The more money you make, the more you lose.
That is the story of Africa over the past two decades. Indeed, along with the impressive record of economic growth acceleration spurred by booming primary commodity exports, the Africa continent has experienced a parallel explosion of capital flight. From 2000 to 2010, the Political Economy Research Institute (PERI) estimates that the African continent lost $510.9 billion through capital flight, or $46.4 billion per year. This is nearly equal to the cumulative amount over 1980-1999 (a total of $537.6 billion, or $26.8 billion per year).
In other words, Africa is losing capital twice as fast as in the past, even as its growth has accelerated over the past decade. The explosion of capital flight in a period of accelerating economic growth and improved macroeconomic environment is at odd with conventional economic theory, which would suggest that an improvement in economic performance would attract foreign capital seeking to take advantage of ensuing higher returns on capital.
Fifteen years ago, the United Nations set 2015 as the target for developing countries to reduce poverty by half. The date has come, but most African countries are far from reaching this goal.
While many countries in the continent have experienced some reduction in poverty headcount, a large number of people in the continent continue to live in dire conditions where they lack of access to basic social and human services. In fact, the World Bank’s data shows that sub-Saharan Africa is the only place where the number of poor people has increased consistently over the past two decades – from 210 million in 1981 to 415 million in 2011. Will the situation be better in fifteen years? No one knows for sure.
What would it take for Africa to improve its odds of conquering poverty faster over the next decade? For most African countries, this will require growing faster, and for all African countries this will require an improvement in the distribution of the gains from growth; that is, a substantial reduction in inequality. Achieving these goals will, however, necessitate substantially higher financing for development.
Where will the additional financing come from?
The focus today is on improving domestic resource mobilization and attracting more foreign capital. Indeed, improvements in governance, reforms in the tax system, and innovations in the financial sector hold real potential for increasing tax revenue and private savings above the current levels. Efforts along those fronts will not only generate much-needed fiscal space but also buy more policy independence.
There is another important source of additional financing that has thus far been untapped. It is the large amounts of resources that can be saved from curbing capital flight and additional capital that can be mobilized through stolen asset recovery. In order to design effective policies and strategies to combat capital flight and entice repatriation of private capital held abroad, it is essential to understand the drivers of capital flight in the first place.
Capital flight from Africa is driven by factors pertaining to domestic conditions as well as external factors related to the global financial system. Thus, in its quest to fight capital flight to improve its capacity to finance its development agenda in the post-2015 era, Africa needs to tackle these domestic and external drivers of capital flight. While addressing domestic, economic, and institutional problems that induce capital flight is challenging, tackling the external pull factors of capital flight will be particularly daunting.
A key external driver of capital flight is the proliferation of offshore finance and the facilities offered by tax havens that enable the smuggling of legally and illegally acquired capital from Africa, and the concealment of private wealth outside of sight of national regulatory authorities. This expansion of offshore finance is partly a byproduct of the triumph of free market ideology that drove deregulation of finance in advanced economies in the “new golden age”. Moreover, the high volumes of profits generated in safe havens make them politically powerful, enabling them to directly and indirectly undermine policies aimed at cleaning up the global financial system. Clearly, the fight for transparency in the global economic and financial system will be challenging. There is no option other than to forge ahead in this indispensable fight.
On the African side, there is a need for collective efforts to increase awareness on the problem of capital flight and its high opportunity costs in terms of foregone development opportunities. It is encouraging that important initiatives are already underway on the continent for this purpose. On the policy dialogue front, a major development was the establishment of the High Level Panel on Illicit Financial Flows from Africa by the United Nations Economic Commission for Africa which is providing a framework to engage policy makers in the search for practical strategies to stem capital flight.
On the knowledge generation front, research institutions and networks (such as the African Economic Research Consortium) are engaged in gathering country-specific information on the scope, nature, and mechanisms of capital flight to inform policy design. It is critically important for African governments to take initiatives to leverage the growing volume of knowledge in this area, and integrate combatting capital flight into their national development agenda.
On the international front, the ongoing high-level debates on the post-2015 sustainable development agenda offer an opportunity for a global compact towards financial transparency and responsible management of international borrowing and lending as part of the overall strategy for scaling up financing for development. As the potential for increasing conventional official development assistance is limited, it is urgent to harness new and innovative sources of financing in order to expand the resource envelope. One such source is stemming capital flight and recovering stolen assets from past capital flight. This is a win-win solution for Africa and its development partners: the continent will get more non-debt generating resources in its purse while donors will buy more development for their buck without adding more pressure on their budgets.
Authors: S. Ibi Ajayi is Professor of Economics and Distinguished Service Fellow in the Department of Economics at the University of Ibadan, and Léonce Ndikumana is a Professor at the University of Massachusetts at Amherst, USA. They are the authors of Capital Flight from Africa: Causes, Effects, and Policy Issues (OUP 2014)