Léonce Ndikumana discusses his newest research on capital flight from Angola, Côte d’Ivoire and South Africa between 1975 and 2015. 290 Billion dollars were funneled out of these countries over this period through misinvoicing and circumventing regulation and taxation. Most of that money ended up in corporations in the global north
GREG WILPERT: It’s The Real News Network and I’m Greg Wilpert, coming to you from Baltimore.
Countries of Africa continue to struggle with their economic development and tend to remain towards the bottom in world rankings of GDP per capita. A recent study conducted by the Political Economy Research Institute, PERI, sheds new light on why countries in Africa have a hard time developing. The study is titled “Magnitude and Mechanisms of Capital Flight from Angola, Cote d’Ivoire and South Africa,” and it develops a new methodology for estimating the extent of capital flight from these countries. The study was authored by Leonce Ndikumana and James Boyce. We have spoken to Leonce Ndikumana before about capital flight from Africa in general terms.
This new study, however, zooms in on these three countries, Angola, Cote d’Ivoire, and South Africa. It finds that during the 40 year period from 1975 to 2015, 60 billion dollars were lost from Angola, 32 billion dollars from Cote d’Ivoire, and 198 billion dollars from South Africa to capital flight. The main means for this capital flight appear to have been a combination of misinvoicing, underreporting of exports, overreporting of imports, and cheating on taxes and tariffs.
We are now joined by Leonce Ndikumana to discuss the study. Leonce is Professor of Economics at the University of Massachusetts, Amherst, and he’s also director of the African Development Policy Program at the Political Economy Research Institute. Also, he is the co-author of the book, Capital Flight from Africa: Causes, Effects, and Policy Issues. Thanks, Leonce, for joining us again.
LEONCE NDIKUMANA: Thank you very much for the opportunity to talk to you.
GREG WILPERT: So before we delve into the specifics, tell us why it is important to understand the magnitude of capital flight. What does this figure tell us about a country?
LEONCE NDIKUMANA: Thank you very much for the opportunity, again, to talk about this important subject, as to why it’s important to worry about the magnitude of capital flight from African countries. The simple answer is that we are concerned and interested about the way African countries can finance their development programs. As you indicated in your introduction, African countries have made big strides in terms of isolating growth and even reducing poverty. But we know that the continent continues to trail other continents in terms of levels of poverty, which remain very high, high inequality, massive gaps in financing for infrastructure or basic services like education and health. And therefore, for these countries, every penny counts.
So the reason we are interested in capital flight is because it basically undermines the efforts of those countries to mobilize resources to meet those urgent needs. Every penny that leaves the country, that’s smuggled out of the country, is money that could have been used to build schools, roads, and clinics, and keep kids in school, and that’s related to growth. That’s why we are interested in this phenomenon. And when we look at the numbers, as you said, these are large, large numbers that amount to money that have been leaving the country unaccounted for. But it belongs to private individuals who are able to smuggle the money out of the country, who are able to accumulate the wealth abroad without being taxed, typically in secrecy jurisdictions in all kinds of forms; financial, liquid assets, or physical assets.
So the reason why we are interested in capital flight and its magnitude is because it is a constraint to financing development. And again, another reason why we wanted to do this particular study, focusing on three countries, which we hope to continue into other countries, is because so far we have been looking at the magnitudes of capital flight from the continent, looking at many, many countries. And we have seen that it is a problem, but we realize that we actually have so far been looking at the forest and we haven’t looked at trees.
GREG WILPERT: When looking at your data on Cote d’Ivoire, it seems that this country was able to stop capital flight and even reverse it around the year 2000. But you also argue that this is not necessarily the result of better policy, but maybe because there was misinvoicing of exports, which is being balanced out by misinvoicing of imports. Is this the case, and what does that kind of misinvoicing mean for the lives of the people of Cote d’Ivoire?
LEONCE NDIKUMANA: Yes, thank you. The interesting thing–when you start to look at individual countries in more details, you find different pictures emerged from different countries. In the case of the Ivory Coast, as you indicated, the last ten, fifteen years look very different from the previous years. And what is the biggest source of change is trade misinvoicing. In the case of Ivory Coast, what reduces the major capital flight is this peculiar situation where you have exports for which the value recorded by Ivory Coast seemed to be very different from value recorded by its trading partners. And it’s peculiar in the sense that normally, when it comes to exports, export invoicing normally amounts to exporters declaring a lower value than the importers, the buyers, as a way of keeping money abroad. But in some cases, as in the case of Ivory Coast, you have this very strange situation where the importers are declaring much larger amounts than the exporting country, which doesn’t make sense.
And that’s why when you look only at the aggregate, it’s difficult to explain what is happening. And that’s why, in this study, we want to go to the disaggregate level and look at how the major products of Ivory Coast are being traded and recorded between Ivory Coast and its trading partners. Because what could be happening is that maybe… Cocoa is probably the biggest commodity exported from Ivory Coast. So we wanted to look at how is cocoa exports being recorded in Ivory Coast and among its trading partners. In that case, for example, you would find that the importing partner is recording a larger number than Ivory Coast. The one possibility would be that the ivory and cocoa is being shipped from other places than Ivory Coast, so the neighboring countries. And you wonder, how did it get there? So you want to look at are there any smuggling between Ivory Coast and its neighboring countries? Are the shipments correctly recorded in terms of this nation, where they’re heading?
