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Africa: Measuring Capital Flight
AfricaFocus Bulletin
Dec 17, 2011 (111217)
(Reposted from sources cited below)
Editor's Note
"The magnitude of African capital flight is staggering both
in absolute monetary values and relative to GDP. For the
thirty-three sub-Saharan African countries for which we have
data, we find that more than $700 billion fled the continent
between 1970 and 2008. If this capital was invested abroad
and earned interest at the going market rates, the
accumulated capital loss for these countries over the
thirty-nine-year period was $944 billion. By comparison,
total GDP for all of sub-Saharan Africa in 2008 stood at
$997 billion." - L. Ndikumana and J. Boyce, in their new
book "Africa's Odious Debts"
This means, Ndikumana and Boyce continue, that "the
cumulative stock of capital flight from the thirty-three
countries covered in this book stood at $944 billion in
2008, compared to external debts of $177 billion. By this
measure, these countries had positive net external assets to
the tune of $767 billion. In other words, the rest of the
world owes more to these African countries than they owe to
the rest of the world. This suggests that Africa could
expunge its entire stock of foreign debt if it could recover
only a fraction of the wealth held by Africans in foreign
financial centres around the world."
This AfricaFocus Bulletin contains excerpts from Chapter 2
of Léonce Ndikumana and James K. Boyce. Africa's Odious
Debts: How Foreign Loans and Capital Flight Bled a
Continent. Zed, 2011. http://www.africafocus.org/books/isbn.php?1848134592
Ndikumana and Boyce pioneered in methodologies for
researching this topic. Their new book, noted reviewer John
Weeks in African Arguments (http://tinyurl.com/4y48pc9), is
a model of "analytical clarity and empirical thoroughness,
[demonstrating that] sub-Saharan Africa, location of the
poorest countries in the world, has generated net capital
outflows for decades. One could with small exaggeration say
that for a generation Africa has provided aid to the United
States and Western Europe."
Another AfricaFocus Bulletin released today, not sent out by
e-mail but available on the web at http://www.africafocus.org/docs11/iff1112.php, contains
excerpts from the just released update by Global Financial
Integrity on illicit financial flows from developing
countries, as well as from a new policy brief by Eurodad on
the need for new international measures for financial
transparency.
[Note that dollar estimates, whether from Ndikumana and
Boyce or from Global Financial Integrity, may vary
considerably depending on the base year used for constant
dollar values as well as other technical considerations.]
For previous AfricaFocus Bulletins on debt, corruption, and
illicit financial flows, see http://www.africafocus.org/debtexp.php
Updates
U.S. Senate Foreign Relations Committee
Hearings on Congo Elections - video & transcripts of
prepared testimony
http://www.foreign.senate.gov/hearings/ / direct URL -
http://tinyurl.com/6nantuf
++++++++++++++++++++++end editor's note+++++++++++++++++
2 Measuring African capital flight
Excerpted with permission of the authors from Léonce
Ndikumana and James K. Boyce. Africa's Odious Debts: How
Foreign Loans and Capital Flight Bled a Continent. Zed,
2011.
http://www.africafocus.org/books/isbn.php?1848134592
In March 2010, the African Union and the UN Economic
Commission for Africa jointly convened the annual Conference
of African Ministers of Finance in Lilongwe, Malawi, around
the theme of 'Promoting high level sustainable growth to
reduce unemployment in Africa'. The agenda included a highlevel
session on 'the phenomenon of illicit financial flows
from Africa and its devastating impact on development
prospects'.1 This reflected increasing recognition that
capital flight poses a major development challenge for
African countries. The issue is at the heart of discussions
of development finance, transparency in public resource
management, and the sustainability of external borrowing.
