ADDIS ABABA, Ethiopia – Across the world, countries that are in the most dire need of funding and investment are losing hundreds of billions of dollars every year to illicit outflows of capital, according to a recent report -- and sub-Saharan Africa, the most poverty-stricken region on earth, is losing the most as a percentage of GDP.
The world's developing countries lost a total of $946.7 billion to corruption, trade misinvoicing and tax evasion in 2011, according to the research. And to make matters worse, the amount that gets spirited away is growing larger with each passing year. Money lost to corruption in developing nations was 13.7 percent greater in 2011 than was lost the year before; illicit outflows totaled $832.4 billion in 2010. The total figures are staggering: between 2002 and 2011, developing countries lost about $5.9 trillion to illicit outflows.
The report, “Illicit Outflows from Developing Countries 2002-2011,” was released this month by Global Financial Integrity, a research and advocacy organization based in Washington, D.C. “Illicit flows are all unrecorded private financial outflows involving capital that is illegally earned, transferred, or utilized, generally used by residents to accumulate foreign assets in contravention of applicable capital controls and regulatory frameworks,” explains the report, adding that this exodus of funds constitutes “a major source of domestic resource leakage, which drains foreign exchange, reduces tax collections, restricts foreign investments, and worsens poverty in the poorest developing countries.”
In other words, those hundreds of billions of dollars could have been used to fund anything from food security to health care to education. Instead they have been squandered in shady trade deals, illegal tax havens and crooked investments. Trade misinvoicing was the biggest driver of losses, accounting for 79.7 percent of illicit outflows.
In terms of pure volume, the countries with the biggest illicit outflows in 2011 are those with relatively large economies; Russia tops the list with $191.14 billion, followed by China with $151.35 billion, and India with $84.93 billion. In Africa, the continent's largest economy, South Africa, was the worst offender with $23.73 billion in losses. Next came oil-rich Nigeria, where corruption cost $12.89 billion.
In terms of GDP percentages, sub-Saharan Africa is faring the worst. Countries there lost an average 5.7 percent of total GDP each year from 2002 to 2011, while the global average was just 4 percent.
Because sub-Saharan African economies are relatively small, it is still the region with the lowest total value of illicit outflows from 2002 to 2011: a cumulative $419.1 billion, which is just 7.7 percent of the total amount lost to all developing countries during the same time period. But the growth of that loss on a year-by-year basis is among the world's highest at 20.2 percent, second only to the Middle East and North Africa, where an average 31.5 percent annual increase in illegal outflow is largely due to rising oil prices.
These findings have grave implications for sub-Saharan Africa, where 48.5 percent of the population lived on less than $1.25 a day in 2010. The region's massive losses mean that less funds are available for sorely needed investments in infrastructure and development. For that reason, says the report, corruption, tax evasion and shady trading practices have “an outsized impact on the continent.”
GFI's findings are important not only for developing countries, but for aid donors as well. The amount lost to illicit outflows in 2011 amounts to an incredible 10 times the amount that came in as official development assistance. The report recommends that developed and developing countries work together to improve transparency and strengthen financial regulatory systems, which would help poorer nations make better use of their own assets in order to improve the lives of their citizens. The way forward will involve measures to verify ownership of trusts and shell companies, reforms to customs protocols in order to discourage trade misinvoicing, initiatives to digitize exchanges of tax information across borders, and efforts to hold money-launderers more accountable in courts of law.
Unless these changes happen -- and fast-- the world's poorest countries will continue to lose huge amounts of funds that could have been used for much-needed development.
“Poor countries hemorrhaged nearly a trillion dollars from their economies in 2011 that could have been invested in local businesses, health care, education, or infrastructure,” said Brian LeBlanc, a GFI economist and co-author of the report. “This is nearly a trillion dollars that could have been used to help pull people out of poverty and save lives. Without concrete action, the drain on the developing world is only going to grow larger.”