How ‘Misinvoicing’ Masks Foreign Resource Exploitation in Africa
Leonce Ndikumana of the Political Economy Research Institute explains why as much as 67% of exports in some countries are simply not registered in trade data
Leonce Ndikumana of the Political Economy Research Institute explains why as much as 67% of exports in some countries are simply not registered in trade data
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
Developing countries around the world, and especially in Africa, often rely on export of raw materials as a major source of revenue to fuel their economy. When prices of raw materials fluctuate, countries can enjoy brief spurts or plunge into sudden crisis. A report published by UNCTAD titled “Trade Misinvoicing in Primary Commodities in Developing Countries” found that when researchers tracked exported commodities they encountered large discrepancies between export data registered by the exporting countries and import data registered by the importing countries. This phenomenon, called misinvoicing in Africa, makes it difficult to know how much was actually exported. As much as 67% of the exports in some countries were simply not registered. Why is this happening and what are the consequences?
Well, on to talk about this with us is Leonce Ndikumana. He’s a Professor of Economics at the University of Massachusetts Amherst and the Director of African Development Policy Programs at the Political Economy Research Institute –PERI. He’s also a member of the UN Committee on Development Policy. Leonce Ndikumana has also just published a blog post titled “Tracking the Gold Trail: Misinvoicing in Primary Commodity Exports”. Good to have you with us, Leonce.
LEONCE NDIKUMANA: Thank you very much for the opportunity to talk to you and your audience.
SHARMINI PERIES: You’re most welcome. So let’s begin. When you look at the titles and so on, this is the kind of stuff that you usually gloss over in your International Development class. So let’s start by explaining what misinvoicing is and why is it necessary to understand this phenomenon?
LEONCE NDIKUMANA: Yes, thank you very much. Yes, the phenomenon of trade misinvoicing is not new in the literature — it’s a very, very old, more than a century. So it’s an analysis that economies to do by comparing trade data between a country and its trading partners. And, in general, if all the transactions are properly recorded at the proper values and quantities, you will find that the inputs declared by a country should match the value of the exports of its trading partner, accounting for the cost of transport, insurance and duty. And, when there are discrepancies which cannot be explained, then economists talk about trade misinvoicing.
And there could be two standard scenarios: one is what they call normal but excessive discrepancies where exports, as declared by the importer, exceed the value of exports by much, much more than the normal value of the cost of insurance and transport and duties. And this could be… but it could also be a situation where, what we call perverse discrepancies, where imports are less than the value of exports plus the cost of transport, insurance and duties.
In the case where you have imports exceeding the value of exports plus the cost of the transport and insurance, this could indicate either export under-invoicing, which means the exporter is under-invoicing the value of exports; or it could be importers are over-invoicing. Which means two things: That when we talk about trade misinvoicing, it’s the outcome of the combination of quantities and prices. So, when you look at the aggregate estimates, you cannot determine whether the misinvoicing is due to the misrepresentation or misreporting of prices or misreporting of quantities. That cannot be ascertained at the aggregate level — you need to go at the disaggregated level.
But the second thing is that because we’re comparing trading partners — partner data — when we do the comparison and generated the discrepancies, it is not possible to add aggregates to assign… to ascertain where the discrepancy is coming from, whether it’s coming from the importer side or from the exporter side. So that’s what I wanted to be sure to make clear that, as we talk about this phenomenon, that people should keep this in mind.
SHARMINI PERIES: Right. And how do you know about the misinvoicing, or if the stuff is not registered, in terms of imports and exports, how do you begin to even track it, as you did in your paper?
LEONCE NDIKUMANA: The United States, as has been done in the literature — again, this is very important. This is not the first study that looks at trade misinvoicing, we have looked at misinvoicing in our work on capital flight and people for many, many decades before us have done that. The difference here is that in this report we looked at the product level.
