Re-writing the rules of finance
Most African countries have a peripheral capitalist economy with limited access to the financial structure. Hence, as the third-world countries work with multinationals with balance sheets multiple times the sizes of their economies, to get financial recourse, most have ended up signing away their countries and their future generations. However, there is a new tune on the continent, fighting multinational corporations on the grounds of exploitation and repression.
It is estimated that every year Kenya loses $558 million (Kes 76.9 billion) in one form or another of tax planning. While the practice is not illegal, multinational companies and Western capitals push through favorable tax policies in exchange for investments, reducing what governments can collect. Some companies also exploit legal loopholes to create a web of companies selling African commodities to each other, a practice called transfer pricing.
Odious debt
This has meant that countries cannot raise enough taxes to meet their growing population’s needs for education, health, and economic transformative infrastructure. These countries have then been encouraged to borrow by bankers selling predatory loans. The allegations of multinationals’ exploitation of underdeveloped countries have been supported by some economists, an example being John Perkins, an Economic advisor who clearly explains how banks use fancy economic studies to lure third-world leaders around the world into giving them patents to their natural resources, such as oils, while also slowly drawing them into a debt trap through high-interest rates, which are expected to repay the loans.
Chickens have come home to roost
With a global recession threatening the West, costly credit has locked out African sovereigns, making it almost certain to default. African states have resorted to tough taxation measures, restructuring domestic loans, fire sale privatization, while others have felt hoodwinked into signing documents that sell countries’ resources to avoid defaults.
Some have called for changing the rules of finance to give developing nations more resources, with many heads of state joining in the contestation against these global financial institutions, where they have felt underrepresented in the decision-making process.
Months ago, Kenyan President William Ruto waded into the murky terrain of foreign debt, where he called out Multinationals for having an arduous framework when administering financial aid. He went on further to add that the global West has continued to disenfranchise Africans by imposing unjust debt repayment policies that are almost unmanageable.
Alternative financing
The World Bank and International Monetary Fund (IMF) have come in to stabilize African economies threatened with default. In Kenya, for instance, The World Bank’s International Development Association was by far Kenya’s biggest multilateral lender, with the country owing IDA 1.4 trillion by April this year.
This help has come with tough conditions of austerity, fueling poverty and rolling back social and political gains. According to critics, the terms and conditions given by the corporations have been found to be unattainable and tacitly encourage neo-colonialism. Many are starting to question whether the age-old policies of structural adjustment programs will work in a completely altered world with China and BRICS offering alternative financing.
The question is, what is the solution for third-world countries in terms of abating debt? Is it debt restructuring? Or maybe trying out other institutions with more concessional terms? Like maybe BRICS? Which way for Africa?
The author, Gertrude Wachira, is Strathmore University student currently pursuing Financial Economics and a fervent writer on business, public policy, and governance. Email: [email protected]
