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The economic problems afflicting Africa in general are many and varied. The papers in this volume analyze these problems for a selected group of sub- Saharan.
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  3. The magnitude and determinants of capital flight: The case for six sub-Saharan African countries;
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The assets accumulated by means of capital flight are private, while the external debts are public liabilities owed to the creditors by the people of Africa through 'their' governments. Not all of the capital that fled sub-Saharan Africa can be presumed to have been saved and invested so as to earn normal rates of return. As we have noted, some of the money was spent on consumption, and some savings may have earned sub-normal rates of return.

Our measure of cumulative capital flight, including interest earnings, therefore does not exactly equal the external assets held by private Africans today. We nonetheless believe that a comparison between the stock of capital flight and the external debt can provide a reasonable indicator of Africa's net wealth. By this measure, sub-Saharan Africa is a net creditor to the rest of the world by a substantial margin. In other words, the rest of the world owes more to these African countries than they owe to the rest of the world.

This suggests that Africa could expunge its entire stock of foreign debt if it could recover only a fraction of the wealth held by Africans in foreign financial centres around the world. Many millions of Africans are desperately poor. But the continent is rich. According to the World Wealth Report, the continent had roughly , high net worth individuals in , twice as many as a decade before.

Compared to other regions, African private wealth holders exhibit a stronger preference for foreign assets as opposed to domestic assets. According to a study by researchers at the World Bank and IMF, an astonishing 40 per cent of Africa's total private wealth was held abroad as flight capital in The corresponding figure for South Asia was 5 per cent.

For East Asia it was 6 per cent, and for Latin America 10 per cent. As a result, private domestic capital per worker in Africa was less than 60 per cent of what it was in South Asia. High net worth individuals typically have more internationally diversified portfolios than their poorer countrymen. According to the World Wealth Report, high net worth individuals in the Asia-Pacific region hold 32 per cent of their assets abroad and those in Latin America hold 55 per cent abroad, percentages roughly five times higher than the overall averages for these regions reported by the World Bank and the IMF.

In this respect, the ultra-rich of Africa today are unlike the robber barons of years gone by in the industrialized countries, who whatever their misdeeds at least did invest in their nations' economies. The preference for foreign assets and aversion to domestic investment comes at a high opportunity cost to African economies.

In the case of legally acquired assets, the continent is deprived of the gains that would accrue from investment at home, not only losing income and jobs, but also forgoing government revenue that could fund public services.

Africa: Measuring Capital Flight

In the case of illegally acquired assets, African countries lose twice: first, they are robbed through fraud and embezzlement; then they are further deprived of any benefits that would trickle down if the loot were invested at home. Africa is bleeding money, as capital flows into the private accounts of African elites and their accomplices in Western financial centres. At the same time, the continent is in dire need of financing. For Africa to overcome widespread and extreme poverty, it needs sustained and sustainable economic growth. This will require very large increases in the levels of domestic investment, especially in infrastructure.

Researchers and development institutions have invested considerable time and energy to prove that African countries need more resources to meet their infrastructure financing needs.


The Africa Infrastructure Country Diagnostic report concluded that Africa's middle-income countries need investment of about 10 per cent of GDP per year in infrastructure alone. To get a first-hand sense of the immensity of the problem, one need only experience any of the cities in sub-Saharan Africa.

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Although this was his first trip to Sierra Leone, he did not expect any surprises; after all, he was going to an African country, and he had been in quite a number of them. But the visit to Freetown turned out to be an opportunity to experience something new: a city that is effectively cut off from its own airport.

To get from the airport to the city, there are three options: a very long road trip around the bay that separates the two; a ferry that is subject to long waits and the risk of capsizing due to overloading; or a seven-minute ride in a helicopter, which is most convenient for those who can afford it but also risky, since these have been known to drop in bad weather with no survivors. On this occasion, the helicopter made the journey safely. Sierra Leone is by no means alone in its dire lack of basic infrastructure.

In fact, apart from the helicopter, Ndikumana's experience in Sierra Leone was little different from what he encounters in his native country, Burundi, when he visits his commune of Vugizo in the south.

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  • The commune has the agricultural potential to feed the towns and cities in the province and beyond, but it is landlocked and has poor access to markets. During the rainy season, it can take two hours to drive the kilometre stretch of dirt track linking it to the nearest paved road. Sub-Saharan African governments badly need tax revenue to bridge the large deficits in the provision of public goods, including not only infrastructure but also health and education. Meanwhile, very few non-resource-rich African countries have recorded sustained increases in revenue.

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    Countries with higher capital flight tend to have lower tax revenue, as can be seen in Figure 2. There are two reasons for this negative relationship. The magnitude of African capital flight is staggering both in absolute monetary values and relative to GDP. Measurement of capital flight poses daunting challenges, and requires some rather sophisticated statistical detective work.

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    • Capital flight from subā€Saharan Africa: linkages with external borrowing and policy options.
    • Funds that are acquired illegally, or funnelled abroad illegally, or both, are not entered into the official accounts of African countries. At the same time, the perpetrators of capital flight benefit from the complicity of bankers and other operators who assist in the placement of the funds in foreign havens. The identities of asset holders are often concealed through proxies and by taking advantage of legal screens available in bank secrecy jurisdictions. Nevertheless, researchers have made substantial progress in developing ways to estimate the magnitude of capital flight. This section reviews the methods used in this book.

