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According to report from Political Economy Research Institute of University of Massachusetts, Ethiopia has lost $24.9 Billion in Capital Flight in 40 years and 3.4 Billion in 2010 alone.
Capital flight is defined as unrecorded capital flows between a country and the rest of the world. Its measurement starts from the inflows of foreign exchange recorded in the country’s Balance of Payments (BoP), in which ‘missing money’ – the difference between recorded inflows and recorded outflows – is reported as ‘net errors and omissions.’
According to the report, factors that contribute to capitalflights are
1. Export misinvoicing
2. Import misinvoicing
3. Unrecorded remittances
Many unrecorded flows result from illicit transactions pursued for a variety of motives, including money laundering, tax evasion and tax avoidance.
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Here is an excerpt from the report.
The performance of Sub-Saharan African economies over the past decade has inspired optimism on the region’s prospects for accelerating progress towards its development goals. Before the global financial and economic crisis, sub-Saharan Africa (SSA) grew by an average of over five percent per annum, a major turnaround from the ‘lost’ decades of the 1980s and 1990s.
Even during the crisis, the sub-continent grew by 3% in 2009, trailing only East Asia as the second fastest growing region in the world. These achievements notwithstanding, SSA still faces major development challenges. It is now clear that the majority of the countries in the region will not achieve key millennium development goals.
The group of 33 SSA countries covered by this report has lost a total of $814 billion dollars (constant 2010 US$) from 1970 to 2010. This exceeds the amount of official development aid ($659 billion) and foreign direct investment ($306 billion) received by these countries. Oil-rich countries account for 72 percent of the total capital flight from the sub-region ($591 billion). The escalation of capital flight over the last decade coincided with the steady increase in oil prices prior to the global economic crisis.
Assuming that flight capital has earned (or could have earned) the modest interest rate measured by the short-term United States Treasury Bill rate, the corresponding accumulated stock of capital flight from the 33 countries stands at $1.06 trillion in 2010. This far exceeds the external liabilities of this group of countries of $189 billion (in 2010), making the region a “net creditor†to the rest of the world. The stereotypical view that SSA is severely indebted and heavily aid-dependent is not
fully consistent with the facts.
This report provides updated estimates of capital flight for 33 SSA countries from 1970 to 2010. It describes the methodology used to estimate capital flight and highlights important methodological differences with other existing studies. The report presents key results on capital flight both in absolute terms and in comparison to other capital flows, especially debt, aid, and foreign direct investment, as well as in relation to the size of the economy (as percentage of GDP and in per capita terms).
The report stresses the urgency of efforts to stem capital flight and repatriate stolen assets as a part of the broader goals of scaling up development financing, combating corruption, and improving transparency in the global financial system.
C A P I T A L Â F L I G H T Â I S Â A Â S E R I O U S Â D E V E L O P M E N T Â C H A L L E N G E
As Sub-Saharan African countries attempt to mobilize more resources for development, they must pay much more attention to capital flight for several reasons.
First, by draining valuable national resources, capital flight widens the resource gaps faced by these countries, perpetuating their dependence on external aid. Moreover, by deepening the resource gaps, capital flight slows down capital accumulation and long-run growth.
Second, capital flight frustrates African countries’ efforts to increase domestic resource mobilization. It erodes the tax base and public expenditure through illicit transfer of private capital abroad, tax evasion and tax avoidance by individuals and companies, and outright embezzlement of government revenue by corrupt officials.
These perverse effects force governments to incur further debts, part of which ends up fueling more capital flight (Ndikumana and Boyce 2011a, 2011b, 2010, 2003).
Third, by draining government revenues and retarding growth, capital flight undermines the poverty reduction agenda. It is estimated that if the capital that currently leaves Africa illegally was invested on the continent, the continent could meet the Millennium Development Goal of cutting poverty in half, a target it is otherwise likely to miss (AfDB, OECD, UNECA, and UNDP 2012).
Fourth, capital flight is both a symptom and an outcome of governance breakdown in source countries as well as in the international financial system. It is a result of corruption, dysfunctional regulation and weak enforcement of rules.
Fifth, capital flight worsens income inequality and it has important social and equity implications. Insofar as the perpetrators of capital flight, tax evasion and tax avoidance are the economic and the political elites, capital flight makes tax incidence more regressive in that wealthy residents incur relatively smaller tax burdens than would otherwise be the case.
Finally, capital flight has important political economy implications for the distribution of power. The political elites are able to consolidate power by financing their oppressive machinery with illicit wealth. As a result, capital flight strengthens dictatorships and provides the means to perpetuate autocratic regimes, as evidenced by the cases of Mobutu in the former Zaïre and the various military dictatorships
in Nigeria, Gabon, and Equatorial Guinea (Ndikumana and Boyce 1998, 2011a).
Capital flight must move higher on the agenda in the development policy discourse not only in sub-Saharan Africa but also globally. Capital flight is not just an African problem; it is a symptom of a global financial system that is working badly.
CONCLUSION
The evidence presented in this report demonstrates that capital flight is a severe drain on the resources of sub-Saharan African countries, and that it is worsening over time. The sub-continent has been transferring more capital abroad than it has received in public and private lending, ironically making it a ‘net lender’ to the rest of the world.
Capital flight frustrates efforts by African countries and their development partners aimed at scaling up financing for development to accelerate poverty reduction.
It also has important social, political, equity and moral implications. It is therefore an urgent development challenge that requires coordinated policy actions at the national, continental and global levels.
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