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A chance to crack down on Africa's loot-seeking elites
A silver lining in this grim economic cloud is an opportunity to clean up the banks and halt the corrupt capital flight
Paul Collier The Guardian, Tuesday October 7 2008
My home town of Sheffield is to fish-and-chip shops what London is to banks. While at Harvard, I used to start my lectures on the financial sector in developing countries by explaining the difference between them. A good fish-and-chip shop makes its money by adding value to the fish and potatoes that it buys. A good bank makes its money in the same way, on the margin between the money it borrows and the money it lends.
But now comes the difference. A criminal can safely be put in charge of a fish-and-chip shop but not of a bank. The former has virtually no assets: if the criminal runs off with the day's fish he cannot retire to Bermuda. But a criminal banker can make a fortune if only he can loot the money that the bank has borrowed: the returns from criminality dwarf running the bank well.
In an ideal world the criminals would run fish-and-chip shops, where they could do no harm, and the honest would run the banks. But the market will allocate people in precisely the opposite way: the criminals will move heaven and earth to get into the banks, while the honest will not mind much which job they take. That is why vigilant public scrutiny is essential to prevent looting.
Vigilant public scrutiny is, of course, precisely what we have not had. In its absence the business model of our financial sector, while not literally criminal, has been to tap our wealth in its custody by shifting it into opaque assets for high fees. Manifestly, wealth-owners did not adequately understand what was going on. We had been lulled into misplaced trust by decades of regulation-enforced decent behaviour.
The regulation which had worked well enough was dismantled because of the recent mantra that finance is the engine of growth as long as it is given free rein. Hence Gordon Brown's emasculation of financial regulation in the UK and Alan Greenspan's era of neglect in the US. This mantra radically exaggerates the upside potential of finance. At best, the contribution of the financial sector to the growth of an economy is second order: it facilitates the creativity of other sectors. Only at its worst is finance first order: as we are now seeing, it can be catastrophic.
Self-evidently, in a healthy society the brightest young minds should be heading for those parts of the economy that are truly first order. In Germany the brightest and best have been attracted to critical sectors such as the railways, which is why they function so brilliantly. In Britain the brightest and best have been attracted to the banks, which is why they so brilliantly looted our wealth. Meanwhile, with talentless management our real economy has lurched from failure to failure: from major cock-ups such as the opening of Heathrow's Terminal Five, to trivial such as the three hours taken by my train yesterday from Oxford to London.
At last, we have a chance for change. Because the banks do well out of secrecy, to date they have successfully opposed proper scrutiny. The wall of secrecy started to crack after September 11, 2001, when governments forced banks to reveal deposits linked to the finance of terrorism. Incredibly, even that was resisted: Citibank lobbied hard to block it. But now that we have the banks on the run there is an opportunity to extend scrutiny, not only to help ourselves, but to help Africa.
The loot-seeking elites that control parts of Africa illicitly send capital out of the region to the tune of $20 to $28bn per year. Illicit money flows are hard to quantify, but this is the new estimate by Raymond Baker of the NGO Global Financial Integrity, the most careful and ingenious study to date. Capital flight of this magnitude is roughly equivalent to the entire aid inflow to the region, so closing it would generate a similar resource transfer to doubling aid. One side-effect of the financial crisis is that aid commitments will be at the front of the queue for spending cuts. For example, in the vice-presidential debate it was the only Democratic spending pledge that Joe Biden suggested might be rethought.
While the crisis will weaken our assistance for the poorest countries by curtailing aid, it could inadvertently have an offsetting effect if we use it to close the illicit outflow. Money flows out of Africa into our banks, and into the offshore banks that depend for their existence upon being able to transact with our banks. US rules on banking transparency are even weaker than the European rules: vast sums looted from the public purse in Africa are being held in nominee accounts and moved around the world at greater speed than our cumbersome legal processes can track them down.
Western legal systems are stacked, thanks to the hired hands of skilled lawyers, to protect the rights of the crooked over the rights of Africa's ordinary citizens. At the time of the Commission for Africa, I urged that Britain revise its laws on banking secrecy. Yet despite the enormous emotional energy aroused by Gleneagles, there was no political appetite: aid, yes; banking openness, no. The silver lining in this grim cloud is that we have a second chance to clean up the banks. Which takes me back to where I began. There is one thing that a dirty fish-and-chip shop and a dirty bank have in common: they both stink.
