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

Capital outflows from a capital starved continent A paradox? 2

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

 … the continent is actually a net creditor to the rest of the world  Figures for 37 countries countries, : Contrary to the perception that Africa is severely indebted… Stock of debt 2008: $275bn Capital flight: $1.68 trillion Africa Rest of the World

Africa receives less aid than capital flight Aid: $867bn Capital flight: $1.3 trillion Africa Rest of the world Total flows for 37 African countries,

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

Capital flight and policy First: Why it matters

 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 a) Capital flight is a development issue

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

 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) c) Capital flight is, by and large, illicit

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

 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 African 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! Africa’s partner governments