits of struggles by the people. In the Southern hemisphere, the liberation of four-fifths of mankind from colonial exploitation and oppression was also an outcome of people’s struggles, not a gift from Capital.

In contemporary Europe and the Western world generally there are fresh battles that people are now engaged in. When the excesses of the environmentally damaging effects of corporate activities began to awaken the political consciousness of the people, the latter decided to mobilize and fight against corporate greed. To some extent they are succeeding. The environment is now on the political agenda of most Western countries and they now even have “green” political parties that fight electoral battles and form part of their Governments. Corporate capital has been forced to turn “green”, at least partially green. However, as is usual in the long history of capitalism, it is smaller capital that cannot afford to invest in “environmentally-friendly” technology that gets thrown out of competition and be merged or taken over by bigger capital. Big capital has made the “green agenda” an instrument of battle for the conquest of markets. The leopard can never change its spots!

Unlike environment, development is not a party political issue in the West. There are “green” political parties, but there are no “development” oriented political parties. There is nobody in the West who would contest a Parliamentary or Congressional election on a platform of “development” of the South. Development has been reduced, misconstructed, to “poverty” issue at the economic level, and to the issue of “good governance” and “human rights” at the political level. And poverty is seen mostly as a “side effect” that can be addressed by throwing money and “projects” to the poor. Institutions such as the World Bank, the UNDP and UNCTAD, and the so-called “Ministries of Development” in OECD countries, have made some “progress” in this area by making the “projects” of the poor “participatory” in order to give the appearance that the poor are participating in the alleviation of their own poverty.[xvi] No attempt is made to address the fundamental, and deeply embedded structural causes of poverty. On the contrary, the “poverty alleviation programmes” are so conditioned as to create, not alleviate, poverty.

A statement such as this is apt to be dismissed as rhetoric by mainstream “development” economists and policy-makers in the West. But what is one to make of the condition put by the IMF, when providing debt relief to Mozambique under the HIPC programme, that Mozambique must liberalize its cashew nut industry and reduce tariffs from 20% to 14%? Thus conditioned, Mozambique was forced to face competition from Indian cashew nuts importers and within a year cashew nut factories closed down creating unemployment for thousands of people.[xvii] Poverty, thus, does not simply exist; it is actually fostered, created, by the system.

The environmentalist lobby has succeeded in the West to make corporate capital partially accountable to their environmental concerns. Western corporations, supported by the same lobby, are now able to show themselves as “superior” to the “dirty” corporations in the South, and are now clamouring to make environment an actionable issue in the WTO. Weaker corporations in the South which cannot raise capital to buy or lease environmentally-friendly technology (such as, for example, CFC-excluding refrigeration technology) are left with only two choices – either enter into “joint” ventures with the stronger Western corporations and thus surrender part of the domestic market and profits to them, or seek protection from their governments. If the environment does become an actionable matter in the WTO (still an unresolved matter), that protection would no longer be available to the weaker corporations in the South, and they would in time have to surrender the domestic market to the stronger corporations of the West.

The same kind of process is now taking place on the “developmental” issue. As stated earlier, development is reduced into a “poverty alleviation” issue at the economic level, and a “good governance” and “human rights” issue at the political level. All these issues elicit strong resonance of support from peoples’ and workers’ movements, NGOs and “leftist” political parties in the North. It puts them on a high moral pedestal. Their corporations are now able to take advantage of this high moral ground and, with the backing of their own “progressive” movements fighting for human rights and against child labour, to further advance their conquest of markets of the South. Like the environment, they want “labour standards” to become an actionable issue in the WTO. At the same time, the World Bank, the IMF and Western donors are putting “good governance” conditionalities, on top of economic ones, as part of their “development” strategy.

