Léonce Ndikumana and James K. Boyce
22 December 2011
analysis
Africa is bleeding money, as capital flows into the private accounts of African elites and their accomplices in Western financial centres,’ write Léonce Ndikumana and James K. Boyce, in an excerpt from their new book.
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 high level 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, over-invoicing (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 over-invoicing 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 host origin 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.
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