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Monday, October 06, 2008

"A Chance to Crack Down on Africa's Loot-Seeking Elites"

Paul Collier says the financial crisis presents a chance to stop looting in Africa:

A chance to crack down on Africa's loot-seeking elites, by Paul Collier, Comment is Free: ...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... 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. ...

At last, we have a chance for change. Because the banks do well out of secrecy, to date they have successfully opposed proper scrutiny. ... 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. ... Capital flight of this magnitude is roughly equivalent to the entire aid inflow to the region...

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. ...

The silver lining in this grim cloud is that we have a ... 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.

    Posted by on Monday, October 6, 2008 at 05:58 PM in Development, Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (5)

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