To sum up, Capital, because of its inherent character (it has no soul), cannot be sensitive to the human condition. Its basic function is to make profits, and in the process to conquer markets and cheaper sources of labour and raw materials. In the present epoch, capital does not even have to engage in production or generate employment. Money-capital can multiply itself through purely speculative activities without going through the laborious process of production. Capital’s inherent tendency is to concentrate, to monopolise. This tendency can be contained, for a while, by anti-trust legislation. But the main counter against Capital are the people.

However, in the present conjuncture of world history it is premature to expect a global movement of people that can effectively counter the centralizing power of Capital. NGOs and certain sections of the people’s movements in the North rejoice at their partial success in making corporate capital “accountable” to concerns of environment. But they are so preoccupied with their own concerns and interests that they use arguments such as “labour standards” and “child labour” as a means of protecting, effectively, their own industries and corporations from competition from the South. Thus well-meaning and socially sensitive peoples’ movements in the North are unwittingly providing moral arguments for the further concentration of international Corporate Capital and its conquest of the markets in the South. This then is the dangerous character of the present period we live in. There are, of course, serious and justified moral issues at stake. But the complexities of these have generally escaped the NGO movement in the North.

In concluding, we start with the first question posed in the terms of reference of this study: “Does data confirm that FDI is increasing sharply, and that foreign direct and portfolio investment are large relative to their economies, and therefore of critical concern in formulating economic and SHD policy?”

The answer is that instead of capital flowing into Africa there is a net, indeed massive, outflow of capital. These take at least fourteen different forms identified in this paper, but data on these are hard to come by because there is no institution in the world that is commissioned and funded to carry out an empirical investigation of this kind. Certain accounting conventions have so mystified the reality of capital flows that statistics of the kind collected by the IMF, the World Bank and UNCTAD show, for example, that South Africa is a large “beneficiary” of capital inflows when, in reality, the country is literally bleeding from capital outflow.[xviii]

The same accounting conventions show that Africa has a “low rate of savings” and hence “needs” foreign capital to make the difference between low savings and the requirement for high rate of investments if Africa has to attain a certain growth target. Actually, the rate of savings is likely to be very high in Africa, but much of the domestic savings are siphoned off the continent under various guises. Under these conditions, there will never be a time when the rate of saving will match the needed rate of investment. Africa will perpetually remain capital-starved. Unless the savings are retained within Africa for domestic capital accumulation, Africa will forever be seeking capital from outside and thus remain a permanent hostage to the conditions imposed by international capital. These conditions, under the IMF and World Bank regime, are increasingly becoming political as well as economic. And so, in addition to becoming an economic hostage to the dictate of international capital, Africa is in danger of also losing its political independence. This is the real meaning of capital-led Globalization.

As for the question, are FDI inflows in Africa “… large relative to their economies, and therefore of critical concern in formulating economic and SHD policy?”, the answer is that, no, there is no net FDI inflows in Africa. However, although there is no net inflow, Africa is already more or less in the control of multinationals, either directly through ownership of Africa’s resources (such as oil, gold, diamonds, land, forests, fish, etc.), or through international marketing monopolies in commodities (such as coffee, tea, cocoa, tobacco, cotton, etc). Hence the question of making corporate capital accountable to “sustainable human development” is not only relevant but also urgent. In other words, it is not FDIs but corporate capital that is already in the continent that needs to be “reconditioned” in order to be SHD-sensitive. However, as the example of the struggle of the people of Ngoni in Nigeria against Shell and other oil monopolies demonstrate, it is not something that can be left to Government “policy”; it is a matter of struggle by the people from below. As argued earlier, capital can only be contained and made accountable to human concerns by the very people who suffer from its exploitation and oppression.

The author was also asked to “(r)eview recent studies on motivations behind the investment decision in Africa. Comment on the management of FDI and portfolio flows….” These are two separate questions. On the “motivation” of investment decision in Africa, it is the argument of this paper that most studies on this subject are products of neo-liberal economics that view capital in benign terms and as a necessary agency for the “development” of Africa. It is the contention of this paper that contrary to this perceived “motivation” of corporate capital, the latter is motivated primarily by profit, and in its pursuit of profit, to conquer all markets. In the process, Big Capital, backed by Big Powers, destroy or absorb (through “mergers and acquisitions)” all those that cannot stand competition. Instead of being agencies of development, FDIs, as part of Capital, are instruments for the continuing and persistent domination of Africa.

