PLUGGING AFRICA’S LEAK
Foreign aid programs continue to pour
funds into what seems like Africa’s bottomless bucket. Illicit financial flows
out of Africa are twice the amount of foreign aid into the
region.
Foreign aid programs continue to pour funds
into what seems like Africa’s bottomless bucket. Illicit financial flows out
of Africa are twice the amount of foreign aid into the region.
Between 1970 and 2008, according
to a study by Global Financial Integrity (GFI), illicit
flows from Africa totaled at least $854 billion, and could reach
as high as $1.8 trillion when taking into account missing data from
certain countries and other conduits of illicit flows not captured
in the study.
Although $1.8 trillion is already an incredible volume
of illicit outflows, the actual figure could be higher still. This
figure grows if we account for untraceable money generated
by smuggling, violations of intellectual property rights, trade
in narcotics and other contraband goods, human trafficking, sex trade, and
other illegal activities.
Illicit flows have been a consistent and crippling problem in African
countries. The GFI study found that illicit funds from the continent continued
to ratchet upwards every decade since the 1970s, at an average
rate of 12 percent per year. In fact, Africa is a net
creditor to the world — it "gives" back to the world
through illicit capital flight at least twice, and in some regions
thrice, the amount of capital it receives in external
assistance. No wonder, then, that this staggering loss of capital
seriously hampers Africa’s efforts at poverty alleviation and economic
development, decade after decade.
Complicity of Banks
Traditional policy interpretations
of "capital flight" do appropriately account for the debilitating
effects of the money leaving these countries — money that these
countries desperately need to build economic and political foundations.
But this antiquated approach does not recognize that banking institutions
in the developed world facilitate the absorption of illicit
funds.
Illicit flows must be curtailed through a two-pronged approach, which
recognizes that both developing and developed countries must do their part
in addressing the problem. While developing countries, like those
in Africa, currently lack the governance and transparency
to effectively regulate and control these outflows, equally at fault
are the jurisdictions — mostly developed countries and their Western
banking institutions — that not only absorb these illicit funds without
hindrance, but actually solicit them through "private investment" banking
services. Emerging markets need to implement sound economic policies and
improve governance. But developed countries also need to ensure that the
financial institutions that absorb these flows are subject to stricter
oversight and operate in a more transparent manner.
The drivers of illicit financial flows vary from country to country,
but overall transparency in the global financial system would
significantly curtail all forms of outflows, by making it harder
for tax cheats and other corrupt individuals to siphon off funds from the
country. If retained by the region, the astonishing $854 billion
estimated to have flown out of Africa would be enough
to not only wipe out Africa’s total outstanding external debt
of around $250 billion (as of December 2008), but it would
also provide around $600 billion for poverty alleviation and economic
growth.
Development aid to Africa won’t be effective as long
as these illicit outflows continue to grow. Sub-Saharan African
countries experienced the bulk of illicit capital leaving the continent,
with the West and Central African region registering the largest outflows. The
top five countries with the highest outflows were: Nigeria
($240.7 billion), Egypt ($131.3 billion), South Africa
($76.4 billion), Morocco ($41.0 billion), and Algeria
($35.1 billion). Estimates indicate that Africa lost around $29 billion
per year from 1970-2008, of which the sub-Saharan region accounted for
$22 billion. On average, countries like Nigeria that export oil lost
capital at nearly $10 billion per year, far outstripping the $2.5 billion
per year lost by the group of countries exporting non-fuel primary
commodities. Indeed, these numbers indicate that much of the wealth
generated by oil-exporting African countries does not trickle down
sufficiently to benefit the nation’s population.
In developing countries that do not or are unable
to implement genuine economic reform and better governance, economic
growth brings more opportunities for individuals to accumulate illegal
wealth and transfer that wealth abroad. In periods where illicit outflows
accelerated, oil prices increased, and so did opportunities
to mis-invoice trade. In fact, two methods often used to siphon
money away from legal and traceable markets involve the under-invoicing and
over-invoicing of exports and imports, respectively.
Fixing a Broken Model
The current development paradigm isn’t working.
Poverty rates continue to stagnate and even rise, and countries such
as Somalia, Sudan, and Zimbabwe continue to struggle as failed
states. In fact, the political and economic foundations that typically
underlie stable and prosperous countries are absent in most African
countries. According to the UN Millennium Development Goals (MDGs),
$348 billion is needed to meet the goals by 2010 and $529
billion by 2015. If illicit financial flows are not curtailed, Africa
and its donors won’t be able to meet these goals.
Policy measures must be taken to address the factors underlying
illicit outflows and also to impress upon the G-20 the need for better
transparency and tighter oversight of the international banks and offshore
financial centers that absorb these funds. Global Financial Integrity recently
launched the
G20 Transparency Campaign to enable people around the
world to take action on the problem of illicit financial flows.
When the G20 meets in Canada this June, this problem must
be at the top of the agenda.
Reform of this shadow financial system through greater transparency
is in the best interest of not only African countries seeking
economic growth, but also the interests of developed countries. Curtailing
illicit flows would improve the effectiveness of aid and help graduate
African countries from aid dependence to a path of sustained
economic development.
Karly Curcio
FPIF Analyst Karly Curcio is a junior economist at Global
Financial Integrity, a program of the Center for International
Policy.
http://www.fpif.org/articles/plugging_africas_leak
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