So what we do is to look at data supplied by countries on their export of primary commodities. And then data supplied by their trading partners as import of those commodities. And we compared those data from exporters and the data from importers accounting for a normal standard or value of cost of transport, cost of insurance, which we assumed to be roughly around 10%. And when we find significant differences, from a prima fascia perspective we said that this is a signal of a possibility of trading misinvoicing. But, then, as I said, for you to be able to determine what is the source of misinvoicing you can’t get that from the aggregate estimate, because, as I said, it could be and underestimation of export, but it could be also an overestimation of imports.
But there are also other issues that arise because of the nature of the data — which, if we had time we could go into, but the report does identify those — which is, first of all, there could be differences in the way the countries are classifying the products, although, all the countries are supposed to be following the international standards for commodity classification, which all countries are signed up for, which is a UN sanctioned classification. There could be a possibility where simply products are misclassified at origin or at the destination.
SHARMINI PERIES: Right.
LEONCE NDIKUMANA: And there could be a difference, that is called issues, that may create these differences. But the problem is that when the discrepancies are persistent, then you can really say this is somebody who missed an item here, missed an item there. That’s when you begin to see that if there’s evidence of persistent, systematic discrepancies, that deserves further analysis, which now has to be done at the more disaggregated level.
SHARMINI PERIES: Right. So the problem is systemic, as well, and not just an accounting problem.
So you mention in your post that, according to the World Bank, 88% of African countries are net losers when comparing the value of the commodities which they export and their revenue from those exports. Explain this to us, why is this a problem? And, obviously, the problem is deep in that case. Eighty-eight percent is a large percentage.
LEONCE NDIKUMANA: Yes. The issue that I pointed out here is a big, major development issue which has been in discussion, especially in the context of the sustainable development goals. The idea is that Africa and the developing countries need to go on a path where they are about to achieve high growth, but that growth has to be sustained.
So growth comes from aggregation of capital — physical capital, human capital — by using the country’s endowment in natural resources and other resources. So sustainability here means that when the proceeds from exploitation of natural resources have to make up for the loss in those resources. Because we are talking about exhaustible resources. So when the resources are being used, you need to be sure that the gains are commensurate enough to compensate for the cost of those resources so that the country can actually invest in generating other resources, other growth capacities, so that when the resources are depleted — because they will be depleted — the country’s not left in the dark.
So the issue here is when the World Bank cited the fact that the majority of southern(?) African countries find themselves as having net resource wealth depletion, what they are looking at is whether the gains obtained from utilization of natural resources, in terms of accumulation of physical capital, in terms of accumulation of human capital, with that they actually compensate from the value of the resources used, so that over time, the population has not less than what the previous population had to live off. Because what you want to see is that the future generations are not short-changed when the resources are being utilized and not enough savings is being put aside for future generations. That’s the big concern.
So the reason why the value of exports of primary commodities is important is because that’s when we can determine how much countries are getting — but it’s not just looking at the value of the exports, it’s also looking at what actually accrues to the country itself, in terms of the … sharing between the companies that are exploiting the resources, the companies that are exploiting those resources and what goes to the government, in terms of tax revenue, rents, from natural resources.
This is very important for African countries, for one very important reason. One is that, while African countries own their natural resources — these minerals, the oil, and so on — they actually, in most of them, the exploitation is done by foreign companies. If you go to many oil-producing companies in Africa, the majority of oil companies are foreign. It’s true also for other primary commodities. Which means that a share of the value of the oil and minerals which are being exploited in African countries accrue to the rest of the world, not Africa. That’s where the issue becomes very, very important.
SHARMINI PERIES: Right. And this is a very important point here — because of the involvement of international and multinational corporations, it’s even more important to get at the accounting of all of this. And this kind of situation gives way to a lot of corruption and missing resources and so on. How much of this is sort of deliberate, in the sense that it allows for corruption to take place?
