How can Africa stop illicit capital flight?

Africa is usually perceived as a net beneficiary of the global financial system, with aid and investment flowing to the continent from richer parts of the world. This is simply not true. Illicit capital flight is draining Africa dry – costing the continent about one trillion dollars over the last 50 years, according to a high-level panel chaired by former South African president Thabo Mbeki. More money, it turns out, flows out of Africa than into it.

And the bleeding is only getting worse. According to Global Financial Integrity, a Washington DC-based research and advocacy group, illicit capital flight from the Economic Community of West African States (ECOWAS) grew by 23% a year during the first decade of this century, reaching a total of $11 billion in 2011. GFI estimates that, if nothing is done, the region will be losing $14 billion a year by 2018. If Africa is to finance its development priorities and meet the Sustainable Development Goals, it cannot afford inaction.

The channels of leakage are many. Abusive transfer pricing – in which legally related entities misprice goods or services – accounts for roughly 60% of the continent’s illicit capital flight, according to the United Nations Economic Commission for Africa. A recent report by Dalberg Global Development Advisors and the Open Society Initiative for West Africa estimates that from 2012 to 2018, ECOWAS governments could have raised up to $56 billion dollars in tax revenue, if they had put in place effective transfer-pricing regimes.

A 2010 report by the African Development Bank also identified abusive transfer pricing and excessive tax incentives as the main source of the problem. Other areas that need to be plugged include money laundering and other proceeds of crime, wealth hidden in offshore tax havens, tax avoidance, and the dodging of custom duties.

One may take issue and quibble with the numbers but there is a general consensus that illicit capital flight from Africa far exceeds aid flows and investment in volume. Addressing this problem will require a coherent and harmonized response. Given weak national and regional capacities in the continent’s tax and revenue agencies, there is a need to create a regional transfer pricing advisory body that will bring together tax administrators, accounting and tax advisors, and multinationals, to serve as a platform for experience-sharing and consultation.

In West Africa, Ghana and Nigeria are the only countries that have dedicated policies on transfer pricing – put in place to monitor capital outflows from the oil sector, which by some estimates account for 30% of total transfer mispricing in Africa. For the most part, however, disparities in rules governing transfer pricing within the regional common markets offer loopholes that can be exploited by foreign companies. These must be plugged.

Out of control tax incentives are another source of the problem. Many African governments, desperate to attract foreign-direct investment, engage in an ill-informed race to offer the most generous tax incentives. These are often implemented without parliamentary oversight, public vetting, or a cost-benefit analysis – and with little or no impact-analysis on the economy.

The efficiency of these policies is questionable. In 2008, the IMF warned that “the costs (of concessions) are very large, while the benefits appear to be marginal at best.” Governments will have to learn how to design policies that best serve their country’s economies.

Civil society must also play its part, with a united campaign to direct their governments’ attention toward this issue. Popular movements are already gathering to push back against short-sighted government policies. They should add their voices to the effort to make sure that the flow of funds is stopped, reclaimed, and invested in sectors that will ensure inclusive and equitable development. This issue is far too important to be left to governments and policymakers.

As long as financial leaks are sucking the life out of African economies, the continent will struggle to deal with challenges like youth unemployment and have only a limited capacity to invest in areas like health and agriculture. In its Agenda 2063, the African Union emphasized the need to mobilize domestic resources toward sustainable and inclusive development. Ensuring that illicit financial flows do not continue to deplete government coffers would be the perfect place to start.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Abdul Tejan-Cole is Executive Director of the Open Society Initiative for West Africa.

 Image: A girl selling apples by the roadside waits for customers just outside the Angolan city of Lubango, January 15, 2010. REUTERS/Finbarr O’Reilly.