As for the question of “management of FDI and portfolio flows”, the answer is that whilst there is no net FDI inflow in Africa, individual countries are very vulnerable to currency and speculative attacks from outside, as happened in Zimbabwe in August 1997 and in South Africa in early 1998. There does not appear to be a concerted effort by African countries to address this very serious issue. However, it is the contention of this paper that it would require a major overhaul of the entire system of central banking conceptual and management structures to do anything serious and sustainable in this critical area. Most central banking infrastructure in Africa is by now completely infiltrated by IMF-trained and “conditioned” experts (in some cases by direct placement of people from Washington). These officially cannot be relied upon to protect the national economy from speculative attacks. African Central Bank officials and even most Ministers of Finance are caught up with the mind-set of the IMF paradigms for Africa’s “development”. They are made to believe (but also motivated by their own class interests) that even externalization of funds is “good” for Africa, even as, ironically, they are looking for FDIS to “fill the gap” between savings and investments![xix]

The author was furthermore asked to “(a)ssess the macroeconomic impact and policy implications of capital flows, including policy implications for the design of growth and SHD policies, and to focus mainly on policies needed to manage the sequencing of reforms more effectively, and on a broader range of policy instruments required to influence the impact of FDI flows on SHD in key sectors of the economy.” Although not stated explicitly, the question assumes that there are net inflows of capital in Africa, and that it is the task of policy makers to “sequence” them so that “FDI flows” can be SHD-sensitive in “key sectors of the economy.” The truth of the matter is that the reality is the opposite of this. Most African countries are now in such dire balance of payments crises that it is not the “sequencing” of inflow with which they are most concerned, but with the “sequencing” of outflows of capital. This includes outflow in the form of debt servicing, dividends, payments for needed imports, pension for former colonial servants, holiday allowances for the elite class, etc. Hence, the first task of political leadership in Africa is to “sequence” the outflow of capital by first and foremost refusing to pay for all illegitimate debts incurred by Africa. It must then critically look at all the various ways in which capital exits from the continent (including corruption of officials and externalisation of capital by devices such as “transfer pricing”), and so, in the long run, put a check on the massive outflow of capital from Africa.

Finally, the author was asked to “(i)dentify measures which will help African governments to attract more development-oriented private flows, SHD-oriented private flows, and for managing the economic impact of growing and more volatile flows.” The implied assumption here is that somehow the “good” FDIs might be attracted to Africa by certain policy incentives whilst the “economic impact” of bad “volatile flows” might somehow be managed. Here we come back to the question of capital. As argued earlier, capital is not a neutral tool of production but an instrument of extending the power of the powerful over those that are weak, divided and technologically backward. Capital is an instrument, above all, for the centralization of power in the hands of fewer and fewer corporations, backed by the Big Powers, through agencies such as the WB, the IMF and the WTO. It is an illusion to think that “development-oriented” or “SHD-oriented” capital can be “attracted” to Africa by some “policy” initiatives. Capital can be made to be responsive to development, or welfare, or environmental concerns, only through pressure from the very people who suffer from its primarily profit-seeking activities. Capital can be restrained only from below not from above.

