chapter  7
20 Pages

Africa’s revolving door: external borrowing and capital flight in sub-Saharan Africa


External borrowing can be a good thing, or a bad thing, from the standpoint of the well-being of a country’s people. If the money is invested productively, in activities that yield a rate of return high enough to repay the debt with interest and still come out ahead – in theory, the underlying premise of development finance – then it is a good thing. Even if the money is used to purchase items for consumption, rather than invested, this can be a good thing if it helps the populace through lean times and lets them repay when the economy improves, a consumption-smoothing logic akin to the life-cycle behavior of individuals who borrow in their younger years and repay later when the have higher incomes. Indeed, in such circumstances external borrowing can be a blessing. But if neither of these conditions holds – if the borrowed funds are neither invested productively nor used for consumption needs – then external borrowing can be a bad thing, burdening future governments and citizens with debt service costs without commensurate benefits.