#TA10 Blog Series

Looking back, Looking ahead: African Philanthropy for Socio-Economic and Political Justice in the 21st Century

Drivers of Inequality in Africa: Illicit Financial Flows (Part 1)

The second decade of the new century has come with a renewed optimism about Africa’s development, with the “Africa Rising” narrative gaining popularity. According to a 2013 issue of the Economist Magazine, the continent had 4 of the 10 fastest growing economies in the world, yet as already highlighted in previous posts, we are also paradoxically seeing an increase in poverty at the bottom of the pyramid. The paradox of high growth and high poverty – with increases in inequality across the continent – is one that has been reflected in many different countries. There are many factors that cause and sustain inequality, but this post will focus on what may be the most significant of these, Illicit Financial Flows. Africa faces a more debilitating challenge of the illicit movement of her finances out of the continent. It is estimated that approximately US$854 billion has been moved out of Africa illicitly over a 39-year period, predominantly to Western financial institutions, turning the continent into a net creditor to the world (Ndikumana and Boyce 2003, 2008). The bulk of IFFs from Africa originate from West Africa amounting to 38% of all funds illicitly flowing from the continent. Nigeria stands out as the leading source of IFFs and is estimated to have lost $218 billion dollars between 1970 and 2008.  Faster economic expansion associated with rising income levels can actually drive capital flight if growth is not accompanied by genuine economic reform and better governance (IMF, 2000). During the period of significant economic growth, Africa also saw an acceleration in illicit financial flows.  


What do We Mean by Illicit Flows?

The term Illicit Financial Flows (IFF) describes monies that are illegally earned, transferred or utilized. There are four common practices of externalizing finances illicitly:

Corruption - the proceeds of bribery and theft by government officials constituting about 3% of the global total. (However in Africa there is reason to believe that it could be higher)

Criminal - proceeds generated through drug trafficking, racketeering, counterfeiting and they constitute about 30-35% of the total

Commercial tax evasion - mainly through trade mispricing and are by the largest component- 60-65% of the global total.

Smuggling - unfortunately no economic model that relies on official data to estimate illicit financial flows can capture effectively the scope of smuggling.

There also are what may be called external investments by Africans, whereby many African investors seem to prefer foreign over domestic assets resulting in the highest share of private external assets among developing regions (Collier, Hoeffler and Pattilo, 2001). Although the choice of keeping savings outside of the continent, is not necessarily illicit it has the same effect of starving domestic markets with savings for long term investment.

The lack of strong governance and institutional capacity, accompanied by the liberalization of economies have also contributed to the ease with which surplus capital and savings have fled the continent. If Africa is to attain its projected developmental goals, it will require bold political will and leadership, as well as strong institutions in government, the private sector and civil society in order to drive a national development agenda.

Background: The Drivers of Illicit Financial Flows

Of the many factors that contribute towards the increase of illicit financial flows from Africa, the major one is the liberalisation of financial services and weak regulatory institutions in many countries. Under the Washington Consensus[1],the imperative for the free movement of capital has been identified as critical for the effective functioning of markets, and although it potentially contributed towards ease of doing business around the world there have also been unintended consequences. The first signs of the negative effects of these reforms was in the Asian crisis[2] . The speculative nature of capital and its direct link with illicit flows has already been raised by many others.

At the peak of structural adjustment, developing countries were advised against using a heavily regimented regulatory financial services inadvertently creating an enabling environment for tax avoidance. For instance, in Zambia investors bought the copper mines at rock bottom prices, but in less than ten years copper prices were on the rebound but the multi-nationals stuck to the agreements they had entered into with the Chiluba-led government. Take the example of the Konkola copper mines, whilst they earned approximately US$301m in profit in 2006/7, they allegedly only paid US$6.1million in taxes during the same period. The Zambian example unfortunately is not isolated, many countries entered into mining agreements during the period of liberalization.  The indicator of growth that dominated the discourse at the time was the number of jobs created.

Furthermore, the liberalization regime also insisted on the repatriation of profits by multinationals without restrictions from governments and their regulatory bodies. Multinationals, for instance, continued to import through their head offices, and in the process creating opportunities for over-invoicing on certain capital goods to allow the repatriation of more foreign currency. Many multi-nationals sell their products to their sister companies at prices below prevailing market value in order to lower their commitments in tax. In many instances the practices discussed were allowed or at worst overlooked during the structural adjustment days.

