Capital Flight and Policy Performance

1. Capital Flight and Policy Performance LEONCE NDIKUMANA University of Massachusetts TICAD V Task Force - Preparatory Meeting November 14, 2012 IPD (Columbia University)

2. Capital outflows from a capital starved continent A paradox?

3. Volumes are staggering Capital flight from 37 African countries, billion 2010 $

4. Contrary to the perception that Africa is severely indebted… Africa Rest of the World … the continent is actually a net creditor to the rest of the world Figures for 37 countries countries, 1970-2010:

5. Africa receives less aid than capital flight Total flows for 37 African countries, 1970-2010 Africa Rest of the world

6. Capital flight and other flows (37 African countries: billion, constant 2010 $)

7. Capital flight and policy First: Why it matters

8. a) Capital flight is a development issue • Capital flight undermines resource mobilization • reduced private domestic investment • reduced tax base • reduced public investment and social services • The revolving door: capital flight fueled by external borrowing • more than ½ of each dollar borrowed leaks out as capital flight

9. b) Capital flight has important political economy implications as well • capital flight deepens inequality • capital flight deepens deprivation (undermines social service delivery) • capital flight strengthens corrupt regimes and dictatorships

10. c) Capital flight is, by and large, illicit • the sin at the origin: capital outflows are illicit if they involve funds that were acquired illegally (through corruption, drug and human trafficking, trade mispricing, …) • the sin at transfer: capital outflows are illicit if they are not properly recorded with national authorities • the sin at hidden foreign holdings: capital held abroad is illicit if it is not reported to the authorities (most likely due to sins #1 and #2)

11. Capital flight and policy performance Second: what should be the policy response?

12. African governments • First of all, realign priorities in resource mobilization: Africa chasing the wrong dollar? • Aid: there won’t be a Marshall Plan for Africa … the illusive “Big Push” • External borrowing = a leaky collection basket • Remittances = an untapped resource • Domestic resources = also an untapped resource • Second, plug the financial hemorrhage – stem capital flight • Transparent and accountable management of debt • Transparent management of natural resources • Enforcement of anti-corruption regulations

13. Africa’s partner governments • Enforcement of responsible management of loans • Support UN New Principles on Responsible Lending and Borrowing • Emulate Norway’s initiative – donors auditing own loans • Enforcement of banking transparency rules – curtailment of offshore finance • Support efforts towards stolen asset recovery. Up to date, StAR has not returned a penny to Africa!