What choices do African countries have against this inexorable force of centralization of capital, fuelled by the profit motive, and backed by the power of the Big Powers? Should they become part of this movement and surrender their sovereignty to the TNCs for the latter to “develop” them? Or should they resist the forces of capital and risk either sanctions from the Big Powers (like has happened to Iraq), or getting isolated (as for Cuba) and being left behind in the movement of history? Or is there a halfway house between these options – for example, maintain a semblance of sovereignty but accept the rule of the TNCs and settle for whatever crumbs of bread they leave behind (mostly in the form of real estate) after they have taken away bulk of Africa’s resources (gold, diamonds, cocoa, timber, fish, etc)? These are very large and fundamental issues that must be faced by Africa and by the countries of the South. But this is not the place to enter into a discussion at this broad level. Here then are a few practical suggestions that are for immediate to short-term application.

African governments and peoples, it is the recommendation of this paper, must think through a three-pronged overall strategy: one, maintaining national control over economic and social policies; two, making sure that domestic savings contribute effectively to the local capital accumulation and not spirited away under various guises; and three if FDIs are to come at all, these should be properly targeted and conditioned.

Maintaining national control over economic and social policies should be the primary raison detre of African governments. If they surrender this control to foreigners then they have no reason to have fought for independence from colonialism in the first place. It is this aspect of national independence that is most threatened by the centralization of capital and power in the hands of mega-corporations. The experience of South Korea and other East Asian countries following the 1997/98 “currency” crises testify to this.

At the broad macro-political-economic level this means three things. One, it means resistance against the imposition of conditionalities for receiving international capital that compromises national independence. The kinds of policies imposed by the IMF and the World Bank on African countries that agreed to accept their money-capital and advice must become a thing of the past. It is better to do without that kind of capital and advice than surrender control over national policy. Secondly, it means local companies must be given preference over foreign corporations in the production and marketing of goods and services. Joint enterprises between them may be acceptable, but this must not result in surrendering the control over market and production to foreign companies. FDIs are often known to “crowd out” locally owned companies. This must be firmly resisted. African governments should help local companies with, inter alia, credit facilities, production subsidies, export market incentives, and domestic market protection. Of all the above, the most critical is the protection of the domestic market against predatory incursions by foreign corporations that do so in the name of “growth” or “technological transfers” or some such seductive carrots. Thirdly, national governments must maintain control over social, environmental and cultural policies. A recent tendency, favoured among others by the Secretary General of the UN, Kofi Anan, to surrender social and environmental welfare over to the TNCs must be firmly rejected. The state in Africa cannot relinquish its primary responsibility for the welfare of its population and its environment. In the context of national development, Governments must facilitate a social contract so that workers and small farmers get a full and fair share of their labour and enterprise.

Within these broad political-economic parameters, African governments must first and foremost close all the channels by which domestic savings are spirited out of the country. This paper identifies fourteen of these channels. There will, of course, be resistance from the powerful countries against the closing of these, for on them depend the survival of their own consumerist economies, and the super-profits of their mega Corporations. This action requires joint action by the developing countries, for none of them can manage this process on its own. Hence, developing countries must learn to work together in inter-governmental agencies such as the United Nations, the Bretton Woods institutions, the WTO as well as other fora in order to co-ordinate action on this front.

Once domestic savings are protected, countries must then purchase such technologies as are needed from the open market rather than through FDIs. Africa may not necessarily need “the state of the art” technologies that carry with them proprietorial patents rights, and hence exorbitant fees as royalties. A lot of the capital that comes with FDIs goes back to where it came from in the form of such fees, and for the payment of machinery or equipment, or hybrid seeds and complex types of fertilizers and pesticides, that may not necessarily be needed in Africa at this stage of its development. At the same time, African countries must fully utilize the provision for parallel importing and compulsory licensing that is provided for under Article 31 of the Trade-Related Intellectual Property rights (TRIPS) agreement of the WTO.[xx] There are some provisions in the WTO, such as Article 31 of TRIPS, that are useful, but overall the Agreement is highly iniquitous to Africa and to the rest of the developing countries.[xxi] The WTO is founded on the Uruguay Agreements from which African countries were excluded from effective participation, and they have therefore no moral or political obligations to accept the inequities that the WTO is now enforcing on Africa, and the rest of the developing world. Pressure to conform to the inequities of the WTO must be resisted.

