Capital flight in Africa

By Tim Worstall | 20 July 2005

In a letter to the Economist this week Percy Mistry of the Oxford International Group points out that the aid we send to Africa is merely replacing a small part of that capital which is flowing out.

Moreover, aid in the recipient countries merely restores a tiny fraction of what is misappropriated from exchequers by local politicians and governments. Africa experiences capital flight of up to $90 billion a year and the external stock of capital held by Africa's political elites is $700 billion-800 billion. Along with missing billions in export earnings from oil, gas, diamonds and other minerals that are not openly accounted for, it then becomes unclear if Africa suffers from a poverty trap because of a lack of money.

These numbers are nothing to do with debt repayment by the way. In an e-mail he explained his calculations further:

...there have been five key econometric studies done to measure capital flight more precisely. The first by Collier et al comes up with a figure of about $285 billion, another an MIT study comes up with $187 billion, another for South Africa comes up with about $150 billion for that country alone, another for Nigeria comes up with $107 billion for Nigeria alone, another by ODI comes up with $185 billion or so. All these studies have been done over different time periods and cover different country samples (usually omitting Congo and Angola) and all try to be too clever by half in the way that econometricians specialise in to show their peers that their methodology is better than anyone else's. I found all the studies methodologically flawed and biased towards underestimation. Why? Because: (i) they omitted a serious analysis of BoP errors and omissions from 1970 onwards, (ii) many failed to adjust nominal dollars into equivalent recent (in the case of my figures - 2005) dollars, (iii) all focused exclusively on sub-Saharan Africa (capital flight from Morocco, Egypt, Tunisia and Libya is very large as well), (iv) all omitted the large kickbacks from infrastructure and defence supply contracts that finance a significant proportion of capital flight (e.g. the corruption element in a single water project - i.e. the Lesotho Highlands Water project was estimated to be about $300 million or around 15% of total project cost, whereas estimates for kickbacks under power and water and road/rail construction projects across SSA usually range between 25-40% of total contract cost), (v) most omitted altogether the capital flight figures from Zaire/Congo (which are probably twice as large as Nigeria's since almost everything extracted there finds its way out via capital flight) since official figures were unavailable; (vi) they also omitted capital flight figures from Angola between 1970-95 for the same reasons.

The point about emphasizing such figures is not simply to show that there is corruption in Africa. I think we knew that. Nor is it to try and call for less aid. It is rather to show the amount of money, up to $800 billion, that is owned by Africans abroad (taking into account appreciation of these assets over time as well) and that could feasibly be invested in industry in that continent. Why isn't it? The assumption must be that those who know the place best, those who rule it, do not believe that their own money would be safe being invested there. As some of the studies quoted above show wealthy Africans have a propensity to invest 40% of their net worth abroad compared to about 3% for Asians. Despite the well known fact that direct investment in Africa has better returns than that in more developed economies (as it obviously should, one would expect better returns to capital where there is a shortage of it) they prefer it to be elsewhere.

This indicates a much greater problem than the fact that it has been, in part, stolen via corruption and so on. If the locals won't invest there, why would anyone else?

This bolsters the view that we need to work more on the legal infrastructure, the basics of things like property rights, the rule of law, even, gasp, democracy, for once we have those right that flight capital should come roaring back, to the great benefit of the local economies.