Draining development: illicit flows from Africa
<
https://www.opendemocracy.net/author/menelaos-agaloglou> Menelaos
Agaloglou
20 October 2014
Since 1970, Africa has lost at least $854 billion through capital flight
which is not only enough to wipe out the continent's total external debt of
$250 billion but leaving around $600 billion for poverty alleviation
Illicit flows are difficult to measure due to lack of reliable data. Global
Financial Integrity in 2008 reported that Africa has lost between $854
billion and $1.8 trillion in the last four decades.
The flows seeking higher returns are directed towards western financial
institutions and the process is being facilitated by tax havens, trade
mispricing (by overpricing imports and underpinning exports on customs
documents, residents can illegally transfer money abroad), fake foundations
and money-laundering techniques.
Sometimes it is a response to economic and political instability or to high
taxes placed on international trade. Frequently it is a way of hiding the
illegal accumulation of wealth owed to corruption or criminal activity.
Additionally, massive illicit flows can also be a reaction to a defaulting
government debt or to a lost confidence on the economic strength of the
country.
These outflows of capital seriously harm the efforts for poverty alleviation
and socio-economic development. In the first place, investment has
decreased, yielding negative implications for job creation, improvement of
infrastructure and industrialization.
Illicit flows of money harm economic growth by stifling private capital
formation and causing the tax base to remain narrow. Since it drains hard
currency reserves, it encourages poor countries to borrow money from abroad
making their debt crisis worse and curtailing public investment further.
This burden is paid more by the poor since high levels of unemployment and
increased inflation affects them more. Illicit flows increase inequality
that can lead to political tensions and further poverty.
Interestingly, Africa has become a net creditor to the world despite its
global image as an inactive recipient of aid and loans. It has the highest
share of private external assets among developing regions. Since 1970,
Africa has lost at least $854 billion through capital flight which is not
only enough to wipe out the continent's total external debt of $250 billion
but leaving around $600 billion for poverty alleviation and pro poor growth.
Africa is the largest recipient of aid in the world. Vast amount of
resources are being spent every year with the task of achieving poverty
reduction and meeting the Millennium Development Goals.
But what's the point of sending money in the region if the region sends it
back? For the region as a whole, illicit outflows outpaced official
development assistance by a ratio of around 2:1. Taking other statistics
into account, developing countries lose at least $10 through illegal flight
for every $1 they receive via the aid regime. It is logical to conclude here
that it would have been more beneficial to keep the locally produced wealth
and invest it in the continent rather than waiting for aid from abroad to
safeguard basic needs.
A serious inquiry that needs further investigation is what exactly this
amount (between $1 trillion and $2 trillion) being lost means in terms of
schools, hospitals and infrastructure. For example, the Education For All
2011 report stated that current aid levels fall short of the $16 billion
required annually to close the external financing gap in low-income
countries.
This crime kills the economic chances of the region. In 1970 it sent abroad
2% of Africa's GDP, in 1987 it sent abroad 11% and 8% of its 2007 GDP.
Illicit outflows from Africa grew at an average 12% a year over the four
decades. To have a chance to meet the Millennium Development Goals, African
countries must attack the illicit outflow and try to recover what is now
held abroad. If the amount lost could be returned, then development can be
achieved painlessly with local resources finally putting an end to aid
dependency.
Economic growth without reform that can keep the wealth locally reinvested
will lead to more illicit capital flight, and not to less. Sub Saharan
Africa had high growth-rates over the last decade. Illicit outflows have
also increased during this period. If the resources gained from growth
cannot be invested locally then pro poor growth will not be achieved and the
continent will continue suffering from extreme poverty. The region crucially
needs diversification of its economy, research and development in relation
to its agriculture and an expansion of its social services both in urban and
rural areas. Only locally-led efforts, with local resources, can succeed in
bringing prosperity.
Former South African president Mbeki blamed multinational companies for the
flow of capital out of Africa, whereas other people are blaming the growing
African elite for wanting higher returns for their money. The alternative
view is that this economic problem of the outflow of money is just one of
the consequences of the real problem that generates all others: in many
African countries, governments (even the whole apparatus of the state) lack
legitimacy, and their policies and actions do not represent the whole of
society but special groups with economic and political power. In most
African countries there is no bargain among groups; just the imposition of
power by a small elite.
An effective state can tax its citizens with a political settlement, a
rational consensus between state and citizens whereby taxes will be used to
further guarantee and protect their interests. At this point we can start
perceiving the problem of illicit flows more as a political problem and less
an economic one. It is necessary for African societies to address their weak
state legitimacy by becoming more open political units, which will integrate
the different groups from the societies they supposedly lead. On the other
hand businessmen, in order to keep their wealth inside their countries, need
to be sure that they will profit with a positive real rate of interest.
Serious macroeconomic policies, such as lower fiscal deficits, low inflation
and reduced monetary expansion need to follow.
In conclusion, capital flight places the whole burden of solving the problem
upon African countries. However one views the problem, either as an economic
or a political one, the burden is placed on these societies to solve
problems through their own efforts.
It is true that African financial institutions are the smallest and least
developed in the world. It is also true that they are not transparent -
probably a symptom of their connection with the political establishment
which also lacks credibility among the locals. But credibility, transparency
and legitimacy are central ideas to development. It would be wiser to start
our development discussions from these basics rather than wasting more
resources and time setting more and more millennium goals.
Received on Mon Oct 20 2014 - 15:57:07 EDT