Africa’s $1.3 Trillion Gone "Missing"

Léonce Ndikumana

News about Africa’s economic prospects has been quite upbeat recently. Now seen as a “continent on the rise“, Africa has earned the labels of “an economic dynamo” and the next “global growth pole“. Investors see it as the next investment frontier and believe it’s now “Africa’s turn“. It is indeed true that the continent has been able to attract higher volumes of investments especially since the turn of the century, which have contributed to its recent growth acceleration.  Paradoxically, the growth surge and the increase in private capital inflows have accompanied an upswing in capital flight from the continent. As Africa has received more capital, its political and economic elites have siphoned more capital out towards safe havens.

Over the last four decades between 1970 and 2010, the continent has lost an estimated $1.3 trillion from capital flight (in constant 2010 dollars). Our new report on Capital Flight from North African Countries finds that net unrecorded capital outflows from four North African (Algeria, Egypt, Morocco and Tunisia) exceeded $450 billion. This is equivalent to 87.9 percent of their combined GDP in 2010. With a combined population of 159 million, this translates into a capital loss of $2851 per capita. Over the same period, capital flight from 33 sub-Saharan African countries amounted to $814 billion. This exceeds official development aid ($659 billion) and foreign direct investment ($306 billion) received by these countries.

One of the conduits of capital flight is trade misinvoicing, or the falsification of exports and imports invoices by African traders with the complicity of their foreign business counterparts. For the 37 African countries combined, export underinvoicing amounted to $828 billion. This was partly offset by net import underinvoicing (smuggling) to the tune of $528 billion, resulting in net unrecorded outflows through trade misinvoicing of $300 billion.

Assuming that flight capital has earned (or could have earned) the modest interest rate measured by the short-term United States Treasury Bill rate, the corresponding accumulated stock of capital flight from the 37 African countries stands at $1.6 trillion in 2010. This is nearly equal to Africa’s total GDP in 2010 ($1.7 trillion). The stock of capital flight far exceeds the external liabilities of this group of countries of $276 billion (in 2010), making Africa a “net creditor” to the rest of the world. The stereotypical view that Africa is severely indebted and heavily aid-dependent is thus not fully consistent with the facts.

These unrecorded capital outflows are illicit insofar as they proceed illegally through corruption, embezzlement of national resources, trade in illicit goods and services, and money laundering; they are transferred abroad illegally (not recorded with national authorities), secretly held abroad, or all the above.

The illicit nature of capital flight should make it a matter of concern to all stakeholders nationally and internationally. Capital flight carries high opportunity costs for the source country and its people. It represents a net reduction in national savings, and thus implies forgone investment opportunities.

Given that the perpetrators and beneficiaries of capital flight are the political and economic elites, the accumulation of illicit wealth abroad widens the income gap between the rich and the poor. The loss in government revenue and the resultant adverse impact on social service delivery causes further deprivation for the poor who are not least able to afford private services. The middle class also suffers the negative effects of inadequate provision of social services, while the elites who are responsible for the inadequate provision of services are unaffected by shortages, as they are able to procure these services abroad. Few among the African political elite send their kids to the ill-equipped public schools at home. They and their family members do not seek medical treatment in the public clinics that face chronic shortages of supplies and trained medical staff. Thus, these political elites who can obtain services abroad are insulated from the effects of shortages and inefficiencies in social service delivery at home. This creates a perverse incentive structure that perpetuates underfunding of social services, further exacerbating social inequity and poverty.

Capital flight also has important political implications. Accumulation of illicit wealth by the political elites helps them to consolidate power by providing a source of financing for their security apparatus. Capital flight weakens the mechanisms of accountability, erodes the quality of institutions, and undermines political freedom and civil liberty.

If Africa is to become indeed the next “economic dynamo”, and reach and sustain the high growth that lifts the majority of the population out of poverty, it needs to keep its resources onshore. To do so, the continent will need cooperation from Western governments to enforce laws and rules on transparency in banking systems, combat money laundering, tax evasion and tax avoidance that rob Africa of vast amounts of revenues especially from its natural resources. It is encouraging that the global investor is turning an eye on Africa, but this will be of little help if African elites keep shipping more capital to “safe havens”.

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