Fight Against Poverty Being Undermined By Capital Flight Economics Essay

Capital flight in Africa has become an increasing job as the continent has lost more than ‘?1tn… over the last four decennaries ‘ ( Guardian, Accessed 23rd November ) . Although, surprisingly capital flight has managed to maneuver clear of major spotlight even though it had been a outstanding issue in the yesteryear.

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“ The disregard of capital flight in current arguments is striking given the attending it received at the 1944 Bretton Woods conference, ( which ) is said to hold laid the foundations for today ‘s fiscal order and many reformists today talk of the demand for a ‘renewed Bretton Woods vision ‘ The Bretton Woods architects saw the ordinance of capital flight as a cardinal pillar of the international fiscal order they hoped to build. “ A ( Epstein: 2005: 289 )

Even though Harry Dexter and John Maynard Keynes had seen a different menace from capital flight at the clip ( The illicit flight of capital from Eastern European states to the US ) its menace to developing states in general is enormous.

This essay will reason that capital flight is sabotaging the battle against poorness ; it will make this by analyzing the phenomena of capital flight in African provinces utilizing Nigeria as a instance survey. Research has traditionally focused on capital flows between African provinces and developed provinces. However, the turning importance of illicit capital flight within Africa is besides an of import factor in understanding why Africa is still the poorest continent in the universe. Harmonizing to planetary fiscal unity ( GFI ) which is a US based research organic structure,

‘So long as illicit capital continues to haemorrhage out of hapless African states over the long term at a rapid gait, attempts to cut down poorness and hike economic growing will be thwarted as income distribution becomes of all time more skewed taking to economic and political instability. ‘ ( Kar and Kartwright-Smith, 2010 )

In order to successfully analyze this phenomena this essay will get down by sketching the magnitude of capital flight and distinguish between licit and illicit signifiers of capital flight within Africa. This essay will so speak about the argument environing capital flights effects on poorness in Africa. Third, this essay will foreground the consequence that Ghana ‘s quest for an offshore banking service in Accra will hold on illicit capital flight from the part and Africa in general. This essay will so look into capital flight in the oil industry in Nigeria. This essay will reason by proposing how the province can travel about undertaking illicit capital flight in this globalising epoch by looking at the effects of debt and assistance.

Distinguishing between licit and illicit capital flight

It is of import to specify capital flight as a clear definition helps in distinguish between its licit signifier ( which has become a norm in the international fiscal system as a consequence of globalization ) and its illicit signifier ( which has dire effects on African economic systems, accordingly cut downing the sum of money that could be spent on contending poorness ) . Capital flight is a contested term due to its vagueness in distinguishing between licit and illicit capital flows out of a state. The usage of the term ‘flight ‘ suggests that the money is being moved illicitly, but this is non accurate as there are capital flows that are legal. These legal minutess would normally dwell of just payment in the commercial minutess, to the full paid revenue enhancements in the state of beginning and insuring that there are accurate studies, recordings and certification for these flows. On the other manus we have illicit capital flight which normally consists of the undermentioned features: the money has left the state without any revenue enhancement being paid, hence, being lost in the system. As revenue enhancement equivocation is illegal in many states capital flight can be classed as money laundering.

Capital flight when taken at face value means the motion of capital from state A to state B. This essay will be taking the Department for International Development ‘s ( DFID ) definition of capital flight, which calls it ‘that portion of the escape of occupant capital which is motivated by economic and political uncertainness. ‘ ( 2002: 4 ) . This definition stresses that there is no demand for there to be flight factor motive for escape of capital and that capital flight does non hold to be a existent resource transportation. The other definitions that will be discussed below nevertheless, are either excessively wide or excessively restrictive of capital flight. Some economic experts who disagree with the definition of capital flight which this essay has adopted are Tornell and Velasco, who for illustration ; define capital flight as being when ‘productive resources flow from hapless to rich states ‘ . Others define capital flight as being an ‘illegal dealing which occurs when bargainers keep capital abroad by the disproof of trade paperss ‘ ( 1992: 1209 ) . This definition of capital flight is really restrictive as it confines capital flight to merely merchandise ; even though capital flight can be ascribed to other channels such as smuggling goods illicitly ( Gold, old-timers and Gems ) .

Capital flights effects on poorness in Africa

Africa has been the posting kid of the universe, harmonizing to William Easterly having ‘ $ 450 billion [ in ] foreign assistance… over the past four decennaries ( Times Accessed thirtieth November ) ‘ . This money has non brought Africa much closer in developing into the success narrative that so many thought it would be in the 1960 ‘s due to its abundant resources. However, the argument on development is switching. Many bookmans today argue that a major hurdle in cut downing poorness in Africa is capital flight. Take for illustration Hippolyte Fofack and Leonce Ndikumana who argue that the ‘ … repatriation of capital flight would assist launch African states on a way of higher economic growing, and finally increase the gait of poorness decrease ( 2010: 15 ) . Whereas, some economic experts argue that capital flight may so be good for Africa. ‘The much-denigrated capital flight out of Africa may good hold been a rational response to low returns at place ( Devajaran, Easterly and Pack, 1999: 15 ) . ‘ However, they do non take into history that the private benefits of the person are much less than the benefits of these citizens puting in their ain economic system. table 1 below from the ( GFI ) study shows that over the 39 twelvemonth span of the research Africa lost $ 854 billion to capital flight. It goes on to state that this would non merely wipe out the entire $ 250 billion external debt of the part but it would besides go forth $ 600 billion for ‘poverty relief and economic growing ‘ Kar and Kartwright-Smith, 2010: 10. With talk from the international community and G8 in peculiar on duplicating the sum of assistance fillet this capital flight would bring forth approximately the same sum as duplicating assistance. This essay is non reasoning that duplicating of assistance will bring around poorness in Africa ; nevertheless, it is reasoning that by clawing back some of Africa ‘s legitimate money, from these backchannels, would give hope for Africa.

