Addressing Illegal Export of Honestly Acquired Capital
This is part 2 of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.
Encouraging “home bias” in investment
The development of profitable investment opportunities not only helps keep capital onshore, but also can help attract private capital held abroad, including remittances from the African diaspora. In the case of African countries, there is considerable scope for reducing the costs of production and trade through increasing the quantity and quality of infrastructure—especially power, transportation, and communication. Measures to accelerate the development of domestic and regional financial markets could also help to shift African investors’ preferences in favor of domestic markets. Domestic-currency government infrastructure bonds, for example, have provided an important source of financing for public infrastructure in Kenya (Brixiova and Ndikumana, 2013).
Many African countries have resorted to fiscal incentives to promote domestic investment. These include tax allowances on capital investment, tax exonerations on investment-related imports, and generous tax holidays for major investment projects. A major drawback of this strategy, however, is that it can entail significant tax revenue losses in a continent where most countries face large financing gaps. A second problem is that the implementation of investment tax incentives is plagued by corrupt practices that result in an inefficient allocation of investment as well as excessive foregone revenue. A third concern is that tax incentives often are skewed in favor of foreign direct investment, putting domestic investors at a competitive disadvantage.