LEONCE NDIKUMANA: It is. So, because you have to understand that this is a very complex sector — the extractive industries are a very complex sector, which involves many players, domestic and foreign — and these foreign players have a lot of power because they are big corporations, they have a lot of money, they have a lot of capital, they are very well-equipped in terms of technical core capacity, good lawyers, good accountants and so on. And when it comes to negotiating the resource exploitation deals, it’s very hard to say that we have a level playing field, in terms of capacity, because African governments are still building up their capacity to manage resources. Whereas, the companies they are dealing with, are very mature, very well established. So African countries have to be sure that what they are getting is worth the value of the resources that they are generating.
And this raises issues of not only capacity, but also of governance. You have to have a government which is truly fighting for the interests of its population. You have to have a leadership which is able to stand for the wellbeing of the people, and withstand the pressure — the pressure from forces which may want to maintain the status quo of unfair distribution of the gains from natural resource exploitation.
SHARMINI PERIES: And I can understand, in terms of exporting countries, why there might be some of the problems in the sense that systematic accounting and books and monitoring agencies and all of those kinds of essential institutions may not be in place. But what happens at the other end, in terms of the importing countries? Why is it getting lost in tracking at the import level?
LEONCE NDIKUMANA: At the import level, again, I go back to the… there could be, again, simple, statistical data problems in terms of the classification, the timing of the import again. But what we find in this analysis is another dimension of the complicity of the global trading system, where you find that over the commodity trading chain, from the producer to the end user, you have intermediaries. And these intermediaries may be linked. So, many times, in some cases, what we found is that there are cases where the commodities recorded in those source countries as going to country A, in fact, can’t be found in country A’s import data. And people have tried to figure out what would be happening. One of the things that could be happening is that the company that actually declares as buying the commodities from South Africa, Zambia, Angola, is actually not bringing the commodities where the company is headquartered, but is probably sending it to another country. And the implication is that then it becomes difficult to compare trading partner statistics. Because the named importer at the source is not the one that’s recorded as the destination.
So the question is then why is it that a country which needs to buy, say, oil from Angola, or copper from Zambia, or gold from South Africa, why would that company not buy directly from that country and go through a second or a third intermediary? The complication is that we then have a problem of making evaluation of the goods being traded so that we can reconcile, we can compare the value of the goods at the end and the value of the goods at the origin, so that we can be able to determine what is the share of the final value of the goods that accrue to the producer? For us to be able to know whether the producers in African countries are getting their fair value for their commodities, we need to know the final value of the goods.
SHARMINI PERIES: Leonce, why did you choose to focus on gold exports from South Africa as an example in your study?
LEONCE NDIKUMANA: Thank you very much. So the case of gold is what I use for illustration in the blog, but in the study itself, gold is one of the three groups of commodities exported by South Africa, which we analyze along with other products which were analyzed for other countries. The selection was based on the products which represented a large share in total exports by the country. But also the case of gold, in the case of South Africa, is where we find the biggest discrepancies that probably explains why it’s generated more attention after the … of the first report.
So the discrepancies we found were that the value of gold imports by South Africa’s trading partners were larger than the value of gold exports as recorded by South Africa going to those countries. Again, this is a situation where these discrepancies need to be investigated a little bit more because many reasons could be explained, could be behind those discrepancies. One, again, would be the issue of classification. In the case of South Africa, the government classifies, as other countries do, gold into non-monetary gold and monetary gold. If that distinction is not maintained along the chain of the transaction, this can create a discrepancy.
So that is what we found, that there are discrepancies between the values recorded by importers of non-monetary gold as compared to exports of non-monetary gold declared by South Africa. But we also found that the distinction between non-monetary gold and monetary gold is not systematic. In fact, we found that in the latter years, from 2011 to 2014, the two series(?) are merged which makes the comparison more complicated. Because then you wonder whether the same classification is maintained at the end of the transaction. So that’s what we found as the key finding in the case of gold. But, again, it’s just one of the other export commodities that we looked at — it has nothing special.
SHARMINI PERIES: All right, Leonce. I thank you so much for joining us today and we look forward to your next study.
LEONCE NDIKUMANA: Thank you very much.
SHARMINI PERIES: And thank you for joining us on The Real News Network.