• Paul Collier directs the Centre for the Study of African Economies at Oxford University and is the author of The Bottom Billion
A silver lining in this grim economic cloud is an opportunity to clean up the banks and halt the corrupt capital flight
Paul Collier The Guardian, Tuesday October 7 2008
My home town of Sheffield is to fish-and-chip shops what London is to banks. While at Harvard, I used to start my lectures on the financial sector in developing countries by explaining the difference between them. A good fish-and-chip shop makes its money by adding value to the fish and potatoes that it buys. A good bank makes its money in the same way, on the margin between the money it borrows and the money it lends.
But now comes the difference. A criminal can safely be put in charge of a fish-and-chip shop but not of a bank. The former has virtually no assets: if the criminal runs off with the day's fish he cannot retire to Bermuda. But a criminal banker can make a fortune if only he can loot the money that the bank has borrowed: the returns from criminality dwarf running the bank well.
In an ideal world the criminals would run fish-and-chip shops, where they could do no harm, and the honest would run the banks. But the market will allocate people in precisely the opposite way: the criminals will move heaven and earth to get into the banks, while the honest will not mind much which job they take. That is why vigilant public scrutiny is essential to prevent looting.
Vigilant public scrutiny is, of course, precisely what we have not had. In its absence the business model of our financial sector, while not literally criminal, has been to tap our wealth in its custody by shifting it into opaque assets for high fees. Manifestly, wealth-owners did not adequately understand what was going on. We had been lulled into misplaced trust by decades of regulation-enforced decent behaviour.
The regulation which had worked well enough was dismantled because of the recent mantra that finance is the engine of growth as long as it is given free rein. Hence Gordon Brown's emasculation of financial regulation in the UK and Alan Greenspan's era of neglect in the US. This mantra radically exaggerates the upside potential of finance. At best, the contribution of the financial sector to the growth of an economy is second order: it facilitates the creativity of other sectors. Only at its worst is finance first order: as we are now seeing, it can be catastrophic.
Self-evidently, in a healthy society the brightest young minds should be heading for those parts of the economy that are truly first order. In Germany the brightest and best have been attracted to critical sectors such as the railways, which is why they function so brilliantly. In Britain the brightest and best have been attracted to the banks, which is why they so brilliantly looted our wealth. Meanwhile, with talentless management our real economy has lurched from failure to failure: from major cock-ups such as the opening of Heathrow's Terminal Five, to trivial such as the three hours taken by my train yesterday from Oxford to London.
At last, we have a chance for change. Because the banks do well out of secrecy, to date they have successfully opposed proper scrutiny. The wall of secrecy started to crack after September 11, 2001, when governments forced banks to reveal deposits linked to the finance of terrorism. Incredibly, even that was resisted: Citibank lobbied hard to block it. But now that we have the banks on the run there is an opportunity to extend scrutiny, not only to help ourselves, but to help Africa.
The loot-seeking elites that control parts of Africa illicitly send capital out of the region to the tune of $20 to $28bn per year. Illicit money flows are hard to quantify, but this is the new estimate by Raymond Baker of the NGO Global Financial Integrity, the most careful and ingenious study to date. Capital flight of this magnitude is roughly equivalent to the entire aid inflow to the region, so closing it would generate a similar resource transfer to doubling aid. One side-effect of the financial crisis is that aid commitments will be at the front of the queue for spending cuts. For example, in the vice-presidential debate it was the only Democratic spending pledge that Joe Biden suggested might be rethought.
While the crisis will weaken our assistance for the poorest countries by curtailing aid, it could inadvertently have an offsetting effect if we use it to close the illicit outflow. Money flows out of Africa into our banks, and into the offshore banks that depend for their existence upon being able to transact with our banks. US rules on banking transparency are even weaker than the European rules: vast sums looted from the public purse in Africa are being held in nominee accounts and moved around the world at greater speed than our cumbersome legal processes can track them down.
Western legal systems are stacked, thanks to the hired hands of skilled lawyers, to protect the rights of the crooked over the rights of Africa's ordinary citizens. At the time of the Commission for Africa, I urged that Britain revise its laws on banking secrecy. Yet despite the enormous emotional energy aroused by Gleneagles, there was no political appetite: aid, yes; banking openness, no. The silver lining in this grim cloud is that we have a second chance to clean up the banks. Which takes me back to where I began. There is one thing that a dirty fish-and-chip shop and a dirty bank have in common: they both stink.
• Paul Collier directs the Centre for the Study of African Economies at Oxford University and is the author of The Bottom Billion