The magnitude of African capital flight is staggering both
in absolute monetary values and relative to GDP. For the
thirty-three sub-Saharan African countries for which we have
data, we find that more than $700 billion fled the continent
between 1970 and 2008. If this capital was invested abroad
and earned interest at the going market rates, the
accumulated capital loss for these countries over the
thirty-nine-year period was $944 billion. By comparison,
total GDP for all of sub-Saharan Africa in 2008 stood at
$997 billion.2 Comparisons to Asia and Latin America have
found that capital flight from Africa is smaller in sheer
dollar terms, but larger relative to the size of the African
economy.3
Reading the hidden balance of payments
Measurement of capital flight poses daunting challenges, and
requires some rather sophisticated statistical detective
work. Funds that are acquired illegally, or funnelled abroad
illegally, or both, are not entered into the official
accounts of African countries. At the same time, the
perpetrators of capital flight benefit from the complicity
of bankers and other operators who assist in the placement
of the funds in foreign havens. The identities of asset
holders are often concealed through proxies and by taking
advantage of legal screens available in bank secrecy
jurisdictions. Nevertheless, researchers have made
substantial progress in developing ways to estimate the
magnitude of capital flight. This section reviews the
methods used in this book.4
Residual measures of capital flight
Our starting point is the balance of payments (BoP), each
country's official record of inflows and outflows of foreign
exchange. These data are compiled annually by the IMF on the
basis of reports from the central banks of its member
governments. The 'current account' of the BoP records
international flows arising from trade in goods and
services, interest payments and transfers - transactions
that do not lead to future claims on resources. The 'capital
account' records flows of loans, investments and other
financial transactions that entail future claims. Outflows
of foreign exchange to the rest of the world, such as debt
service or payments for imports, are recorded as debits
(denoted by a negative sign). Inflows, such as loan
disbursements or payments for exports, are recorded as
credits (with a positive sign).5 The net sum of the current
account and the capital account gives the country's overall
BoP position, which in principle corresponds to the net
change in the country's official reserves of foreign
exchange. A BoP surplus, when foreign exchange inflows
exceed outflows, translates into a gain in international
reserves. A BoP deficit, when outflows exceed inflows,
translates into a loss of reserves. In practice, recorded
inflows and outflows of foreign exchange seldom match
exactly the changes in the country's official foreign
exchange reserves. The missing money, or residual, is
labelled 'net errors and omissions' in the BoP.
In the wake of the 1983 Third World debt crisis, it was
discovered that the inflows of foreign borrowing recorded in
the official BoP were often understated by substantial
amounts. As a result, the total stock of external debt,
built up over years of borrowing, often exceeded the
cumulative borrowing as reported in the BoP. The World Bank
independently assembles annual data on the stock of debt.
This information, contained in a World Bank database called
Global Development Finance (GDF), provides the basis for
corrections to the BoP figures. By taking GDF data on
changes in debt stocks, substituting this for the BoP data
on foreign borrowing, and recalculating net errors and
omissions, we can obtain a new residual estimate of missing
money. The World Bank (1985) and others pioneered this
technique to derive a measure of capital flight.6
...
Trade misinvoicing as a source of capital flight
In addition to incomplete recording of debt inflows, another
well-known source of errors in the official BoP accounts is
trade misinvoicing. This can take several forms. Both
importers and exporters may manipulate the reported values
of their transactions in order to conceal foreign exchange
transactions from the country's monetary authorities. In the
case of exporters, under-invoicing (by falsely underreporting
the quantity of goods exported and/or the price
received) evades tax liabilities and reduces the amount of
foreign exchange that must be surrendered to the authorities
from export receipts. In the case of importers, overinvoicing
(by inflating the quantity and/or price of
imports) increases the amount of foreign exchange they can
obtain on favourable terms from the central bank to pay for
imports. Both export under-invoicing and import overinvoicing
are important mechanisms for capital flight. When
exporters understate the value of their export revenues,
they often retain abroad the difference between the true
value and the declared value. Similarly, when importers send
extra foreign exchange abroad, ostensibly to pay for
imports, the excess (minus a commission for their partners)
is often deposited in a designated foreign bank account.
...
The extent of trade misinvoicing can be estimated by
comparing the export and import data provided by an African
country to the corresponding import and export data of its
trading partners. Both sets of figures are reported in
another annual IMF publication, Direction of Trade
Statistics. If we assume that the trade data provided to
the IMF by the industrialized countries are relatively
accurate, the discrepancy between these figures and the
data from their African trading partners yields a measure
of trade misinvoicing.
...
Discrepancies in workers' remittances
One more item in the BoP statistics that can be an important
source of error is workers' remittances. Over the past few
decades, many African countries have recorded large and
increasing inflows of remittances from their citizens who
are working in other African countries, Europe and, to a
lesser extent, the United States and other industrialized
countries. In some African countries, remittances are now
larger than conventional external financing from aid or
foreign direct investment. However, a substantial fraction
of remittance inflows is transferred through informal
channels that escape recording in official BoP statistics.
The World Bank estimates that unrecorded remittances in
African countries account for more than half of total
remittance inflows.11
Adjusting for remittance discrepancies is important for
accurate measurement of capital flight, as the unrecorded
inflows increase the amount of foreign exchange that is
available to the country. The effect of unrecorded
remittances thus is similar to that of unreported export
earnings: the amount of foreign exchange actually entering
the African country is greater than what is captured in the
official BoP.
...
