Illicit capital flowing out of Africa often benefits foreign investors

By Antonio Macheve Jr

The US-Africa Summit in Washington DC has built enormous expectations for the development of Africa, particularly in what concerns economic ties, trade relations, investments and business between the nations of the African continent and the US.

Despite enormous human-rights violations, conflict, widespread disease and other ills commonly known to Africa, the focus of the conference was largely business-oriented, a forum hosted by Bloomberg Philanthropies and the US commerce department. There is certainly no harm in focusing and prioritising economic ties for growth; in fact, business is necessary and it can be tremendously beneficial for the continent through the creation of jobs lifting some of the poorest of society out of poverty and building a firm middle class. The main issue is whether investments pledged at the summit and increased trade will bring that type of prosperity to ordinary Africans.

As of the second day of the summit, $33 billion in investments had already been pledged to the continent with some of the fastest growing economies in the world. In spite of this large amount pledged, what is conveniently unmentioned is that many more billions leave the African continent to countries such as the US, not merely as natural resource exports but largely as illicit cash outflows. While $33 billion from American businesses will be invested in the continent, it is not known how much of the profits out of that amount will fly back out to the US without benefitting local economies, especially the people at the bottom.

According to Global Financial Integrity, in 2011, nearly $77 billion flowed illicitly out of the African continent, and it has been the case since the continent has had economic ties with the rest of the world. The same source informs that between 2002 and 2011, Africa registered $555.8 billion in illicit financial outflows stimulating crime, corruption and tax evasion. These extraordinary amounts are lost investments with the potential to improve schools, healthcare and infrastructure, promote the growth of local small and medium enterprises, and create home-grown jobs in critical sectors such as tourism, agriculture and the extractive industries.

For example, Mozambique’s mining boom is already showing signs of a great potential for illicit capital outflows from Mozambique to other more developed economies. At the US-Africa Summit, the president of Mozambique encouragingly sought for more investors for the country’s mineral sector, particularly to improve the railways transporting coal from Tete to the seaports exporting the resources out of the country. Nonetheless, the same way that the coal is being transported out of the country, the cash coming out of that industry might be having the same destination. How so?

In Mozambique, the confidentiality of mining contracts and fiscal regime make it difficult to measure whether the state is or will be losing capital through illicit flows. Further, it also makes it impossible to verify whether there is any sort of corruption occurring within the state. Tax evasion is a major issue identified in the illegal movement of cash out of developing countries such as Mozambique to the countries where the large investments mostly come from. One of the most prevalent irregularities in this context is the mispricing of revenues, which essentially means that, hypothetically, a mining company exploring coal in Mozambique may under-invoice its sales or over-invoice its costs reducing amounts declared for taxation and driving these substantial amounts out of the country’s economy and not benefitting local development.

Moreover, the country’s weak monitoring capacity to monitor such processes facilitate their occurrence. It is equally important to keep in mind that, in such contexts, given the secrecy of the fiscal regime, significant revenues may also be diverted at the local level. At times, some of the companies investing in Africa do not pay what is due according to local fiscal regimes, and these processes also tend to be facilitated by host governments, furthering corruption and thwarting chances of reaching Africa’s most crucial development goals. Profits made by multinationals in African economies have, on many occasions, flown to other countries where amounts subject to taxation are relatively cheaper, the widely known tax havens, which also hurts local economies.

Capital illicitly flowing out of one poor African country often benefits countries from the investing side. In this regard, the question of illicit financial outflows is as important as boosting economic ties and enlarging investments for the continent if the end goal is to fight poverty and produce an economic growth that benefits the population at large. Such discussions are not being prioritised, if even mentioned, at the summit. These important questions are worthy of special attention if the amounts pledged by US businesses is to benefit African economies as much as, or at least, close to what how much it benefits the US and other similar economies.

Antonio Macheve Jr is a 2013 Mandela Rhodes Scholar and is pursuing his MPhil in development studies at the University of Cape Town.