One of the problems we have encountered in trying to reconcile trade statistics is the role of what is called trading hubs. These are, for example, in Switzerland, Netherlands. These are places where you have major, major trading companies. But these areas function like a no man’s land, where goods don’t get registered, recorded as being imported, even though the company recorded them as being imported by that company that resides there. And it becomes difficult, then, to reconcile the origin and the destination of the product, which is a big problem. Because for Ivory Coast to be able to know that they are getting the fair value of their exports, we need to know the price of the cocoa at the origin and the price of the cocoa at the destination. When there are black holes in the trading chain, that’s a big problem. And that’s what we can find in our analysis. So our country-detailed analysis will try to go into more detail and look at not just the aggregate trade statistics, but the trade statistics by sector, by commodity, by trading partner, to try to reconcile the values of trade on all sides of the transactions.
GREG WILPERT: Now, looking at Angola, the story seems to be the opposite. Angola emerged from civil war and Portuguese colonization in 1975 and was ruled by a socialist government supported by Cuban troops until 1990, and then quickly punched into a second civil war between 1992 and 2002. Now, your data shows that despite the bloody history of Angola prior to 2002, things have been getting worse in terms of capital flight, rather than better after the ceasefire of 2002. What is the government doing wrong?
LEONCE NDIKUMANA: That’s a very interesting question. I don’t know if it’s only the government of Angola that’s doing something wrong. Because one of the points we make in our analysis of capital flight is capital flight is not just the sole responsibility of African governments, African economies generally, or African actors. Because capital flight, in the detailing of capital from African countries, disguised from authorities, heading to foreign destinations, is made possible only because in those foreign destinations, they are willing partners who are willing to disguise the assets that have channeled in those markets by private Africans, away from the eyes of the authorities. This includes banks in offshore financial centers or the kinds of intermediaries that facilitated the transfer and concealment of those assets, including lawyers, accounting firms, and so on.
So I make this point because it’s easy for the public to blame African governments only when it comes to capital flight, illicit financial flows. But I keep saying that if the crime was only on Africa, then that money that’s being shipped out of the continent in disguised form would not find a home. The bankers would not accept it, the foreign countries would not accept it. But the reason why this phenomenon continues is because we are dealing with a very opaque international financial system, where it is easy to disguise the ownership of assets because of willing collaborators, enablers, as banks, accounting firms, accountants, lawyers who facilitated the manipulation of financial ownership of assets and so on.
In the case of Angola, we find that it’s a typical case of a resource-rich country that we would have expected that it would have been able to leverage those resource wealths, oil, to boost development, to boost growth. But this is not happening, because even as the country–if you look at the aggregate majors of GDP, it has high GDP, if you look at the average income, you would think it’s a high average income country. But it has high levels of poverty, high levels of inequality because those resources are not used to advance the interests of the majority of people through investment in public infrastructure, through investment in public services.
So it’s important, then, to go and document where do the resources go, where does the oil that’s being exploited, how does it get traded, who gets the revenue, how is the revenue being shared, who owns these corporations that are benefiting from natural resource exploitations? And these questions, you can’t answer them if you just look at the aggregate figures. You have to into the details of institutional regulatory sector analysis. And that’s what we tried to do for Angola.
GREG WILPERT: Now, turning to South Africa, it has an economy that is larger than that of Angola and Cote D’Ivoire, or Ivory Coast, combined. It lost 198 billion dollars due to capital flight, according to your findings. It seems that the worst period, though, for capital flight was just after the fall of apartheid. But then around 2010, there is another slowdown in capital flight. What policies drove these changes in slowing down the capital flight?
LEONCE NDIKUMANA: I thank you for the question. Again, I’ll clarify about the limits. But South Africa is a very, very interesting case in the sense that, unlike the case of Angola, which I just described, which is an economy that’s dominated by one or two products, few commodities, South Africa is probably one of the most diversified economies. And therefore, it makes for a very interesting case. Even though it has a large number of mineral resources, it’s also a very diverse economy, tons of manufacturing sector. So it’s important to see how capital flight also occurs in a country like South Africa that’s more diversified, also an economy that in terms of the modern sector, it’s much larger than the other countries.
Now, just a nuance then, and this is more for the people who are listening to us and reading the report, the statistics we produce for South Africa cover from 1970 to 2015. But because of lack of electronic data on trade, on exports and imports that’s comparable to South African data and partners’ data, for the period from 1970 to 1996 or 97, we were not able to include estimates of trade misinvoicing. So in a sense, the series between 1970 to 1997, they could be underestimated because of not accounting for trade misinvoicing. So it’s actually not correct, then, to say that there is a spike from 1998, because the two series before that, we are not including a substantial adjustment. And after that, we are including a substantial adjustment.
GREG WILPERT: OK. Well, we’re going to have to leave it there. I was speaking to Leonce Ndikumana, Professor of Economics at the University of Massachusetts Amherst. Thanks again, Leonce, for having joined us today.
LEONCE NDIKUMANA: Thank you very much.
GREG WILPERT: And thank you for joining The Real News Network.