The International Fund for Agricultural Development (IFAD)
has computed alternative measures of workers' remittance
inflows by using survey data.12 The IFAD estimates were
derived by combining data on total numbers and locations of
migrant workers in 2006 with survey data for various hostorigin
country pairs on the percentage of migrants who send
remittances and the average amount sent. The results
indicate that the true magnitude of remittance inflows to
Africa is substantially underestimated in the BoP data. For
example, IFAD estimates that remittance inflows from
industrialized countries to Nigeria in 2006 amounted to $5.4
billion, compared to $3.3 billion reported in the official
BoP statistics. For Angola, the BoP reports no remittances
whatsoever in that year, whereas the IFAD estimate shows an
inflow of $969 million.
...
Adjustments for inflation and interest earnings
To obtain measures for the period from 1970 to 2008, the
final step is to convert the annual flows into figures that
are comparable across different years, since a dollar
outflow in 1970 is not the same as a dollar outflow in 2008.
...
Counting the missing money
Using the method described above, we estimated the amount of
capital flight from thirty-three sub-Saharan African
countries for which adequate data are available for most
years.16 The numbers are eye-opening. Total capital flight
from these countries over the 1970-2008 period (in 2008 US
dollars) amounted to $735 billion. This is equivalent to
roughly 80 per cent of the combined GDP of these countries
in 2008.
,,,
If the funds that left African countries during this period
were invested in assets that earned the interest rate on
short-term US Treasury bills, the cumulative stock of flight
capital with imputed interest earnings in 2008 would amount
to $944 billion. In practice, of course, the fate of the
missing money in most cases is unknown. Undoubtedly some of
it was not invested, but instead was dissipated in Parisian
shopping sprees and other consumption. On the other hand,
some may have yielded returns above the fairly conservative
US Treasury bill rate. Whatever the rate of return that
accrued on average to African flight capital, its cumulative
stock with imputed interest earnings is a reasonable
indicator of the opportunity cost of the failure to invest
these funds productively in Africa. It also provides the
most appropriate measure for comparison to Africa's external
debts, since these accrue interest regardless of how the
borrowed money was used.
Our $944 billion estimate of the cumulative stock of African
flight capital closely matches the total wealth of Africa's
high net worth individuals (HNWIs) as reported in World
Wealth Report, an annual publication of the financial
services firms Capgemini and Merrill Lynch Global Wealth
Management which tracks the holdings of HNWIs around the
globe. The report defines HNWIs as people with investable
personal assets of $1 million or more. The total wealth of
Africa's HNWIs peaked, according to this source, at $1
trillion in 2007 before slipping to $800 billion in 2008 as
a result of the global financial crisis.17
Table 2.2 African capital flight: the top ten [table
abridged to show only total real capital flight, in $
billion]
Country Total real capital flight, 1970-2008
Nigeria 296.2
Angola 71.5
Côte d'Ivoire 45.4
South Africa 36.2
DR of Congo 30.7
Zambia 24.4
Cameroon 24.0
Republic of Congo 23.9
Zimbabwe 22.6
Ethiopia 20.1
Total for 33 countries 734.9
Source: Authors' computations
Inter-country comparisons
...
Focusing on the dollar amount of capital flight may give a
misleading sense of relative burdens, since in smaller
economies even a modest outflow could represent a
substantial drain. For example, total capital flight over
the period was equivalent to 614 per cent of the 2008 GDP
for São Tomé and Príncipe, 493 per cent for Seychelles, 384
per cent for Burundi, and 312 per cent for Sierra Leone. By
this measure the burden of capital flight was substantial
for a number of large economies, too: 807 per cent of 2008
GDP for Zimbabwe, 265 per cent for the Democratic Republic
of Congo, 223 per cent for the Republic of Congo, and 194
per cent for Côte d'Ivoire.
...
Africa as a net creditor
It is now time to balance the books. How much net financial
wealth does Africa have, given its external assets and
liabilities? To answer this question, we compare external
assets, as measured by the cumulative stock of capital
flight, to external debt. The assets accumulated by means of
capital flight are private, while the external debts are
public liabilities owed to the creditors by the people of
Africa through 'their' governments.
Not all of the capital that fled sub-Saharan Africa can be
presumed to have been saved and invested so as to earn
normal rates of return. As we have noted, some of the money
was spent on consumption, and some savings may have earned
sub-normal rates of return. Our measure of cumulative
capital flight, including interest earnings, therefore does
not exactly equal the external assets held by private
Africans today. We nonetheless believe that a comparison
between the stock of capital flight and the external debt
can provide a reasonable indicator of Africa's net wealth.
