November 17, 2020

UNCTAD Report Aims to Tackle the Relationship Between Illicit Financial Flows and Sustainable Development in Africa

In a Forward for a new report, Mukhisa Kituyi, Secretary-General of UNCTAD, writes: "Worldwide, a loss of trust in multilateralism is weakening the capacity of globalization to deliver a more sustainable and fairer world. Growing awareness of the scale, scope and cost of illicit financial flows is stoking growing skepticism about the power of collective action versus unilateral measures. It is against this backdrop that the United Nations Conference on Trade and Development (UNCTAD) Economic Development in Africa Report 2020 tackles the relationship between illicit financial flows and sustainable development in Africa."

Dr. Kituyi adds: "Illicit financial flows – cross border exchanges of value, monetary or otherwise, which are illegally earned, transferred or used – cost African countries around $50 billion per year, dwarfing the amount of official development assistance the continent receives annually. Illicit financial flows are a shared problem and a shared responsibility for developed and developing countries; their economic impacts are a major development issue across the globe, even more so for African economies whose sustainable development prospects critically pivot on massive investments."

The Economic Development in Africa Report 2020: Tackling Illicit Financial Flows for Sustainable Development in Africa argues that illicit financial flows (IFFs) "are a shared responsibility between developed and developing countries, at the core of multilateralism. Illicit financial flows appear to be large, but irrespective of their scale, they need to be tackled as a significant impediment to the economic development of Africa. High levels of illicit financial flows, as shown by the prevalence of misinvoicing and capital flight, indicate that many African Governments do not benefit from a significant portion of their international trade transactions and experience significant losses in capital and foreign exchange. Key stylized facts, resulting from the models developed in this report, include":
  • In Africa, IFFs linked to the export of primary extractive resources were estimated as being as high as $40 billion in 2015 and $278 billion (cumulative) over the past decade. This is a conservative estimate and should be taken as a lower bound (chapter 2).
  • In Africa, on average, extractive export underinvoicing is equivalent to 16 percent of merchandise exports of the commodities covered in this report (chapter 2).
  • Generally, commodities show a similar pattern across countries: at 77 percent, gold is the largest contributor in total African extractive export underinvoicing, and other precious metals, such as platinum (6 percent) and diamonds (12 percent), are also persistent positive contributors (chapter 2).
  • Capital flight, which captures trade misinvoicing and other balance-of-payment transactions, was estimated at $88.6 billion, on average, during 2013–2015 or around 3.7 percent of African GDP.
  • Capital flight between 2000–2015 was $836 billion or 2.6 percent of GDP. In terms of capital flight, the largest positive absolute outliers are Nigeria ($41 billion), Egypt ($17.5 billion) and South Africa ($14.1 billion), on average, during 2013–2015.
  • IFFs are negatively associated with target 8.2, on achieving higher levels of economic productivity. As indicated by the econometric analysis in chapter 5, labor productivity, as an indicator for productive capacity, is inversely related to IFFs. This suggests that an increase in illicit financial flows is decreasing domestic productive capacity. The effect is likely however to be low in Africa due to the continent’s relatively low productive growth.
  • As IFFs were found to be negatively correlated to poor financial sector regulation, improvement in the latter could stimulate productivity growth. It could also reduce capital outflow through stronger compliance with the Financial Action Task Force and capacity to track financial flows.
  • Curbing IFFs is an avenue for improved prospects for environmental, social and economic development in Africa. The impact of IFFs on environmental sustainability has hardly been assessed in the literature, although environmental damage in the extractives sector is a major concern. Countries with high IFFs may be more vulnerable to climate change and appear to have the lowest ability to leverage investments for health, education and climate change mitigation.
  • Public expenditure reductions potentially have unequal impacts on gender, especially if cuts affect health and education expenditures. A negative impact of IFFs is prevalent where tax evasion affects the allocation of scarce government funds and reduces fiscal expenditure on public services where women and youth are the majority beneficiaries.

The report also presents the following findings:
  • Strengthen African engagement in international taxation reform
  • Intensify the fight against corruption and money-laundering
  • Invest in data infrastructure and transparency (including gendered data)
  • Strengthen regulatory frameworks at the domestic level through a multi-track approach
  • Devote more resources to the recovery of stolen assets
  • Protect and support civil society organizations, whistle-blowers and investigative journalists
  • Build bridges between multinational enterprises, taxation and the 2030 Agenda for Sustainable Development
  • Invest in research to account for links between illicit financial flows, environmental sustainability and climate change
  • Rekindle trust in multilateralism through tangible actions in the fight against illicit financial flows
  • Engage on illicit financial flows and ethics

The report concludes that "[t]he role of multilateralism in reducing the harm from IFFs and encouraging greater participation by African countries in global governance on the matter is clear. The expectation is that the recommendations drawn from the analysis presented in this report will strengthen the policy approaches taken to tackle the incidence and impact of IFFs. A stronger and more resilient Africa, as a result, would be better situated to tackle the current coronavirus disease pandemic, as well as future challenges."

With a youthful population and a growing middle class, I view the African continent as a basket of significant business and investment opportunities. However, having maintained business interests on the continent for over two decades, I have encountered corruption on many levels that have limited the returns of my investment or stymied the activities of those company's I advise. As Dr. Kituyi notes, IFFs "and corruption are inhibiting African development by draining foreign exchange, reducing domestic resources, stifling trade and macroeconomic stability and worsening poverty and inequality. These illicit flows rob Africa and its people of their prospects, undermining transparency and accountability and eroding trust in African institutions. Faced with high capital flight, tax avoidance and a marked dependence on corporate income taxes, African Governments face significant constraints to widening their tax base."

What recommendations do you have for how to eliminate illicit financial flows so that economic development in Africa can flourish?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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