African Economic Conference 2013 28-30 October Johannesburg, South Africa
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Transcript of African Economic Conference 2013 28-30 October Johannesburg, South Africa
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!