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Africa/Global: Capital Flows in Context

AfricaFocus Bulletin
June 2, 2015 (150602)
(Reposted from sources cited below)

Editor's Note

"The dominant policy perspectives on illicit financial flows and Africa's development tend to focus on the unethical, criminal, corrupt and regulatory dimensions of illicit financial flows. Even though these are a legitimate focus, their treatment fails to deal with the structural and systematic dimensions of IFFs that make it easy for the draining of resources from Africa. " Third World Network-Africa

"Tax justice," in the sense of "corporations and wealthy individuals paying their fair share of taxes," cannot of course fully "end inequality," as the headline to this document might be taken to imply. But there is no doubt that it is an essential component of any progressive agenda for checking inequality and promoting basic economic and social rights for all.

This sets a broader context for the phenomenon of "illicit financial flows," which has rightly gained increasing prominence in debates about African development, most recently through the release and endorsement of the Mbeki report by the African Union in February this year (http://www.africafocus.org/docs15/iff1502.php). If these flows, defined by the Mbeki report and by Global Financial Integrity as funds that are illegally earned, transferred, or used, were to be available in Africa, and taxed for development, this would be a massive contribution to progress for the continent.

Civil society organizations in Africa and around the world, however, point out that an exclusive focus on these clearly illegal transfers must be put in the broader context of other mechanisms which may be technically legal but illicit in the sense of illegitimate and contrary to social justice. Likewise, the borderline between "tax evasion" (illegal) and "tax avoidance" (legal but often illegitimate) is constantly changing as lawyers, accountants, and politicians collaborate in changing laws and their interpretations to the benefit of the rich and powerful.

This AfricaFocus Bulletin includes several background documents contextualizing "illicit financial flows," one an overview on Financing for Development from the Trade Union Development Cooperation Network, and two others from Third World Network-Africa, stressing the need to put the Mbeki report's concept of "illicit financial flows" conceived narrowly as those explicitly violating the law into a broader context of other capital flight that may be legal but equally damaging and illegitimate.

Another AfricaFocus Bulletin, sent out by email and available on the web at http://www.africafocus.org/docs15/tax1506a.php, contains an overview statement from the World Social Forum outlining the need for tax justice for development and social justice in both the Global North and the Global South.

For previous AfricaFocus Bulletins on tax justice, illicit financial flows, and related topics, visit
http://www.africafocus.org/intro-iff.php

++++++++++++++++++++++end editor's note+++++++++++++++++

Trade Union position on Financing for Development (FfD)

Trade Union Development Cooperation Network

April 8, 2015

2-page summary below

Full version: http://www.ituc-csi.org/TUs-position-FfD

Financing for Development, the MDGs and Inequality

The FfD agenda is an important reference point for discussions on development finance, and serves as a unique space where governments, in particular from the South, are able to debate important issues like trade and foreign direct investment as well as systemic issues like the international financial architecture and financial regulation. These are the global economic issues that were absent in the origin and overall framework of the Millennium Development Goals and remain piecemeal in the proposed Sustainable Development Goals (SDGs) framework.

The MDGs have been able to mobilise the international community behind agreed goals and targets without giving much consideration to the enabling policy framework necessary to redress the structural causes of poverty. Between the early 1990s and mid-2000s, the economy grew substantially, especially in emerging and developing countries, but the benefits of this expansionary period were unevenly shared. Wage inequality is a key factor in income inequality and it is striking to note that during the period 1990-2008 income distribution took place away from labour, despite an increase in employment rates globally. In contrast, the share of profits in national income increased virtually everywhere.

Decent Work and the Developmental Role of the State

Trade unions contend that the human rights based approach form the foundation of our development objectives. This means that shared prosperity creates decent work and sustainable livelihoods for all and that internationally agreed principles and conventions are respected and upheld everywhere for everyone. A new impetus to jumpstart the global economy is the adoption of an alternative paradigm that promotes fair distribution of wealth and resources, addresses growing inequality and recognizes the centrality decent work as a mechanism for employment generation, social protection, social dialogue and rights at work.

The creation of policy space and democratic ownership for developing countries is essential to counter-balance the current global trade, financial and investment flows and undertake when appropriate, counter-cyclical actions. Democratic States should be supported in their developmental role as the legitimate and accountable partner, driving innovation, incubating the creation of decent work through employment and labour market policies, instituting pro-equity tax policies, steering investments towards sustainable sectors and implementing effective redistribution policies for inclusive growth.

