Plugging the Leaks in Africa’s Economies

DAKAR – Africa is usually perceived as a net beneficiary of the global financial system, with aid and investment flowing to the continent from richer parts of the world. This is simply not true. Illicit capital flight is draining Africa dry – costing the continent about one trillion dollars over the last 50 years, according to a high-level panel chaired by former South African president Thabo Mbeki. More money, it turns out, flows out of Africa than into it.

And the bleeding is only getting worse. According to Global Financial Integrity, a Washington DC-based research and advocacy group, illicit capital flight from the Economic Community of West African States (ECOWAS) grew by 23% a year during the first decade of this century, reaching a total of $11 billion in 2011. GFI estimates that, if nothing is done, the region will be losing $14 billion a year by 2018. If Africa is to finance its development priorities and meet the Sustainable Development Goals, it cannot afford inaction.

The channels of leakage are many. Abusive transfer pricing – in which legally related entities misprice goods or services – accounts for roughly 60% of the continent’s illicit capital flight, according to the United Nations Economic Commission for Africa. A recent report by Dalberg Global Development Advisors and the Open Society Initiative for West Africa estimates that from 2012 to 2018, ECOWAS governments could have raised up to $56 billion dollars in tax revenue, if they had put in place effective transfer-pricing regimes.

A 2010 report by the African Development Bank also identified abusive transfer pricing and excessive tax incentives as the main source of the problem. Other areas that need to be plugged include money laundering and other proceeds of crime, wealth hidden in offshore tax havens, tax avoidance, and the dodging of custom duties.