Once domestic savings are protected, a careful audit is done of the kind of technologies that are needed in Africa and, wherever possible, these are procured from non-patented sources, then the need for FDIs will be commensurately reduced. If, for some reason, FDIs are still needed, then they must be properly targeted and conditioned. African governments must first recognize that there are no “good” or “bad” FDIs outside of national policy. In other words, it is only in relation to national policy can FDIs be described as good or bad. All FDIs are inherently problematic. They do not come as a matter of charity; they come to make profits, to make use of local resources, to take advantage of cheap or skilled labour, or to capture the local market against other foreign competitors, indeed even against local enterprises. FDIs do not transfer technology for love of it; they do so, if they do it at all, in order to control production and the market. This is particularly the case in the post-Cold War era when the big players (such as the USA and Europe) no longer have to make concessions to countries of the South. The TRIPs make the prospect of transfer of technology more difficult than ever before.[xxii]

Hence, there should be no “open door” policy towards FDIs in general. They must be allowed in as and when required by national consensus between the Government, the local private sector, the workers and small farmers, and other organs of civil society. The FDIs must operate under certain nationally determined conditions (for example, limited access to domestic savings), and they must conform to certain performance requirements (for example, effective transfer of technology, or managerial know-how). These conditions are under threat by the various bilateral and regional agreements (such as NAFTA and the post-Lome Cotonou Agreement) that developing countries have been forced to sign by the developed countries, and by pressures to liberalize the economies coming from the World Bank, the IMF and the WTO. These pressures must be collectively resisted by the developing countries.

In addition to the above measures to guard against the essentially predatory nature of FDIs, and capital generally, African countries must also take further precautionary steps to guard against the ephemeral and fickle/volatile character of speculative capital. As earlier argued it is difficult to tell FDIs and speculative capital apart ex ante, especially when FDIs are intermediated through banks and other derivatives. The experiences of Mexico, the East Asian countries and Russia must be studied in depth and lessons learnt from them. International movements such as ATAC advocate measures to tax short term capital (such as the Tobin tax) in order to guard against flighty capital. African countries may support such action, but must not wait this to materialize at the international level (for this may never happen), and must already put in place legislation and an effective monitoring machinery at the national level to discourage speculative capital and predatory run on national currencies.

These, then, are the short-term and immediate measures that African governments must take. However, as earlier indicated African officials are so conditioned by the neo-liberal “development” paradigm, or, alternatively, they are so conditioned by their own class interests, that they may not be able to carry through the above measures without pressure from below. At the end of the day, it is the people, especially the working people in mines, factories, farms, and the service sector, that have must take upon themselves the responsibility to protect their own jobs, income, family welfare, the environment and national patrimony. The Big TNCs and the Big Powers that stand to lose from such globalized rebellion from below will, no doubt, try to divide the people, isolate regimes that are obstreperous, impose sanctions on the weak and the isolated, and so on, but that is the price people have to pay for their liberation. Liberty does not come without sacrifices.

Since the matter was transferred to the UNCTAD from its previous home (the UN Centre on Transnational Corporations), there has been a subtle, but significant, transformation in the manner in which the matter is handled. As well as providing raw data on the flow of capital and on TNCs, the annual WIRs also set out to advocate the liberalization of markets for a freer flow of capital. In relation to countries of the third world, UNCTAD has taken a pro-activist advocacy role to induce them to create better conditions to attract TNCs and FDIs.

