Multinationals bring double edged sword to continent

We often write about the increased positivity surrounding Africa as a destination for investors as well as for multinational corporations seeking avenues for growth. A just released report by Global Financial Integrity, however, lambasts multinationals for money it believes they take out illegally from Africa.

Entitled Illicit Financial Flows from Africa: Scale and Developmental Challenges, the report is adamant about the role of multinational corporations in what some call Africa’s greatest economic sabotage, because it “perpetuates Africa’s economic dependence on other regions”. It estimates that the illicit transfer of most of the $1.5tn multinationals make in Africa each year back to the developed countries, drains hard currency reserves from the continent, stimulating inflation, reducing tax collection and deepening income gaps. It adds the depletion of investments and stifling of competition caused by these illicit transfers actually undermine trade and worsen the socio-economic fabric of poor communities in Africa, leading to shorter life expectancy due to limited spending in providing social services such as health care.

The report says that since the early 1960s when multinationals entered Africa, “foreign direct investment by the multinationals could have been as high as $1.5tn a year, although most is directed towards the developed world”.

“In addition to local businesses, the most significant perpetrators of trade mispricing are multinational corporations” because of their “strong global presence and influence, which facilitate the illicit transfer of funds”, it adds, referring to the World Trade Organisation which estimates that corporations control about 60% of world trade. Others estimate that Africa lost about $854bn in illicit financial flows over the 39 year period (1970-2008); corresponding to a yearly average of about $22bn, which is a considerable amount compared to both the external debt of the continent and the official development aid received over the same period.

It records great variations between regions, countries and even between sectors of activities. “Two-thirds of the outflows was attributed to only two regions, namely West Africa and North Africa, with 38% and 28%, respectively. “Each of the other three regions (Southern, Eastern and Central Africa) registered about 10% of total Africa’s illicit financial flows”, though this was skewed by lack of data and due to the poor quality of available data. It identifies trade mispricing as the most popular way of transferring illicit capital saying “the change in amount for this type of illicit financial flows is directly related to the change in volume of trade during the period.”

Other forms of illicit commercial activities include tax avoidance and tax evasion. These activities basically shift money beyond the reach and appropriate use of domestic authorities.

As noted by the Economic Commission for Africa, the report is very refreshing in the sense that it adds a new dimension to Africa’s underdevelopment dilemma. Having identified the sources, challenges, and current policy responses to illicit financial flows from Africa, the report, more positively, proposes a series of policy options to effectively address this issue at the national, regional, and global levels. These include the creation of disincentives to trade mispricing; the development and implementation of effective capital repatriation schemes; the strengthening of regulatory frameworks and of the stolen asset recovery regime; the development of an effective regional advocacy and sensitisation strategies and; the need to support and expand specific initiatives and conventions against illicit financial flows.

The report seems to validate some of the concerns being raised by African governments of late around transparency of multinationals particularly in the resource space when it comes to revenues. Hopefully these types of studies and the measures suggested above will lead to a greater amount of profits staying on the continent with the concomitant benefits to its economies and its people.

Imara is an investment banking and asset management group renowned for its knowledge of African markets.