By this measure, sub-Saharan Africa is a net creditor to the
rest of the world by a substantial margin. The cumulative
stock of capital flight from the thirty-three countries
covered in this book stood at $944 billion in 2008, compared
to external debts of $177 billion. By this measure, these
countries had positive net external assets to the tune of
$767 billion (see Table 2.2). In other words, the rest of
the world owes more to these African countries than they owe
to the rest of the world. This suggests that Africa could
expunge its entire stock of foreign debt if it could recover
only a fraction of the wealth held by Africans in foreign
financial centres around the world.
Many millions of Africans are desperately poor. But the
continent is rich. According to the World Wealth Report, the
continent had roughly 100,000 high net worth individuals in
2008, twice as many as a decade before. Of these, about
1,800 were 'ultra-high net worth individuals', with at least
$30 million each in investable assets.24 Together these rich
Africans held about $800 billion in investable assets in
2008.
Compared to other regions, African private wealth holders
exhibit a stronger preference for foreign assets as opposed
to domestic assets. According to a study by researchers at
the World Bank and IMF, an astonishing 40 per cent of
Africa's total private wealth was held abroad as flight
capital in 1990. The corresponding figure for South Asia was
5 per cent. For East Asia it was 6 per cent, and for Latin
America 10 per cent. Sub-Saharan Africa and South Asia had
similar levels of total private wealth per worker, but in
sub-Saharan Africa capital flight amounted to $696 per
worker whereas in South Asia it was only $90 per worker. As
a result, private domestic capital per worker in Africa was
less than 60 per cent of what it was in South Asia.25
High net worth individuals typically have more
internationally diversified portfolios than their poorer
countrymen. According to the World Wealth Report, high net
worth individuals in the Asia- Pacific region hold 32 per
cent of their assets abroad and those in Latin America hold
55 per cent abroad, percentages roughly five times higher
than the overall averages for these regions reported by the
World Bank and the IMF.26 If the same pattern holds in
Africa, this would suggest that the greater part of the
wealth of high net worth Africans is invested abroad. In
this respect, the ultra-rich of Africa today are unlike the
robber barons of years gone by in the industrialized
countries, who whatever their misdeeds at least did invest
in their nations' economies.
The preference for foreign assets and aversion to domestic
investment comes at a high opportunity cost to African
economies. In the case of legally acquired assets, the
continent is deprived of the gains that would accrue from
investment at home, not only losing income and jobs, but
also forgoing government revenue that could fund public
services. In the case of illegally acquired assets, African
countries lose twice: first, they are robbed through fraud
and embezzlement; then they are further deprived of any
benefits that would trickle down if the loot were invested
at home.
Bleeding a continent: the costs of capital flight
Africa is bleeding money, as capital flows into the private
accounts of African elites and their accomplices in Western
financial centres. At the same time, the continent is in
dire need of financing. For Africa to overcome widespread
and extreme poverty, it needs sustained and sustainable
economic growth. This will require very large increases in
the levels of domestic investment, especially in
infrastructure.27
A continent in need of investment
Researchers and development institutions have invested
considerable time and energy to prove that African countries
need more resources to meet their infrastructure financing
needs. The 2009 Africa Infrastructure Country Diagnostic
report concluded that Africa's middle-income countries need
investment of about 10 per cent of GDP per year in
infrastructure alone.28 Investment needs for low-income
African countries are higher at about 15 per cent of GDP
annually. To achieve these levels, the continent's
investment would need to be scaled up by at least $100
billion per year to nearly double the current level.
To get a first-hand sense of the immensity of the problem,
one need only experience any of the cities in sub-Saharan
Africa. In July 2009, one of the authors of this book,
Léonce Ndikumana, visited Freetown, the capital of Sierra
Leone, to attend a meeting of the African Caucus of Finance
Ministers and Central Bank Governors. Although this was his
first trip to Sierra Leone, he did not expect any surprises;
after all, he was going to an African country, and he had
been in quite a number of them. But the visit to Freetown
turned out to be an opportunity to experience something new:
a city that is effectively cut off from its own airport. To
get from the airport to the city, there are three options: a
very long road trip around the bay that separates the two; a
ferry that is subject to long waits and the risk of
capsizing due to overloading; or a seven-minute ride in a
helicopter, which is most convenient (for those who can
afford it) but also risky, since these have been known to
drop in bad weather with no survivors. On this occasion, the
helicopter made the journey safely. The cost of building a
bridge to link the city to the airport has been estimated at
$400 million, a modest fraction of the $6 billion in capital
flight that has left Sierra Leone since 1970.29 Despite the
economic benefits that such a bridge would bring to the
country and the region, the government has not been able to
mobilize the necessary money.