Trade Union Priorities for FfD

Domestic Resource Mobilisation, Inequality and the Public Sector

  • Universal provision of public services is a cornerstone to development.
  • Establish or strengthen progressive taxation regimes and improve and raise the ambition of intergovernmental cooperation to fight tax evasion and avoidance practices by multinational enterprises.
  • The country-by-country tax reporting framework for MNEs should be made public.
  • Countries should effectively meet the standard Global Forum on Transparency and Exchange of Information for Tax Purposes.
  • The UN Tax Committee of Experts should be transformed into a new intergovernmental body.
  • Transition to the formal economy will contribute highly to a stabilised income and taxation (redistribution) environment, when based on a coherent implementation of the rights based decent work agenda.
  • Minimum wage and other appropriate labour market and fair fiscal policies should be implemented. Foreign Direct Investment, International Private Finance, Business, Accountability and Decent Work
  • Private financial institutions should be made accountable and ensure transparency all along the investment chains and should mainstream internationally recognised environmental, social and governance criteria in their investment policy.
  • Ensure fair and transparent risk and reward sharing arrangements, whenever public money is used to mobilize private finance.
  • Ensure financial inclusion and financial consumer protection strategies and minimise cost of remittances of migrant workers.
  • Job-creation through private-financed investment and FDI should pursue all dimensions of the decent work agenda.
  • Enhance international cooperation to prevent mutually destructive tax competition between countries through "harmful tax practices".
  • Governments should protect people’s right to universal and affordable public services and invest in public sector capacities and ensure fair risk and reward sharing arrangements, whenever public money is used to mobilize (long term) private finance. Delivering Effective and Innovative Development Cooperation
  • Allocate the 0.7% GNI for ODA and .15-.2% support for LDCs, through time bound mandatory commitments.
  • Progress on aid effectiveness commitments needs to be ramped up.
  • The aid effectiveness frameworks should be empowered through the legitimate UN framework.
  • ODA should focus on poverty reduction, be untied, and addressing essential sustainable development areas.
  • Public policy frameworks should address the risks of new aid modalities.
  • Effective regulation of the financial system and introducing a global Financial Transaction Tax (FTT) are prerequisites for enhancing sustainable developmental impact of international public finance.

Trade, Growth and the Modern Economy

  • Multinational enterprises are responsible to guarantee respect of core labour standards, including women's rights, and environmental integrity throughout their supply chains. * Legally binding instruments should be developed so as to hold multinational enterprises accountable for shortcomings along their supply chains.
  • The current WTO negotiating round and the post-Bali working programme should deliver the mandate of the Doha Development Agenda.
  • Developing countries should enjoy ample policy space in all trade agreements, including on the multilateral level.
  • Domestic firms and workers should be entitled fair shares of the gains from trade and domestic trade policies should be enhanced and protected.
  • Developing countries must not be bound to trade or aid packages designed to suit the needs of the developed world.

Technology and Innovation for Sustainable Development

  • The FfD agenda will need to consider measures to promote, facilitate and finance access to and the development, transfer and diffusion of environmentally sound technologies and corresponding know-how to developing countries, on concessional and preferential terms, as mutually agreed (Rio+20).

External Debt

  • Monterrey and Doha commitments for establishing a legitimate international debt workout mechanism should be implemented taking advantage of the recent UNGA resolution on the matter.

A Global System for Social Justice

  • A new and inclusive global economic architecture should be worked out accompanied by the creation of a UN Economic and Social Security Council.
  • The structural reform of the international financial and trade systems must include full integration of fundamental human rights, core labour standards, and decent work, and mechanisms to ensure compliance.

CSOs call for broadening of concept of illicit financial flows

African civil society groups have called for the broadening of the agenda on the outflow of capital from Africa to not only include illicit but licit means as well, writes Sylvester Bagooro*.

Third World Network-Africa, "Illicit Flows: Beyond the Mbeki Report"

African Agenda, V. 18, No. 1
(http://twnafrica.org/Agenda%2018.1.pdf)

* Sylvester Bagooro is Programme Officer, Third World NetworkAfrica.

The story of Africa in relation to illicit financial flows (IFFs) is a familiar one. It has assumed a dominant position in policy discourses both on the African Continent and beyond. In Africa it has necessitated the setting up of an African Union Commission High Level Panel (HLP) on IFFs, whose report was launched at the 24th Session of the African Union Heads of State' Summit held in Addis Ababa, Ethiopia from 30-31 January 2015.

Africa is a net exporter of capital, with the United Nations Economic Commission for Africa (UNECA) estimating Africa's net financial outflow between the years 1970 and 2008 at around 800 billion US dollars. The last decade has witnessed an exponential acceleration of illicit financial outflows from Africa. From a relatively modest figure of about 12.5 billion US dollars in 2002, illicit outflows rose to 68.1 billion US dol lars in 2009 and have averaged over 50 bil lion US dollars over the period. Thus, the seemingly explosion of debate on IFFs and Africa's development by different actors and at various levels of policy discussions is understandable.

