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"
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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.

1 trillion taken from Africa illegally since 1970

A new study says that 1 trillion British pounds has flown out of Africa illegally since 1970. This is the claim made by a new study from the Global Financial Integrity. This is 1 trillion pounds that could have been used instead for debt reduction or poverty fighting. Instead the money was taken in corruption and graft, tax evasion, and the illegal drug trade.

From the Guardian, writer David Smith tells us more about the study, and how it huts the poor in Africa.

Illicit outflows from Africa grew at an average 11.9% a year over the four decades. Some of this is attributed to oil price rises and increased opportunities to mis-price trade.

"It is not unreasonable to estimate total illicit outflows from the continent across the 39 years at some $1.8tn," writes Raymond Baker, director of the GFI.

"This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mis-pricing and money laundering techniques."

This capital loss has a devastating effect on development and attempts to alleviate poverty, the report says. Even by a more conservative estimate, using accepted economic models from the World Bank and the IMF, Africa has lost $854bn in cumulative capital flight between 1970 and 2008, the report notes. This would be enough to not only wipe out its 2008 external debt of $250bn but potentially leave $600bn for poverty alleviation and economic growth.

"Instead, cumulative illicit flows from the continent increased from about $57bn in the decade of the 1970s to $437bn over the nine years 2000-2008."

Africa lost around $29bn a year between 1970 and 2008, of which the Sub-Saharan region accounted for $22bn. On average, fuel exporters including Nigeria lost capital at the rate of nearly $10bn a year. "The impact of this structure and the funds it shifts out of Africa is staggering. It drains hard currency reserves, heightens inflation, reduces tax collection, cancels investment, and undermines free trade. It has its greatest impact on those at the bottom of income scales in their countries, removing resources that could otherwise be used for poverty alleviation and economic growth."