New Internationalist

The Hidden Economy

Issue 220

new internationalist
issue 220 - June 1991

The hidden economy
Richard Brown discovers the wealth that lurks beneath
the bankruptcy and starvation of Africa’s largest country.

Sudan is now in the grip of its third major famine in seven years. These famines are occurring against the backdrop of a costly civil war which has been raging in the southern part of the country since 1983. Sudan also staggers under one of the largest debt loads in Sub-Saharan Africa – nearly $14 billion. Yearly repayment charges outstrip by far the take from official exports. It is hard to comprehend how such a poor country can hope to raise enough tax income to improve the livelihood of its desperately needy people.

Yet the truth is that Sudan has produced more millionaires than any other Sub-Saharan African country with the exception of oil-rich Nigeria. It is not uncommon to spot the latest model Mercedes Benz on the streets of Khartoum before seeing it in Europe. After the 1985 uprising that toppled Nimeiry, more than 20 brand-new Mercedes were among the confiscated private assets of his Vice President.

Conventional thinking about the Sudanese economy is based on government data – on legally recorded economic transactions. Yet so much of Sudan’s economy remains ‘hidden’ that the official record gives at best half the story. In fact the hidden economy has become the main economy, awash with unrecorded and often illegally acquired savings and foreign-exchange surpluses. As a result, the country is in a state of paralysis with an impoverished Government unable to direct underground wealth to achieve any national purpose.

In the civil service inflation and government cuts have severely eroded real incomes at all levels. Public servants are increasingly unwilling to perform their normal duties without some form of extra private inducement. Just to survive they often need to hold two or three other informal – and untaxed – jobs.

Teachers and university lecturers earn additional income by giving extra lessons during regular work time. At the University of Khartoum the euphemism is ‘internal secondment’; lecturers give classes within the university for an hourly fee on top of their regular salary. Doctors often take on private, fee-paying patients during regular hours using hospital facilities to earn a living wage. Government employees routinely sell licences, official seals and letterheads on the underground market in addition to scarce government stocks of basic commodities such as fuel, sugar and flour.

Higher-ranking government officials with access to foreign exchange or imported commodities do particularly well. This is not surprising when you consider that goods are often bought at the official exchange rate (four Sudanese pounds to the dollar) and then sold at prices reflecting the black-market rate of 40 Sudanese pounds to the dollar.

Foreign-aid loans in Sudan also have more to do with pockets being lined than with the quality or need for the project being funded.

Former President Nimeiry’s deal with his good friend the Saudi Arabian arms dealer and financier, Adnan Khashoggi, is a case in point. Their December 1984 agreement established the National Oil Company for Sudan (NOCS) with equal shares to the Sudanese Government and Khashoggi’s Sigma International. NOCS was given rights over all oil and gas reserves in Sudan. Khashoggi undertook to raise a loan of $400 million for the company; in return he was given a virtual monopoly on marketing Sudan’s cotton. Responsibility for servicing the loan rested entirely with the Government. The result – a 50-per-cent mortgage on the nation’s oil reserves in addition to ‘rent’ on its future cotton exports.1

Another important aspect of the hidden economy is money from people working abroad. By the end of the 1980s over a million Sudanese had migrated to oil-rich Gulf states in search of higher incomes. Two-thirds of Sudan’s professional and skilled workers were employed outside the country in the mid-1980s. Money sent home by migrant workers became a major source of income and livelihood for many Sudanese and also the most important source of Sudan’s foreign exchange.

However, since most of these earnings do not pass through the official channels, they are beyond the reach of the tax collector and do little to overcome the chronic foreign-exchange shortage facing the Government. Migrants naturally prefer the attractive exchange rates offered by the merchants and money-lenders who control Sudan’s parallel market.

In 1986 the Central Bank estimated that around $1.4 billion was being exchanged each year on the parallel market, compared with only $400 million on the official market. Things got so bad in the early 1980s that the country’s foreign-exchange-starved Central Bank itself had to buy hard currency at black-market rates.

If you take these hidden sums into account some dramatic things happen to Sudan’s economic statistics: the Gross National Income for the period 1978 to 1987 jumps by some 45 per cent; the 10-per-cent current-account deficit turns into a 10-per-cent surplus; and gross national savings increase from 5 to 20 per cent in the adjusted accounts.2 Apart from the problem that none of these unrecorded earnings can be taxed, the small group of very wealthy parallel-market merchants and bankers who profit from it spend much of the precious foreign currency on luxury imports like automobiles.

However, most of Sudan’s unrecorded foreign-exchange earnings don’t stay in the country or don’t even make it there. Foreign-exchange dealers travel to where the migrants work in the Gulf to buy up their foreign earnings. The worker’s relatives receive the equivalent in Sudanese pounds back home and the foreign currency is invested abroad in violation of Sudanese law.

And then there is capital flight: Sudan, like all too many developing countries, is crippled by capital flight. Sudanese businesspeople first started illegally buying up foreign assets in the early 1970s with the wave of Gulf Arab petro-dollar loans that were supposed to convert Sudan into the ‘granary of the Middle East’. One key actor was again Adnan Khashoggi. He contracted a commercial loan of $200 million, guaranteed by Saudi Arabia, at twice the interest rate offered by others. Ten million was deposited abroad for ‘greasing Saudi machinery’, of which $4 million constituted Khashoggi’s commission. ‘As for the rest of the money, only God knew, and only Adnan and President Nimeiry would be able to account for it,’ according to Mansour Khalid, Nimeiry’s former Foreign Minister.3

The findings of a Bank Investigating Committee appointed after Nimeiry’s downfall in 1985 sparked the arrest of leading bankers, including the manager of Citibank. I estimate that $11 billion left Sudan between 1978 and 1987; the Bank Committee puts it at $15 billion.4

So the official picture of Sudan as a net recipient of foreign money, mostly in aid funds, is quite misleading. In reality Sudan is a net exporter of capital: the amount of money that has disappeared overseas is at least equal to the country’s accumulated foreign debt. The Government owns the debt, private investors the foreign assets. A large part of Sudan’s income that could be taxed is instead going abroad.

