Tuesday, April 20, 2010

Illicit capital flight from Africa boomed in the 2000s

A study issued a few weeks ago found that a lot of money flows out of Africa illegally. The continent lost anywhere from 800 million to 1.06 trillion dollars between 1970 and 2008. The amount of money that left Africa illegally increased rapidly during the economic boom years of the 2000s, when commodity prices were rising fast.

What is surprising about the study is that bribery and theft only amounted to a small three percent of that total. A third of all the money was lost to the illegal drug trade. Most of the money was through corporate tax evasion, which amounted to 65 percent of the total.

From IPS, we find this interview with one of the authors of the report. Writer Hilaire Avril talked to Dev Kar who worked at the statistics office of the IMF for over 13 years.

The research report was co-authored by Dev Kar, lead economist at GFI and a former senior economist at the International Monetary Fund (IMF), and Devon Cartwright-Smith, an economist at GFI.

The report asserts that "the enormity of such a huge outflow of illicit capital explains why donor-driven efforts to spur economic development and reduce poverty have been underachieving in Africa".

Illicit capital flight from Africa "drains hard currency reserves, heightens inflation, reduces tax collection, cancels investment, and undermines free trade," according to the report.

The authors blame "a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and money laundering techniques"

Q: According to your research, some of the countries worst affected by illicit capital flight are those experiencing conflicts, as in the Horn of Africa?

A: Indeed. Some countries like Somalia and Sudan, which have had long-standing conflicts, or Eritrea, which fought Ethiopia, have not been exempt from illicit financial flows.

Q: The report mentions that the rate at which capital has left Africa illicitly has accelerated in the last decade?

A: Yes, it is accelerating. One of the main reasons is that we have seen a pick-up in the economic growth rate, at least prior to the financial crisis (of 2008).

But the increase in growth was not matched by improvements in governance, or a strengthening of institutions, or commensurate improvements in economic policies and law and order.

So, economic growth may be due to robust oil prices or commodity prices but when income rises, it mostly goes into capital flight. Without proper economic governance, increased growth prospects merely fuel capital flight instead of stemming it.

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