Table 1. Africa: Illicit Financial Flows, 1970-2008

( In 1000000s of U.S. Dollars )

( Kar and Kartwright-Smith, 2010: 10 )

Capital flight in the oil industry in Nigeria

The crude oil industry is the largest subscriber to the Nigerian economic system as a consequence of its position as the most of import industry in the West African province. The Administration of the Petroleum Exporting Countries ( OPEC ) website describes the oil sector in Nigeria as supplying ’20 per cent of gross domestic merchandise, 95 per cent of foreign exchange net incomes, and about 65 per cent of budgetary grosss. ( OPEC, Accessed 02nd December ) ‘ With a part of this size to the Nigerian economic system, any capital flight from the oil sector would hold a immense impact on Nigeria. Therefore, capital flight is clearly shown here to be sabotaging the battle to eliminate poorness in Africa as it is pull offing to take off much needed resources from the Nigerian economic system. Charles Soludo uses a rhetorical inquiry to foreground the extent to which capital flight is impacting Nigeria. He says, ‘ … what happened to the about US $ 300 billion in oil grosss in the last three decennaries. ‘ He so goes on to reason that ‘we know that much of it was wasted and stolen, with the mean Nigerian acquiring impoverished ( Okonjo-Iweala and Soludo, 2003: 45 ) . ‘ Louis Iba goes farther into this analysis by saying that

‘ $ 20billion is said to be invested yearly in the industry by the Federal Government as hard currency calls in assorted joint venture trades with the International Oil Companies ( IOCs ) , but about 90 per cent of this sum… moves out of the state as capital flight… ‘ ( Sunnews, Accessed 02nd December )

These estimations show that there is an tremendous sum of capital flight happening in the oil sector within Nigeria. With Nigeria having in 2006 $ 11,434 million in official development aid ( ODA ) or 26 % of the entire ODA to Africa ( OECD, 2008: 42 ) this $ 18 billion which leaves Nigeria as capital flight would significantly outweigh the ODA the state receives. However, as Nigeria is losing this sum of money due to capital flight the conflict against poorness is being undermined drastically as the over 150 million citizens would be losing out on steps that could be implemented to better their criterions of life.

Methods used by the oil industry in capital flight

The manner that the oil companies manage to reassign money illegitimately out of Nigeria is through false invoicing of their trade minutess. In this instance of capital flight the oil companies under bill in order to obtain foreign exchange which is finally out of the control of foreign exchange governments. This money is so normally placed in a bank and so exchanged at the local cardinal bank for the official exchange rate. This so means that the oil companies end up paying less revenue enhancement so they would otherwise make ( Ajayi, 1992: 21 ; Christian Aid, 2009: 5 ) . The fact that these transportations are illicit agencies that there can non be any statistics which is wholly accurate, although, the estimations are normally seen as being generous. One such estimation has been made by Christian Aid who argue that in 2007 ‘In Nigeria, ?501m was lost from its burgeoning mineral fuel and oil industry. ‘

The consequence that Ghana ‘s quest for an offshore banking service in Accra can hold on illicit capital flight from Africa

An unwanted recent happening for poorness decrease in Africa has been the constitution of an offshore banking service in Ghana. ‘Although its beginnings can be traced back for a really long clip, the precise definition of ‘offshore ‘ is elusive ( Cameron and Palan, 2004: 91 ) . ‘ However, offshore banking can be defined by its minimum ordinance and revenue enhancement. The creative activity of this offshore banking service is a ‘ … move that could see immense mineral wealth in West Africa vanish into it from destitute states ‘ caissons… ( Guardian, Accessed December 3rd ) . ‘ This is a recent phenomena in which can take to major capital flight from the oil rich states in the part such as Nigeria. Consequently, damaging the battle against poorness by ‘ … supplying a major conduit for illicit fiscal flows throughout the part ( Christensen, 2009: 17 ) . ‘ This move to do Ghana the fiscal hub of West Africa has surely opened the doors for increased capital flight in the part, nevertheless, alternatively of the money holding to travel to topographic points such as Europe it can now be deposited in Bankss in Ghana with all hint of the money disappearing at that place. This may be pulling capital flight from other states into Ghana via Barclays ; nevertheless, it is take awaying from the economic systems of the wider part, hence, impeding the attempts to eliminate poorness. Wilson Prichard who is a research worker at the institute of development surveies gives a thorough review of the new offshore banking service,