There are plenty of official suggestions as to how Sudan might tackle this fiscal crisis. But the root problem is not simply the state’s ‘lack of fiscal and monetary discipline’, or ‘overconsumption’ (as the World Bank and the International Monetary Fund contend), but its inability to mobilize the money circulating in the hidden economy. Simply giving Sudan the orthodox advice – increase tax revenues and reduce spending – is pointless.

The Sudanese Government must find a way to use existing savings and foreign-exchange earnings while restoring investors’ confidence in the domestic economy. Only then will the hidden economy be brought into the light of day and adequate tax revenues be put to use to meet the basic needs of ordinary Sudanese.

But it is hard to imagine that the economic chaos can be put right if there is no end to the political chaos, the persistent internal rivalries, the ethnic frictions and the civil wars that have torn Africa’s largest country apart.

The author is Senior Lecturer in Development Economics at the Institute of Social Studies, The Hague, Holland.

1 ’Sudan’, S Turner, Africa Review 1986.
2 RPC Brown, Sudan’s Debt Crisis, PhD thesis and Sudan’s Other Economy, Institute for Social Studies, The Hague, 1990.
3 Nimeiry and the Revolution of Dismay, M Khalid (Routledge and Kegan Paul 1985).
4 Brown, op. cit.

The wings of wealth
In the Third World, capital takes flight
for the West before it can be taxed.
Lester Henry explains how.

Illustration: CLIVE OFFLEY The flight of capital from Third World countries starved of development finance reached staggering proportions by the late 1980s. The amounts involved evoke comparisions with the huge flows of capital into post-war Europe in the 1940s – a ‘huge negative Marshall Plan’ according to some. Faced with a crippling debt load and chronic foreign-exchange shortages, Third World economies would be hard pressed to meet their obligations without this leakage of precious resources. Capital flight erodes the national tax base; cuts local investment; hinders economic growth; skews already skewed income distribution between those who own Mercedes and those who can’t afford to feed their donkeys.

Ironically, without the foreign exchange provided by the flood of ‘development’ loans from international banks in the 1970s, local elites would have lacked the means to engage in capital flight. In the case of Latin America one-third of the borrowed money went to finance the flight of private capital out of debtor countries. This connection between debt and capital flight is often viewed by bankers and their allies as the result of rational actions on the part of both banks and Third World elites in the face of irresponsible government economic policies. This ‘banker’s view’ has it that ‘The banks gave the money to the governments and they dumped it in the streets, and the people picked it up and took it to New York’.1

It is not difficult to see the attraction of capital flight for the wealthy of the Third World. One of these is escaping tax.

High taxes push capital out while low ones pull it in. In much of Latin America – Argentina, Mexico and Venezuela – capital flight is the premier means of tax evasion.2

Fear of social change is another reason for capital flight. Capital safely stowed away in numbered US T-Bill accounts or Zurich term deposits cannot be confiscated or subjected to heavy taxes if the local radicals take over. Whether funds are sent abroad to avoid present or future taxes it is the local tax base which suffers. Money earned on flight capital is almost always outside the taxing range of the government, depriving the public sector of funds badly needed for schools or rural health clinics. Neither can money outside the country contribute to domestic investment. This means less jobs and still fewer taxpayers. A vicious circle is set in motion: capital flight means less tax revenue now and less in the future.

With shrinking tax revenues it is little wonder Third World governments are faced with large budget deficits. The deficits force taxes up and hit the poor or at least those on middle incomes harder than those with their wealth safely tucked away in other countries. The use of consumption taxes, such as the value-added tax (VAT), result in rich and poor paying the same amount in taxes on the goods they buy. Of course the poor end up paying a much larger percentage of their income than the rich. Taxes like VAT are now gaining wide-spread use in countries under IMF austerity programs.

Tax havens are the ‘pull’ factor for capital flight. These havens have proliferated over the last few years. And we are not just talking about exotic places like Panama and the Cayman Islands. The US is now the world’s largest tax haven due to a deliberate policy of removing taxes on bank and Treasury Bill interest payments to non-residents.

Tax havens are zealously defended by proponents of the ‘banker’s view’. For David Devlin of Citibank they are a way of ‘enabling investors to evade attempted theft on the part of their governments’. For Aloys Schwietert of Swiss Bank Corporation any attempt to stop capital flight ‘would lead to an assault on basic human rights’.2

The biggest beneficiaries of capital flight are undoubtedly the international banks. These banks have been collecting huge amounts of money in interest payments on Third World debts – while at the same time soliciting the elites in these same countries for deposits of flight capital. The big losers are the majority of Third World people who see their services cut and their taxes raised in order to pay off the banks.

Lester Henry teaches economics in Brooklyn.

1 Sjaastad, L.A., Fortune, Nov 26 1984.
2 Lessard D., Capital Flight and Third World Debt, Institute for International Economics, 1987.

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