Sierra Leone is by no means alone in its dire lack of basic
infrastructure. In fact, apart from the helicopter,
Ndikumana's experience in Sierra Leone was little different
from what he encounters in his native country, Burundi, when
he visits his commune of Vugizo in the south. The commune
has the agricultural potential to feed the towns and cities
in the province and beyond, but it is landlocked and has
poor access to markets. During the rainy season, it can take
two hours to drive the 40-kilometre stretch of dirt track
linking it to the nearest paved road.30
The Millennium Development Goal (MDG) of halving extreme
poverty by 2015 remains elusive for much of Africa. The MDG
Africa Steering Group estimated in 2008 that for Africa to
achieve this and related development goals, public external
financing would have to increase by $72 billion per year in
the medium term.31 Were Africa able to recoup only a
fraction of what it has lost in capital flight, this would
go a long way towards filling this gap. The United Nations
Economic Commission on Africa estimated in 1999 that an
investment/GDP ratio of 34 per cent would be required to
achieve a 7 per cent GDP growth rate in Africa, which would
cut poverty by half by 2015.32 This investment target is in
reach for African countries if they can manage to stem
capital flight and recoup some of the money stolen in the
past.33 Otherwise, efforts to mobilize additional
development financing for growth and poverty reduction will
yield only limited results.
Capital flight and tax revenue
Sub-Saharan African governments badly need tax revenue to
bridge the large deficits in the provision of public goods,
including not only infrastructure but also health and
education.34 Some resource-rich countries have seen revenue
gains thanks to natural resource booms, but these may prove
to be transient. Meanwhile, very few non-resource-rich
African countries have recorded sustained increases in
revenue.35
Countries with higher capital flight tend to have lower tax
revenue, as can be seen in Figure 2.3. There are two reasons
for this negative relationship. First, capital flight
directly erodes the tax base by subtracting from it private
wealth and income earnings on that wealth. Second, high
capital flight is symptomatic of an environment
characterized by corruption and weak regulation,
circumstances that both promote capital flight and undermine
tax administration. (In contrast, if capital flight were
motivated primarily by a desire to escape high taxes, one
would expect the opposite correlation: countries with less
tax revenue would tend to have less capital flight.)
If we look at the 'tax effort' - the ratio of the actual tax
revenue to the potential revenue based on the country's
economic structure and level of development - we find that
actual tax performance in sub-Saharan Africa generally
remains well below potential, and that resource-rich
countries tend to perform even worse in this respect than
resource-scarce countries.36 In the case of Nigeria, for
example, when oil rents are excluded, the tax effort index
is 0.44, meaning that the country is generating only 44 per
cent of its potential tax revenue from non-oil sectors. In
Angola, the corresponding index is 0.39. Natural resource
revenues are often poorly mobilized, too. In the Democratic
Republic of Congo, for example, it is reported that gold
exports can reach up to one billion dollars a year, but
these exports generate a negligible $37,000 in tax
revenue.37
Rampant tax exemptions contribute to low revenues. Often
exemptions are awarded not on the basis of the criteria set
by the law - which typically aim to stimulate private
economic activity, for example by means of tax incentives -
but rather on the basis of the political influence of
individuals and firms. As a result, tax revenue may not
follow the expansion of private sector activity and private
wealth. A case study on Ethiopia, where resource inflows to
the private sector are increasing but the proceeds from
corporate taxation are declining, estimates that the revenue
forgone through exemptions doubled between 2005 and 2007.38
At the same time, Ethiopia has a relatively high nominal
income tax rate, which may contribute to greater tax fraud.
Taxes that are high in theory thus can be low in practice,
owing to both legal exemptions and illegal evasion.
Capital flight has substantial adverse distributional
effects, too, exacerbating gaps between rich and poor. The
rich, by virtue of the fact that they hold a larger share of
their assets abroad, are shielded from the wealth effects of
devaluation of the national currency. Indeed, they may
benefit from devaluation, as this allows them to reap
windfall gains if they bring some of their capital back into
the country. Since capital flight itself puts pressure on
the exchange rate, it increases the likelihood of this
exchangerate effect.
At the same time, by depressing government tax revenue,
capital flight adversely affects the poorer segments of the
population who depend most heavily on publicly funded
services. For example, when the government is unable to
provide adequate medical supplies and qualified health
personnel for public hospitals, the poor who cannot afford
the alternative of going to private clinics suffer the most.
The same goes for education. We will return to this point in
Chapter 4.
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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