How Capital Flight Is Undermining Africa’s Development

Feature Article How Capital Flight Is Undermining Africa’s Development

Capital flight is a major way in which African Countries have been forced into poverty. According to Forum Syd, 2011, between US$ 1.26-1.44 trillion disappear from Africa every year ending up in tax havens facilitated by Multinational companies. The sum of money that leaves developing countries each year as unreported capital outflows, referred to as illicit capital, amounts to 10 times the annual global aid flows and twice the debt developing countries pay each year.

Forum Syd is an international non-governmental organization working with people and people's right. Some of the 15 African countries with the highest amounts of capital flight include Tanzania, Mozambique and Ghana. For example, between 2002-2006, Tanzania alone lost up to USD 660m per year in capital flight. In comparison, the health budget of Tanzania amounts to USD 7.6 million and women die every day while giving birth.

These lost monies could significantly contribute to development by way of combating hunger, disease and reduce poverty.

It is undeniable fact that lost tax revenue affects all countries, rich and poor, but the impact on developing countries is significantly higher. Developing countries face a set of common challenges; weak institutions, especially weak tax systems, large informal sectors, and corruption in governments. Collectively theses weaknesses serve as an incentive for citizens to pay tax, making tax collection difficult.

Some members of the international communities compound these challenges through their machination.

Many African countries come under pressure to adopt domestic policies that undermine their taxing rights. Tax competition results in either the lowering of tax rates to unbelievable levels or offering tax holidays for years on end in the hope of attracting Foreign Direct Investment (FDI).

In addition to that, there is a lack of transparency and accountability regarding agreements signed between African governments and multinational companies, particularly in the extractive sector. The future of Africa looks bleak according to projections by some development experts; it is estimated that there will be more wars on the continent and poverty will be an everyday phenomenon in the next 25 years. But all is not lost.

The young generation of Africa has a dream for Africa, a dream of a rich, self –sustaining independent Africa.

To quote the legendary Martin Luther King Jnr, “We must accept finite disappointment but never lose infinite hope”. It is true that the current rate of development on the continent leaves much to be desired, but we are not losing infinite hope for a better future for Africa”.

The flight of capital from Africa and its absorption in western economies deserve same attention and require concerted efforts to deal with. In a Seminar at the Oslo House of Literature-Norway, as part of the Transparency and Accountability in the Extractive Industries (TRACE) Program, organized by Publish What You Pay (PWYP-Norway), participants from resources rich African Countries proposed the following policy recommendations:

• Improving governance and strengthening national capacity among African governments in managing extractive industries is the first and most important step. Africans should see it as a responsibility to fix their political systems, as Africans, for better resource governance;

But it's also the shared responsibility of the international community –to work for greater transparency in the global financial systems. We can do this by:

• Positioning transparency and accountability at the Centre of African natural resource policies to secure a fair share of national resource revenues for African citizens. There should be automatic information exchange between tax authorities and sanctions on tax havens that do not cooperate. Multinational companies should declare their profits in countries where they operate as part of international financial reporting standards;

• Norway should be playing the role both as champion and mentor to expand on initiatives to deepen transparency, building on the EU and the US regulation. This can be done through extended country by country reporting;

• Together, we should urge companies to follow best practices in transparency and raise corporate standards;

• Urge civil society including PWYP to build capacity and continue holding governments and companies accountable;

• Most importantly, efforts should be made to ensure that flight capital is repatriated to Africa. This is out of a moral standpoint: large proportions of this money legitimately belongs to Africans and must be restituted to the legitimate claimants. But also for economic reasons, repatriation of capital flight will propel growth on the African continent on a higher sustainable path, while preserving its financial stability and reducing our dependence on aid and loans.

• Finally, if all developing countries could increase the amount of taxes raised to at least 15% of national income, an additional US$200 billion per year would be available to governments, according to Action Aid estimates.

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Started: 02-07-2024 | Ends: 31-10-2024