African Economic Conference 201328-30 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

Outline of the Presentation

I. Illicit financial flows (IFF): definition and channels

II. Quantifying IFF through trade mis-pricing in Africa: Methodology & Results

III. Reinvesting lost IFF into African economies: Methodology & Results

IV. Implications of IFF for regional integration in Africa

V. Policy Recommendations

I. 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.

I. IFF – Definition and Channels

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)

Proceeds from commercial tax evasion supposed to represent the bulk of IFF; about 65% of total IFF according to Baker (2005)

II. Quantifying IFF through trade mis-pricing: Methodology & Results

If IFFMISINV i,j,k,t > 0, IFF occurs from African country ‘i’ to country ‘j’ in product ‘k’ in year ‘t’.

II. Quantifying IFF through trade mis-pricing: Methodology & Results

Between 2001 and 2010, it is estimated that USD 409 billion left Africa as IFF

II. Quantifying IFF through trade mis-pricing: Methodology & Results

Cumulative IFF by African Economies, 2001-2010, USD billion

Source: Author’s calculations

II. Quantifying IFF through trade mis-pricing: Methodology & Results

Cumulative IFF by destination (> USD 5 billion), 2001-2010, USD billion

Source: Author’s calculations

II. Quantifying IFF through trade mis-pricing: Methodology & Results

Source: Author’s calculations

Top 10: Cumulative IFF from Africa by GTAP Sector, 2001-2010.GTAP Sector USD Billion

Metals nec (Copper & Gold and other non-ferrous metals) 84.00

Oil 69.59

Natural gas 33.99

Minerals nec (non metalic minerals eg. Cement, gravel, plaster etc) 33.08

Petroleum, coal products 19.98

Crops 17.06

Food products 16.86

Machinery and equipment nec 16.82

Wearing apparel 14.00

Ferrous metals (Iron & steel) 13.15

Total 318.54

III. 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

III. Reinvesting lost IFF into African economies: Methodology & Results

2 scenarios:

1) 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.

2) 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.

III. 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.

III. 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)

III. Reinvesting lost IFF into African economies: Methodology & Results

Change in Africa’s exports, by Main Destinations, compared to baseline in 2017 - %

III. Reinvesting lost IFF into African economies: Methodology & Results

Change in intra-African trade, by Main Sectors, compared to baseline in 2017 – USD billion

-20

-10

0

10

20

30

40

50

60

70

80

Agriculture and food Primary Industry Services

African countries Developing countries Developed countries

Source: Author’s calculations

IV. 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

V. 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

Thank you!