There are references in the WIRs, here and there, over its ten years of reporting that FDIs and TNCs are not unproblematic. In other words, the authors of these reports can show passages where they have put to question the unqualified view of FDIs as agents of development. However, this is done in an eclectic, incidental, manner, for the overall thrust of UNCTAD’s argument is that both FDIs and TNCs are good for development and that the developing countries should be creating the necessary environment to attract these. Even if this were the case, it is questionable if it is the role of UNCTAD to act as advocates for TNCs. If the contention of this paper, namely that FDIs contribute to the domination of Africa by TNCs through FDIs turns out to be correct in the verdict of History, then UNCTAD, in retrospect, would have been an active agency in laying the ideological foundations for the domination of Africa. This would for UNCTAD be a shocking indictment, for it would contradict its very raison detre. It would, therefore, be prudent for UNCTAD not to take such a definitive position in favour of FDIs and TNCs as it does in its WIRs.

Furthermore, UNCTAD needs to revisit the conceptual, or knowledge, basis of its WIRs. UNCTAD prides itself as a “knowledge-based” institution. If so, then it is legitimate to ask where its knowledge comes from and for whose benefit. The first move in the direction of correcting its flawed conceptual basis of WI Reports would be to redefine “outflows” of capital to include at least the above fourteen categories of capital outflows that are in the main responsible for the continuing draining away of the domestic savings of Africa (and of the rest of the third world). This drainage makes domestic capital accumulation such a difficult task, comparable to what the Greek God Sisyphus faced trying to roll a rock up the precipice of a mountain.

A third step that UNCTAD needs to take (besides distancing itself from an advocacy role for TNCs, and changing the conceptual basis of WIRs) is to integrate considerations of “sustainable human development” in its work programme. This means many things. The first is for UNCTAD to move away from its economistic moorings and recruit qualified people who understand the human being in its holistic concept and not purely as an economic or market category. Secondly, since UNCTAD is also concerned about trade (as well as development), it must build into its knowledge and analytical framework a methodology of how to measure trade from not simply productive point of view but also from an equity point of view. Thirdly, UNCTAD needs to follow the lead of UNDP in the latter’s effort to include the human index in measuring “development”, and try to go beyond UNDP on this route. Here it must challenge UNDP’s concept of equity as welfare, which is confined within the utilitarian philosophy and which still tolerates an asymmetrical world as long as the “welfare” of the poor is catered for. UNCTAD could go beyond this and consider alternative philosophical foundations to welfare and utilitarianism. The grassroots protestors against the WTO at Seattle and Washington had provided a clue on the direction that trade should take, namely in the direction of “fair” not “free” trade. Justice as fairness is a sparsely explored concept and UNCTAD might want to develop its knowledge base towards bringing it closer to the people than existing power structures by looking at justice as fairness rather than in terms of justice as poverty eradication. [xxiii]

A. Present data on the scale and composition of private capital flows to Africa.

Does data confirm that FDI is increasing sharply, and that foreign direct and portfolio investment are large relative to their economies, and therefore of critical concern in formulating economic and SHD policy?

B. Review recent studies on motivations behind the investment decision in Africa. Comment on the management of FDI and portfolio flows (both geographically and sectorally).

Comment on volatility of flows, factors (eg., the debt overhang) preventing medium-term bank lending, and short-term bank flows.

C. Assess the macroeconomic impact and policy implications of capital flows, including policy implications for the design of growth and SHD policies.

Focus mainly on policies needed to manage the sequencing of reforms more effectively, and on a broader range of policy instruments required to influence the impact of FDI flows on SHD in key sectors of the economy.

D. Identify measures which will help African governments to attract more development-oriented private flows, SHD-oriented private flows, and for managing the economic impact of growing and more volatile flows.

[ii] The following news item on a strike by workers in South Africa in Southern Africa published in London by "Business Monitor Int.Ltd": Vol 5, no 5, May 2000, p.2, is indicative: "Whether the response by workers will be truly national is open to doubt but inevitably the strike will be damaging to the country in the eyes of investors.... The Government must persuade the union leadership that the world is no longer flat, but round." Similarly, the local press in Zimbabwe periodically comes out with caution against any action that might send “wrong signals” to foreign private investors. That this is not just an African phenomenon can be attested by the following story from The Wall Street Journal, ” May 15, 2000, p.A25: A senior U.S. Treasury official recently “urged Mexico’s government to work harder to reduce violent crime, saying the country’s high crime rate could frighten away foreign investors.”

