IFF only they’d spent it on the poor

DRC miner
Lifting his bosses and rulers out of poverty

Over the past fifty years or so, Africa has received about a trillion dollars in Official Development Assistance (ODA) from OECD Development Assistance Committee (DAC) donors. If you look at the excellent data sets we’ve produced on ODA over the years, you can work out what percentage or actual sum of that went to different purposes (education sector, health sector…) and who gave it and got it. If that’s too time consuming, here’s a simpler one I’ve prepared for you. Over the same period, Africa gave around a trillion dollars, mainly to developed countries, and almost 100% to the financial sector in the form of illicit financial flows (IFF).

I took the numbers from a report just published by the African Union and UN Economic Commission for Africa called Track it! Stop it! Get it! IFF (pdf). The Commission defines IFF as “Money that is illegally earned, transferred or utilized. These funds typically originate from three sources: commercial tax evasion, trade misinvoicing and abusive transfer pricing; criminal activities, including the drug trade, human trafficking, illegal arms dealing, and smuggling of contraband; and bribery and theft by corrupt government officials.” Nigeria is the worst offender, at $217 billion over 1970-2008, with Egypt coming second at $105 billion over the same period.

Most of the means used to get this money are probably familiar to you, although some of the terminology may not be, “unequal contracts” for instance. The report illustrates this term using iron ore mining in Guinea. As the world economy started to recover from the Great Recession, a commodities boom pushed up the prices of raw materials, and competition among mining companies to buy concessions was fierce. Guinea’s iron ore deposits are estimated to be worth $140 billion over the next 20 years, and multinationals from various countries were bidding to exploit them. In 2008, the government sold a concession for this ore for an astonishingly low $165 million. The lucky buyer promptly resold half the concession to another company for $2.5 billion. A new government terminated the contract and sold the concessions for $20 billion, so they may be right to suspect corruption in the original deal.

That commodities boom is one reason behind optimistic opinions about Africa. In a report called “The New Africa” (pdf) published at the end of last year, the Financial Times said that: “Africa is enjoying an era of economic promise that has survived war and famine, dictatorship and corruption”. The African Economic Outlook 2014 from the OECD, African Development Bank and UN announces “steadily progressing economic and social conditions that bode well for the immediate future.”

But the number of people living on less than $1.25 a day in Africa rose from 290 million in 1990 to 414 million in 2010 according to the UN’s 2013 report (pdf) on progress towards the Millennium Development Goals (MDGs). And as the IFF report points out, poverty isn’t just a question of money, it’s “multidimensional”, meaning that access to health care, education, potable water and housing are unsatisfactory too, or what the OECD calls “inequalities in incomes, health outcomes, education and well-being” in its Initiative on Inclusive Growth.

The $50 billion a year siphoned off through IFF could for example cover the extra $30 to $50 billion the African Development Bank estimates the continent needs to invest in infrastructure each year. That’s looking at the broad picture. Here’s what it means to the people that money was stolen from. If you follow the blog regularly, you may remember that at the end of last year I wrote about a panel discussion on Ebola I chaired here at the OECD.

One of the articles I read to prepare the meeting was an account by Peter Piot of his journey back to the town of Bumba 40 years after identifying Ebola, then an unknown virus. Bumba was in Zaire then and now it’s the Democratic Republic of Congo (DRC). Reading Piot’s account, you get the impression that apart from the country’s name, not much else has changed. Bumba’s population has grown to 150,000 but there still isn’t a single paved road, no running water and no electricity network. There are hardly any patients in the hospital because the government hasn’t sent any drugs for over two years and most sick people can’t afford to pay for treatment. The hospital pharmacist buys drugs at the local market and resells them to help pay for the hospital. Patients who can’t pay cash leave their bicycle or some other valuable in the pharmacy as security.

As its title suggests, an OECD report on Illicit Financial Flows from Developing Countries: Measuring OECD Responses (pdf) looks at what some of the countries receiving the money have done. OECD countries returned $147 million in 2010-2012 and froze almost $1.4 billion of stolen assets. The African Union-UN report calculates how long it would take countries to reach MDG 4 (“Reduce by two thirds, between 1990 and 2015, the under-five mortality rate”) with and without IFF. If the DRC had the tens of millions it loses to IFF each year to spend on services, it could reach Goal 4 by 2054, which is not great, but is 90 years sooner than if illicit flows continue at current rates.

Useful links

OECD work on economic and financial crime

OECD work on tax and development

Patrick Love

2 comments to “IFF only they’d spent it on the poor”

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  1. Luc Lapointe (@Keen_T0) - 13/02/2015 Reply

    Dear Patrick,

    Interesting article but I think it would be even more interesting to look at why people who earn lots of money prefer to take their money out than live in their own country and pay the appropriate taxes. So my questions are:

    1) is the problem the fact that people prefer to take their money out than pay taxes?
    2) or is the problem the fact that “investors” have little confidence in the government and feel that the money would only keep on funding corruption?

    I am not defending IFF but I think that it would be easy to see that IFF activities most likely take place in countries where there are corruptions (just an assumption). I am based in Colombia and people who have money do everything possible to take their money out of the country (I imagine for the same reason).

    Saludos cordiales….

    • Patrick Love - 13/02/2015 Reply

      Good afternoon Luke.
      I think the answer to your first question is that few people like paying taxes, but wealthy individuals and companies have the means to hire experts to avoid paying their fair share. This isn’t just a problem in Africa of course, as shown by the low taxes paid by large multinationals in OECD countries.
      For question 2, in the case of bribing government officials, it’s the investors who are doing the bribing – a trillion dollars a year according to the World Bank. According to a recent OECD report on foreign bribery, “bribes are being paid across sectors to officials from countries at all stages of economic development. so it isn’t just in the countries you’d expect. And until recently, some OECD countries not only didn’t prosecute foreign bribery, the bribes were tax-deductible.
      Thanks for your comments and questions.

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