African Economic Conference 2013 28-30 October Johannesburg, South Africa

1. African Economic Conference 2013 28-30 October Johannesburg, South Africa Quantifying illicit financial flows from Africa through trade mis-pricing and assessing their incidence on African economies Simon Mevel, Siope Ofa & Stephen Karingi / RITD / UN-ECA

2. Outline of the Presentation • Illicit financial flows (IFF): definition and channels • Quantifying IFF through trade mis-pricing in Africa: Methodology & Results • Reinvesting lost IFF into African economies: Methodology & Results • Implications of IFF for regional integration in Africa • Policy Recommendations

3. Illicit Financial Flows (IFF) – Definition and Channels • IFF can be considered as flows of money that has broken laws: • That is to say, money illegally earned, transferred or used, at its origin, or during the movement of use Source: Author’s consolidation of different concepts, 2013.

4. IFF – Definition and Channels • Proceeds from commercial tax evasion supposed to represent the bulk of IFF; about 65% of total IFF according to Baker (2005) Source: Author’s consolidation of different concepts, 2013. • Focus on trade mis-pricing essentially due to availability of trade data (transfer pricing requires firm level data)

5. Quantifying IFF through trade mis-pricing: Methodology & Results • IfIFFMISINV i,j,k,t > 0, IFF occurs from African country ‘i’ to country ‘j’ in product ‘k’ in year ‘t’.

6. Quantifying IFF through trade mis-pricing: Methodology & Results • Between 2001 and 2010, it is estimated that USD 409 billionleft Africa as IFF

7. Quantifying IFF through trade mis-pricing: Methodology & Results • Cumulative IFF by African Economies, 2001-2010, USD billion Source: Author’s calculations

8. Quantifying IFF through trade mis-pricing: Methodology & Results • Cumulative IFF by destination (> USD 5 billion), 2001-2010, USD billion Source: Author’s calculations

9. Quantifying IFF through trade mis-pricing: Methodology & Results Source: Author’s calculations

10. Reinvesting lost IFF into African economies: Methodology & Results • Using: • MIRAGE multi-country multi-sector dynamic Computable General Equilibrium (CGE) model • Global Trade Analysis Project (GTAP) database • Previously estimated IFF • Looking at progressive return of initially lost IFF from Africa over the period 2006-2010 between today (i.e. 2013) and 2017 through international income transfers

11. Reinvesting lost IFF into African economies: Methodology & Results • 2 scenarios: • Non-constraint international income transfer • Countries/regions having benefited from IFF over the period 2006-2010 see their national/regional incomes progressively reduced between 2013 and 2017; while countries/regions having initially lost from IFF (i.e. Africa) see their national/regional income progressively increased over the same period; total income reduction must be strictly equal to total income increase. • International income transfers constrained in the recipient countries • Whereas countries/regions having benefited from IFF over the period 2006-2010 see their national/regional incomes progressively reduced between 2013 and 2017, governments of countries/regions having initially registered losses from IFF are now constrained to spend the additional income received towards improving trade facilitation measures.

12. Reinvesting lost IFF into African economies: Methodology & Results • Scenario 1: non-constraint international income transfer • Africa’s real income would be boosted, increasing by 21.2% in 2017, • Terms of trade would be such as Africa’s exports reduced by 19.3% and Africa’s imports would be increased by 33.1% and sourced by RoW • This could therefore be a subsidy given to African consumers, allowing them to buy more goods from RoW that have become relatively cheaper.

13. Reinvesting lost IFF into African economies: Methodology & Results • Scenario 2: constraint international income transfer • Real income would increase in all countries and overall for Africa by 2.7% • Africa’s exports and imports would increase considerably (17.7%) and (17.9%) respectively • Africa’s exports would be stimulated the most towards Africa (i.e. increased in intra-African trade)

14. Reinvesting lost IFF into African economies: Methodology & Results • Change in Africa’s exports, by Main Destinations, compared to baseline in 2017 - %

15. Reinvesting lost IFF into African economies: Methodology & Results • Change in intra-African trade, by Main Sectors, compared to baseline in 2017 – USD billion Source: Author’s calculations

16. Implications for regional integration in Africa • IFF losses from the African continent are considerable (estimated at USD 409 billion between 2001-2010) • Greater than Africa’s external debt • Greater than all ODA received by the continent • Greater than all FDI to Africa • While costly reforms are required to make the regional integration process more effective: • Trade facilitation measures show great potential to boost intra-African trade and its industrialization • 51 priority projects from PIDA (2012-2020) cost about USD 70 billion

17. Policy recommendations • Although reinvesting previously lost IFF (if spent properly) into African economies can positively impact continental trade and income, what is lost cannot be fully recovered • It is critical to curb IFF in the first place as it could be better used for developmental purposes (domestic resource mobilisation) • Adoption of transparent and effective regulatory policy on extractive industries agreements between Governments and MNCs • Regulating the behaviours of MNCs is crucial, particularly taxation and investment policies, ensuring that MNCs adheres to such rules

18. Thank you!