But the debate is not without conceptual weakness and confusion. The dominant policy perspectives on illicit financial flows and Africa's development tend to focus on the unethical, criminal, corrupt and regulatory dimensions of illicit financial flows. Even though these are legitimate focus, their treatment fails to deal with the structural and systematic dimensions of IFFs that make it easy for the draining of resources from Africa.

It was against this background that TWN-Africa convened a 3-day Africa-wide meeting in Accra, Ghana, from the 10-12th of November 2014 with the main objective of broadening and deepening the conception of IFFs and Africa's development trans- formation. The meeting brought together participants from academia, civil society organisations, the media and women groups for discussions on IFFs and structural transformation of Africa's economies. In laying out the main issues for the conference, Dr Yao Graham, Coordinator of TWN-Africa, called for the discussions to go beyond illegality, corruption and governance and to focus on how economic surpluses are generated in Africa, the dominant players involved in the process of generation and the distribution of the surplus.

Hence the meeting discussed a wide range of issues such as finance and the financial systems and architecture, taxation, foreign direct investment (FDI), the extractive sector and the role of the state.

The issue of illicit financial flows it became clear was only the tip of the iceberg and is a manifestation of an economic system that privileges foreign capital and corporations to the neglect of the interests of majority of Africans and domestic capital. The debate must thus be broadened to include structural drivers within African economies and not just "resource losses". This is because such a focus does not capture the whole magnitude of resource leakage in Africa.

In using Foreign Direct Investments (FDIs) as an instrument and means by which Africa loses resources it was revealed that the expectations of FDIs in Africa have pushed most African countries to give generous concessions to foreign companies with the assumption that FDIs will help create wealth and lift millions out of poverty and develop African economies. This is done through rules, in most cases approved by legislative assemblies that legitimize the earnings of corporations. Today, in Africa and many parts of the world corporations wield enormous power over many states. Though the earning is 'legitimate' it is made possible by over-liberalized rules, which provide an avenue for accumulation and repatriation of profits. The fact that no country has ever developed through FDI seems to be lost on most African countries. In most cases, the developmental impacts of FDIs are high when there is a strong domestic investment component which foreign corporations complement. Currently, FDI contributes more to perpetuate Africa's role in the global division of labor as producers of primary commodities and help keep Africa subservient to the needs of the economic development of industrialized countries. So Africa's fetish about FDIs has to be reversed if it wants to minimize or control IFFs.

One other issue of concern was the financialisation of commodities as a systemic approach through which resources are drained from Africa. Thus instead of the financial sector playing its intermediation role in the productive sectors of the economies it has become a master. The privatization of the financial sector, capital account liberalization - abolition of forex controls, other forms of public regulations all introduced to promote interests of finance sector players - was not to structurally transform the continent. The most dominant financial institutions today in Africa are thus foreign ones with development banks disappearing or becoming rare on the continent. This has been made possible because of the notion that foreign capital and its owners would bring good regulation and therefore achieve a stable and reliable financial system. But this has turned out to be a means of draining resources out of Africa.

More so financialization is thriving in Africa based on Africa's resources, production, and surplus among others through trade agreements. Deregulation as contained in Free Trade Agreements (FTAs) on financial services sets limits on regulation and capital controls. For instance one of the rules on the General Agreement on Trade in Services (GATS), and repeated in the Economic Partnership Agreement (EPA) especially in the CARIFORUM EPA and other FTAs states that parties should not limit the amount of foreign investors in their financial sector. Institutionalization of protection of investors through trade and investment agreements is rampant in Africa.

In order to stem illicit financial flows the role of the state must go beyond the regulatory function and the governance dimensions into active participation in the generation of economic surpluses in Africa. The state function cannot be reduced to regulations and monitoring the behavior of the corporations operating in Africa. This is because no country has achieved market- led development. Development is a political process propelled by nationalism. Hence the market cannot be an alternative to the state. The weakness of the African states should rather be fixed. Limiting the role of the state to the behavior of rules or good governance checklist is anti-developmental. To fix the state, citizens must be empowered to recapture the state from particular interest on one hand; and critical engagement with national governments.


What the Mbeki Panel Says

Third World Network-Africa, "Illicit Flows: Beyond the Mbeki Report"

African Agenda, V. 18, No. 1
(http://twnafrica.org/Agenda%2018.1.pdf)

Set up by the Joint African Union and United Nations Economic Commission for Africa Conference of African ministers of Finance Planning and Economic Development, in February, 2012, the High Level Panel on Illicit Financial Flows from Africa was among others to ensure 'Africa's accelerated and sustained development, relying as much as possible on its own resources.' It became known as the Mbeki Panel after its chair former South African President Thabo Mbeki.