      Our starting point is the balance of payments BoP , each country's official record of inflows and outflows of foreign exchange. These data are compiled annually by the IMF on the basis of reports from the central banks of its member governments. The 'current account' of the BoP records international flows arising from trade in goods and services, interest payments and transfers - transactions that do not lead to future claims on resources.

      The 'capital account' records flows of loans, investments and other financial transactions that entail future claims. Outflows of foreign exchange to the rest of the world, such as debt service or payments for imports, are recorded as debits denoted by a negative sign. Inflows, such as loan disbursements or payments for exports, are recorded as credits with a positive sign. A BoP surplus, when foreign exchange inflows exceed outflows, translates into a gain in international reserves. A BoP deficit, when outflows exceed inflows, translates into a loss of reserves. In practice, recorded inflows and outflows of foreign exchange seldom match exactly the changes in the country's official foreign exchange reserves.

      The missing money, or residual, is labelled 'net errors and omissions' in the BoP.

      Africa: Measuring Capital Flight

      In the wake of the Third World debt crisis, it was discovered that the inflows of foreign borrowing recorded in the official BoP were often understated by substantial amounts. As a result, the total stock of external debt, built up over years of borrowing, often exceeded the cumulative borrowing as reported in the BoP. The World Bank independently assembles annual data on the stock of debt.

      By taking GDF data on changes in debt stocks, substituting this for the BoP data on foreign borrowing, and recalculating net errors and omissions, we can obtain a new residual estimate of missing money. The World Bank and others pioneered this technique to derive a measure of capital flight. In addition to incomplete recording of debt inflows, another well-known source of errors in the official BoP accounts is trade misinvoicing. This can take several forms.

      Both importers and exporters may manipulate the reported values of their transactions in order to conceal foreign exchange transactions from the country's monetary authorities.

      The magnitude and determinants of capital flight: The case for six sub-Saharan African countries

      Both export under-invoicing and import over-invoicing are important mechanisms for capital flight. When exporters understate the value of their export revenues, they often retain abroad the difference between the true value and the declared value. Similarly, when importers send extra foreign exchange abroad, ostensibly to pay for imports, the excess minus a commission for their partners is often deposited in a designated foreign bank account.

      The extent of trade misinvoicing can be estimated by comparing the export and import data provided by an African country to the corresponding import and export data of its trading partners. If we assume that the trade data provided to the IMF by the industrialized countries are relatively accurate, the discrepancy between these figures and the data from their African trading partners yields a measure of trade misinvoicing.

      One more item in the BoP statistics that can be an important source of error is workers' remittances. Over the past few decades, many African countries have recorded large and increasing inflows of remittances from their citizens who are working in other African countries, Europe and, to a lesser extent, the United States and other industrialized countries.

      In some African countries, remittances are now larger than conventional external financing from aid or foreign direct investment. However, a substantial fraction of remittance inflows is transferred through informal channels that escape recording in official BoP statistics. The World Bank estimates that unrecorded remittances in African countries account for more than half of total remittance inflows.

      Adjusting for remittance discrepancies is important for accurate measurement of capital flight, as the unrecorded inflows increase the amount of foreign exchange that is available to the country. The effect of unrecorded remittances thus is similar to that of unreported export earnings: the amount of foreign exchange actually entering the African country is greater than what is captured in the official BoP.

      The results indicate that the true magnitude of remittance inflows to Africa is substantially underestimated in the BoP data. To obtain measures for the period from to , the final step is to convert the annual flows into figures that are comparable across different years, since a dollar outflow in is not the same as a dollar outflow in Using the method described above, we estimated the amount of capital flight from thirty-three sub-Saharan African countries for which adequate data are available for most years.

      This is equivalent to roughly 80 per cent of the combined GDP of these countries in In practice, of course, the fate of the missing money in most cases is unknown. Undoubtedly some of it was not invested, but instead was dissipated in Parisian shopping sprees and other consumption. Using a Portfolio Choice Framework, the study employs two different estimation techniques as Generalized Method of Moment and Fixed Effect Regression on panel data sets of 32 countries in Sub-Saharan Africa over the period The variable of interest, corruption, retains its expected positive sign and statistically significant across all the estimations.

      The relationship remains very strong even when other equally important institutional variables such as regime durability, rule of law and independence of the executive are taken into account. This suggests that a higher perception of corruption among public authorities as in bribery, kickbacks in public procurement, embezzlement of public funds, among others facilitates an increase in capital outflow from SSA. The findings further indicate that regime durability and rule of law are important institutional variables that also significantly influence capital flights in SSA.

      The findings imply that institutional reforms should be encouraged if SSA is to win the war against corruption and by extension against capital flight. There should be a creation of democratic environment and good governance practices that foster stronger governance institutions, decline in corruption and better domestic investment climate to help reverse the high spate of capital flight in the region.