‘Aside from the general societal costs associated with the operation of revenue enhancement oasiss globally, in the absence of a really strong regulative model and really strong criterions of transparence there ‘s a peculiarly high hazard that a revenue enhancement oasis in West Africa, which is place to major oil wealth and high degrees of corruptness, could ease large-scale corruptness and revenue enhancement equivocation, and present a correspondingly big hazard to good administration and economic growing in the part. ‘ ( Guardian, Accessed 12th December )

The altering nature of the province and how it can travel about undertaking illicit capital flight in this epoch of globalization

There is a turning statement that globalization has lead to provinces going more openly connected to each other ; hence, ensuing in the easiness of capital flow from one province to another through the many transnational companies ( MNC ‘s ) . This statement is chiefly supported by hyper globalization theoreticians. Ohmae argues that this is an epoch of rapid globalisation as provinces are going borderless and interconnected for the first clip in history ( 1996, p. 79 ) . This statement is founded on the belief that there has been a major addition in international trade, with major capital motion and the of all time increasing importance of establishments. These theoreticians would reason that the state province has become disused. This essay will nevertheless, take a transformationalist stance on globalisation by reasoning that globalisation has non come and gone but it is under manner ( Held D. McGrew A, Spechler, 2000, p. 630 ) and that is why African provinces are still holding jobs in covering with capital flight. This supports the guess that ‘Africa integrated into planetary fiscal markets earlier and more to the full than other developing parts ( Zedillo, 2008: 45 ) . ‘ This lead to Africa haemorrhaging money out of the continent to the North due to the easiness in which money had been able to go from state to state. The province ‘s function had changed due to globalization as it had to now look attractive to investors by holding a competitory revenue enhancement rate, but it besides had to guarantee that it was able to make an economic policy with Torahs that could understate revenue enhancement equivocation by companies. Although, this is a batch harder than it sounds as today a province can non one-sidedly guarantee that revenue enhancement equivocation does non take topographic point as it has to negociate trades with states that harbour this money ( revenue enhancement oasiss ) , which are non ever willing to easy free this gross.

Another manner in which globalization is said to bring on capital flight is through its power to legalize capital escapes. This is due to the broad fiscal systems accent on the legality of licit capital flight. Singh argues that ‘international fiscal integrating has farther strengthened the procedure of capital flight from Africa ( 2005: 26 ) . ‘ Therefore, globalization has lead to a more broad international system which is suiting of capital flows, and as a consequence companies and persons have become more advanced in the ways they can dodge revenue enhancement through capital flight. The ground why it has become more accommodative is due to the belief that the free motion of capital goads economic growing. Consequently the international system is one of cat and mouse ; where provinces try and curb capital flight through Torahs and companies and persons try and bypass these Torahs through new more advanced ways.

This essay has argued that capital flight from Africa is damaging in poorness decrease ; hence, it will propose how provinces can seek to undertake this issue. Due to the ‘globalising ‘ universe in which we live in today African provinces have to reform their Torahs in order to make a feasible economic policy which drastically limits capital flight. One manner in which they could make an economic system in which minimises capital flight is by debt alleviation. Ajayi explains this well when he says that ‘The revenue enhancement duty originating from an addition in external debt can take to capital flight. [ Furthermore ] The flight of one investor leads to a rise in the possible revenue enhancement duties of the staying investors ( 225 ) . ‘ So it is basically a spiral in which capital flight leads to capital flight. Therefore, provinces can undertake capital flight by eliminating the debt load which in bend would decrease the opportunity for higher revenue enhancements ( Economic Commission for Africa, 2003: 2 ) .

Besides Paul Collier makes an interesting statement on how assistance can cut down the sum of capital flight, due to it doing ‘investment more attractive ( Collier, 2008: 123 ) . ‘ Aid has been seen as a expletive to African provinces in the recent pas by economic experts due to its correlativity with corruptness and bad administration ; nevertheless, if it decreases capital flight so certainly it may be assisting work out one of its nucleus aims, relieving poorness. The thought that aid makes foreign investing more attractive is interesting to take on and should be one which African provinces could see when seeking to cut down capital flight, nevertheless, they must see the negative side effects it can hold every bit good in order to do a rational pick.


This essay has argued that capital flight is sabotaging the battle against poorness ; it has done this by analyzing the phenomena of capital flight in African provinces utilizing Nigeria as a chief instance survey. This essay begun by sketching the magnitude of capital flight and distinguishing between licit and illicit signifiers of capital flight within Africa. This essay so talked about the argument environing capital flights effects on poorness in Africa, reasoning that capital flight is damaging to relieving poorness due to the sheer sum of money it takes off from the economic systems of these provinces. This essay thirdly highlighted the consequence that Ghana ‘s quest for an offshore banking service in Accra has on illicit capital flight in Africa. This essay so investigated capital flight in the oil industry in Nigeria. In decision it suggested how province ‘s can travel about undertaking illicit capital flight in this globalising epoch by looking at the effects of debt and assistance on capital flight.


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