Structural adjustment also meant reducing the numbers in the public service and also cutting back on perks. As a result, many experts left the public service for lucrative positions within the private sector, burgeoning NGO sector and others emigrated overseas, thus heavily constraining the regulatory capacity of the bureaucracy. In a context where the private sector has become highly sophisticated in terms of exacting certain demands to remain within the country and also in ways to circumvent paying taxes the state is unable to effectively respond. These institutional weaknesses were further exacerbated by the third dimension and driver for IFF, weak politics of governance. Many of the resource rich African countries have a democracy deficit (e.g. Angola, Equatorial Guinea and Gabon) whose rent seeking political elite collude with capital and siphon resources out of the country. The lack of democracy and transparency in these regimes contributes to weakening the governance of revenues from commodities. It is also no coincidence that oil rich countries such as Nigeria with high growth rates do not have equitable development, but instead experience increasing illicit flows and growing gap in terms of incomes and lifestyles between the rich and poor.

The massive outflows of capital are on one hand, due to sub-optimal policies caused by the liberalizing agenda and weak regulatory institutions within developing countries on the other; but more importantly they find synergy in deep flaws within the global financial architecture. Illicit Financial Flows (IFFs) are neither unique no endogenous to Africa, but – as reflected in the global financial crises – they are part of a larger opaque global financial system that pivots around tax havens. Though some states (e.g. England and the USA) have identified these leakages, there is little to nothing that can be done at present to stem the financial hemorrhage in the absence of visible public outrage.

The Challenge: Africa’s Global Positioning and Illicit Financial Flows

Emerging literature does not unfortunately make an adequate connection between illicit financial flows and the liberalisation regime of the last three decades that many African countries are emerging from. Whilst Africa, for the first time, features in a more significant way in the post-economic crisis discourse as part of the missing link to global recovery processes – it is unfortunately being seen as continuing its role as supplier of critical raw materials and contributing new land area for the expansion of agriculture - the logic and values driving accumulation have not all of a sudden gone through a major transformation.  The illicit financial flows challenge forms a part of many other challenges related to Africa’s positioning within the global circuits of capital and coherent responses require a more concerted and collaborative approach amongst African government, citizens and support from international institutions. The current ‘name and shame’ approaches, through documentaries, op-eds and public platforms - whilst very important - need to be complimented by official responses at national and regional levels. Africa may be the next frontier of growth but, as already argued, economic growth without credible reforms of the international system and national processes could lead to more capital flight.

At the moment, every individual African country is focused on attracting foreign direct investment (FDI) in various productive sectors, and often will bend over backwards for it. Data has shown that over the last decade, sub-Saharan Africa has attracted the least FDI compared to other regions, and Africa as a collective is yet to develop a coherent unified and standardized approach to dealing with foreign investment. Though the newly oil rich countries such as Ghana, Uganda and Kenya potentially have more leveraging power to insist on investor guidelines and on maintaining equity in these new resource areas, these encounters are often plagued with information and capacity asymmetries. New tools such as the Africa Mining Vision are yet to be coherently integrated into the way of government’s business.


There is a need for a big picture approach to resolving the challenge of illicit financial flows, which includes reorienting global systems of accumulation to serve/ prioritize local needs. Stiglitz has already noted that pro-globalization policies have the potential of doing a lot of good, if undertaken properly and if they incorporate the characteristics of each individual country. However, if poorly designed - or if a cookie-cutter approach is followed - pro-globalization policies are likely to be costly. They will increase instability, make countries more vulnerable to external shocks, reduce growth, and increase poverty. Current FDI regimes have mostly been developed using a cookie cutter approach. There is need to revisit different investment regimes that allow for reforms and distribute power between communities, government and the investing entities beyond corporate social responsibility (CSR) approaches. African governments need to invest in improving conditions of service for the soft technical skills required for monitoring sectors susceptible to illicit flows. The African Union, through its protocol process, can also play a leading role by setting standards for FDI, movement of money out of Africa and conduct of political elites. If no reforms are undertaken, the envisaged economic growth can be a mirage and only feed the privileged few. In the next part of this blog series we will take a closer look at initiatives that have been set in motion to counter the illicit movement of financial resources out of the continent.   



[1] The term Washington Consensus was coined in 1989 by economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that constituted the “standard” reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the IMF, World Bank, and the US Treasury Department. The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy.

[2] Joseph Stiglitz (2002) in Globalisation and its Discontents has ably described how the liberalisation (or liberation) of finance led to speculative tendencies and consequently the Asian crisis of the 1990s.

Does Africa Need Philanthropy?
The Difference a Decade Makes

Get in Touch

  • Lot 4, Almadies Ngor, Dakar Sénégal
  • +221 33 869 46 86
  • +221 33 824 15 67

Twitter Feed

Due to an error, potentially a timed-out connection to Twitter, this user's tweets are unable to be displayed.

Conferences and Workshops