In the foreword to its report presented in January, Thabo Mbeki states that in their work, 'it became clear that Africa was a net creditor to the rest of the world, even though, despite the inflow of official development assistance, the continent had suffered and was continuing to suffer from a crisis of insufficient resources for development.'

This assertion is based on findings by the Panel that at least $50 billion ( a 2010 study by Kar and Cartwright - Smith says Africa has lost over $1 trillion in illicit flows in the last 50 years) is lost by Africa annually 'through illicit financial outflows' and a timely intervention to stem this fleecing of Africa will ensure according to the report that, 'these development resources remain within the continent'. The Panel acknowledges that it did not include capital flight out of the continent even though it could contribute a lot to the diminishing of resources on the continent because it could be 'entirely licit'. According to the Panel, 'to escape 'complicated explanations of what qualifies as IFFs and debates' it decided not to include capital flight which may be investors' rational response to 'economic and political risk'.

The Panel's work was thus based on the need to:

i. Develop a realistic and accurate assessment of the volumes and sources of these outflows

ii. Gain concrete understanding of how these outflows occur in Africa, based on case studies of a sample of African countries and

iii. Ensure that we make specific recommendations of practical, realistic, short-to medium term actions that should be taken both by Africa and by the rest of the world to effectively confront what is in fact a global challenge.

Six African countries were selected based on regional representation, importance of extractive sector in their economies and post-conflict countries. Thus, Algeria, The DRC, Kenya, Liberia, Mozambique and Nigeria were selected as case studies. In the end it did not prove a bad selection as the countries did not only fit the bill for but also provided eye-openers to long-assumed situations. As a kind of control measure, Mauritius and South Africa were also thrown into the bargain to as it were 'gain an understanding of how their institutions and processes are geared to mitigate illicit financial outflows'.

In a session titled 'Main messages of the Report', the Panel says the 'IFFs are not only an African problem but are indeed a matter of global governance that calls for a wide range of actions, including at the level of the global finan cial architecture.' It also contends that 'successful com- bating of IFFs will generate positive impacts for the gov ernance landscape of Africa, resulting in sustainable improvement and enhancements for the local business and private sector development.' The report's definition of IFFs and how it manifests itself also takes a chunk of the session on 'Main messages'. Those resulting from commercial activities include hiding wealth, tax evasion, dodging customs duties and domestic levies. Others are transfer pricing, trade mispricing, misinvoicing of services and intangibles, unequal contracts and illegal export of foreign exchange. Criminal activities aimed at keeping transactions away from authorities are another major conduit of IFFs. These include trafficking of people, drugs and arms, smuggling, financial fraud, money laundering, stock market manipulation and outright forgery among others. The report acknowledges the challenge involved in estimating the IFFs as they are 'mostly hidden and therefore difficult to track' but in doing so it nevertheless 'felt that there was enough scope to track IFFs based on existing work and on discrepancies in economic transactions recorded between Africa and the rest of the world.'

The existence of the IFFs, according to the report can be traced to a number of 'Drivers and enablers' underpinned by 'push and pull factors'. Chief among which is the 'desire to hide illicit wealth'. This is helped by poor governance, weak regulatory structures, double taxation agreements, tax incentives, financial secrecy and or tax havens. Having identified these, the report expresses its alarm that the IFFs from Africa are not only large but 'increasing' across the three major categories mainly, 'commercial, criminal and corrupt activities'. At the heart of the fight against IFFs must be a political resolve to tame it, need for transparency and closer monitoring of commercial routes of illicit flows. African countries must also critically look at their over-dependence on the natural resource extraction sector because it has proven to be one of the main vectors of IFFs through 'transfer pricing, secret and poorly negotiated contracts, overly generous tax incentives and underinvoicing'.

The services sector, a growing area in Africa's economies is another area prone to IFFs because of the challenges in measuring its contribution as well as its digitized form and 'novel and abstruse ways'. The 'digital revolution' that has led to 'speedier transfer of money' and data general ly has led to an increased vulnerability of African countries to IFFs as they are not yet technologically and human resource-wise ready for this radical technological advancement. Even if they are they are yet to match the speed with which the changes take place. For all these and others African countries must be cautious in dealing with foreign transactions which invariably lead to the outflow of resources from the continent.

In conclusion, the Panel sees its work as a 'contribution to addressing the complex issue of the illicit outflows of capital from Africa'. Recognising that it is a global issue that requires the involvement of other actors outside of Africa for instance the UN system and individual developed countries, the Panel nevertheless says,

'The sources of IFFs are from within the continent, and the fundamental responsibility for eliminating the sources rests with the governments of African states. Therefore the Panel calls for the African Union to take leadership in ensuring that Africa takes the necessary measures to curtail and indeed eliminate all avenues for IFFs.'


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to subscribe or unsubscribe to the bulletin, or to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org


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