[iii] See Joseph Stiglitz, More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus, Speech delivered at the January 1998 WIDER Annual Lecture, Helsinki, Finland

the WIDER lecture

[vi] As the Government of Zimbabwe discovered when in early 2000 it tried to take over the white-owned farms. The act itself may be questioned on constitutional or moral grounds, but the relevant point here is the reaction of the former colonial power, the United Kingdom, to this act of “appropriation”. The conflict finally became not only one between the white farmers and the Government of Zimbabwe but also, more significantly between the latter and the Government in the U.K.

[vii] There used to be a theory of “underdevelopment” in the 1960s linked with names like Walter Rodney and the Latin American school of thought known by that name. The theory went out of fashion because times changed, and because it did have some conceptual problems. I made a critique of this theory in “xxx” in Review of African Political Economy, 1982. Nonetheless, the essence of the theory, namely, that foreign capital, being imperialist in exploitation of local resources and cheap labour, impoverishes the recipient country rather than “developing” it, remains generally valid.

[viii] “Deregulation of banking began in earnest during the early 1980s. De Kock Commission recommended lifting prudential requirements and credit and interest rate ceilings, and adopted a “risk-based” approach to the ‘capital adequacy’ of a bank, in effect shifting regulation of bank activities from the state to the market. Increased capital flight was facilitated – often illegally – by financial institutions, and from 1985 to 1992 amounted to an estimated 2.8 per cent of GDP in net terms.” Patrick Bond, Elite Transition: From Apartheid to Neo-Liberalism in South Africa, Pluto Press, 2000, p.25

[xi] See, for example, The Economist, 13 December, 1997. Table. 76. Big investment banks make enormous profit, yet RATE of profit declined sharply. The article goes on to say that Investment banks try to deal with shrinking rate of profit by taking more risks or cross-subsidising.

[xiii] "In some ways the IMF has done more in thes past months to liberalize these economies and open their markets to US goods & services than has been achieved in rounds of trade negotiationals in the region." Larry Summers, "American Farmers: Their Stakes in Asia, Their Stake in IMF," Office of Public Affairs, US Treasury Dept, Washington DC, Feb 23, 1998.

[xix] We have already referred to how the De Kock Commission in South Africa had recommended the lifting of prudential requirements and credit and interest rate ceilings which facilitated massive flight of capital, estimated by some to be as large as 2.8 per cent of GDP in net terms. In more recent times, the Central Bank approved the bailing out of xxxx that made bad investments in Russian bonds. In one instance, the Central Bank allowed capital export to enable Gencor’s purchase of Shell Oil’s Billiton mining group. Was it just a coincidence that Finance Ministers Derek Keys’ resigned in mid-1994 to run Billiton? In 1999 Government allowed the biggest corporations in South Africa (including De Beers, Anglo-American, Old Mutual and South African Breweries) to transfer their headquarters to London leading to a massive fall in the Johannesburg Stock Exchange capitalisation. In addition, Old Mutual was authorised to demutualise itself, converting itself into a shareholder company, thus transferring the control over pension funds, largely from the working classes, from its beneficiaries to those who have power over the market.

[xx] In 1999, the South African Government tried to pass an Act enabling it to undertake parallel importing of essential drugs, especially those needed for HIV/AIDS. The US Government, pressurised by pharmaceutical TNCs, tried to block the Act by arguing, falsely, that it violated the TRIPS agreement. The US even put South Africa under its Regulation 301, placing South Africa under “suveillance” which is itself a form of sanctions for it sends “wrong signals” to foreign investors. At the time of writing this paper, the matter has not been resolved, and the Act has not been passed. Yet South Africa is right to resist pressure from the US, and to take whatever measures are necessary to protect the lives of its people.