African CSOs call for broadening of concept of illicit financial flows

Contrary to the prevailing image, Africa is a net exporter of capital. The United Nations Economic estimates the net financial outflow between the years 1970 and 2008 at around 800 billion US dollars. This is much more than all the official development assistance received by the continent. And the illicit financial outflows from Africa have accelerated  exponentially during the last decade.

This is the conclusion of a high level panel on illicit financial flows that was set up by the African Union. The panel was chaired by former South African president Thabo Mbeki and it was launched in January. Yao Graham, coordinator of TWN-Africa argues that the illicit financial flows are only the tip of the iceberg and a manifestation of an economic system that privileges foreign capital and corporations to the neglect of the interests of majority of Africans and domestic capital.

The story of Africa in relation to illicit financial flows (IFFS) is a familiar one. It has assumed a dominant position in policy discourses both on the African Continent and beyond. In Africa it has necessitated the setting up of an African Union Commission High Level Panel (HLP) on IFFs, whose report was launched at the 24th Session of the African Union Heads of State' Summit held in Addis Ababa, Ethiopia from 30-31 January 2015.

Africa is a net exporter of capital, with the United Nations Economic Commission for Africa (UNECA) estimating Africa's net financial outflow between the years 1970 and 2008 at around 800 billion US dollars. The last decade has witnessed an exponential acceleration of illicit financial outflows from Africa. From a relatively modest figure of about 12.5 billion US dollars in 2002, illicit outflows rose to 68.1 billion US dollars in 2009 and have averaged over 50 billion US dollars over the period. Thus, the seemingly explosion of debate on IFFs and Africa's development by different actors and at various levels of policy discussions is understandable.

But the debate is not without conceptual weakness and confusion. The dominant policy perspectives on illicit financial flows and Africa's development tend to focus on the unethical, criminal, corrupt and regulatory dimensions of illicit financial flows. Even though these are legitimate focus, their treatment fails to deal with the structural and systematic dimensions of IFFs that make it easy for the draining of resources from Africa.

It was against this background that TWN-Africa convened a 3-day Africa-wide meeting in Accra, Ghana, from the 10-12th of November 2014 with the main objective of broadening and deepening the conception of IFFs and Africa's development transformation. The meeting brought together participants from academia, civil society organisations, the media and women groups for discussions on IFFs and structural transformation of Africa's economies.

In laying out the main issues for the conference, Dr Yao Graham, Coordinator of TWN-Africa, called for the discussions to go beyond illegality, corruption and governance and to focus on how economic surpluses are generated in Africa, the dominant players involved in the process of generation and the distribution of the surplus. Hence the meeting discussed a wide range of issues such as finance and the financial systems and architecture, taxation, foreign direct investment (FDI), the extractive sector and the role of the state.

The issue of illicit financial flows it became clear was only the tip of the iceberg and is a manifestation of an economic system that privileges foreign capital and corporations to the neglect of the interests of majority of Africans and domestic capital. The debate must thus be broadened to include structural drivers within African economies and not just “resource losses”. This is because such a focus does not capture the whole magnitude of resource leakage in Africa.

In using Foreign Direct Investments (FDIs) as an instrument and means by which Africa loses resources it was revealed that the expectations of FDIs in Africa have pushed most African countries to give generous concessions to foreign companies with the assumption that FDIs will help create wealth and lift millions out of poverty and develop African economies. This is done through rules, in most cases approved by legislative assemblies that legitimize the earnings of corporations. Today, in Africa and many parts of the world corporations wield enormous power over many states. Though the earning is 'legitimate' it is made possible by over- liberalized rules, which provide an avenue for accumulation and repatriation of profits. The fact that no country has ever developed through FDI seems to be lost on most African countries. In most cases, the developmental impacts of FDIs are high when there is a strong domestic investment component which foreign corporations complement. Currently, FDI contributes more to perpetuate Africa's role in the global division of labor as producers of primary commodities and help keep Africa subservient to the needs of the economic development of industrialized countries. So Africa's fetish about FDIs has to be reversed if it wants to minimize or control IFFs.

One other issue of concern was the financialisation of commodities as a systemic approach through which resources are drained from Africa. Thus instead of the financial sector playing its intermediation role in the productive sectors of the economies it has become a master. The privatization of the financial sector, capital account liberalization - abolition of forex controls, other forms of public regulations all introduced to promote interests of finance sector players-was not to structurally transform the continent. The most dominant financial institutions today in Africa are thus foreign ones with development banks disappearing or becoming rare on the continent. This has been made possible because of the notion that foreign capital and its owners would bring good regulation and therefore achieve a stable and reliable financial system. But this has turned out to be a means of draining resources out of Africa.

Moreso financialization is thriving in Africa based on Africa's resources, production, and surplus among others through trade agreements. Deregulation as contained in Free Trade Agreements (FTAs) on financial services sets limits on regulation and capital controls. For instance one of the rules on the General Agreement on Trade in Services (GATS), and repeated in the Economic Partnership Agreement (EPA) especially in the CARIFORUM EEPA and other FTAs states that parties should not limit the amount of foreign investors in their financial sector. Institutionalization of protection of investors through trade and investment agreements is rampant in Africa.

In order to stem illicit financial flows the role of the state must go beyond the regulatory function and the governance dimensions into active participation in the generation of economic surpluses in Africa. The state function cannot be reduced to regulations and monitoring the behavior of the corporations operating in Africa. This is because no country has achieved marketled development. Development is a political process propelled by nationalism. Hence the market cannot be an alternative to the state. The weakness of the African states should rather be fixed. Limiting the role of the state to the behavior of rules or good governance checklist is anti-developmental. To fix the state, citizens must be empowered to recapture the state from particular interest on one hand; and critical engagement with national governments.

By Sylvester Bagooro. Sylvester Bagooro is Programme Officer, Third World Network-Africa.

Source: African Agenda vol.18.1, Third World Network.