African Economic Conference 2013
28-30 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
 Proceeds from commercial tax evasion supposed to
represent the bulk of IFF; about 65% of total IFF according
to Baker (2005)
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)
II.
Quantifying IFF through trade mispricing: 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 mispricing: Methodology & Results
 Between 2001 and 2010, it is estimated that USD 409
billion left Africa as IFF
II.

Quantifying IFF through trade mispricing: Methodology & Results
Cumulative IFF by African Economies, 2001-2010, USD billion
Source: Author’s calculations
II.

Quantifying IFF through trade mispricing: Methodology & Results
Cumulative IFF by destination (> USD 5 billion), 2001-2010,
USD billion
Source: Author’s calculations
II.
Quantifying IFF through trade mispricing: Methodology & Results
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
Source: Author’s calculations
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
80
70
60
50
40
30
20
10
0
-10
-20
Agriculture and food
Primary
African countries
Source: Author’s calculations
Developing countries
Industry
Developed countries
Services
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!