Innovative Source of Development Finance for Africa: The Return of Stolen Funds

Abstract

This essay rejects the undue emphasis on external development finance as one principal mains of bridging the financing gap and breaking poverty traps in Africa. A simple model is used to show our elite preference for de facto power informs the use of extraction strategy that diverts public resources into private use, creating a gap between actual economic performance and potential economic performance: which is our simple definition of development gap in this essay. This de facto power constitutes the clog in the wheel of Africa’s economic development. The seizure of this stolen wealth and its systematic return to Africa is one way of breaking elites’ de facto power. Furthermore, we show how the development gap is related is related to the product of elite’ de facto power and social multiplier that amplifies the initial adverse actions of elites. A modified Keynesian model is used to show how de facto power or institutional capacity is linearly related to the size of government and investment multipliers, demonstrating how lower level of de facto power can provide required development finance locally by increasing government and investment multipliers and how an institutional environment that inhibits the exercise of de facto power can raise business profits, also providing additional source of domestic development finance. The increase in government and private investment multipliers will raise economic growth. There will be further second-order effect of increased economic growth in raising national savings. Limitations of this approach are also discussed.