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A money changer counts banknotes in Monrovia, Liberia September 21, 2018. REUTERS/Derick Snyder
Africa in Focus

Figures of the week: Deterring capital flight can help finance African development priorities

From 2000 to 2015, roughly $836 billion in capital left the African continent, according to a recent report by the United Nations Conference on Trade and Development (UNCTAD). This so-called “capital flight” occurs along legal pathways like remittances and other transfers or via illegal means like money laundering or misinvoicing. Capital flight is particularly prolific in Africa, so much so that it has rendered the continent a net creditor to the world. At the same time, money leaving the continent decreases the taxable revenue collected by the home country and makes it more difficult for the private sector to meet its financing needs. Curtailing this capital flight in its many forms could open up resources for spending on human development priorities like education and health.

Figure 1. Capital flight and revenue loss from tax avoidance by African region

Figure 1. Capital flight and revenue loss from tax avoidance by African region

Source: UNCTAD (2020), “Tackling Illicit Financial Flows for Sustainable Development in Africa”

While a large share of capital flight occurs legally, it also can be illegal in nature. The authors estimate that between 34 and 59 percent of the capital flight comes from trade misinvoicing, or deliberately misreporting the value, volume, or commodity traded. In the report, the authors estimate the extent of misinvoicing by comparing the reported value of the goods exported from one country to the reported value of the corresponding imports of another country. While, in theory, these values should be the same, in practice there are often small differences, as exporting firms incur costs of shipping and insurance when exporting their merchandise. At the same time, large positive trade gaps—the difference between reported imports in the destination country and reported exports in the origin country—could be a sign of export underinvoicing, or the underreporting of the value of goods exported. Export underinvoicing is a major source of illicit financial flows in Africa, especially for high-value low-weight commodities like gold, and typically done to evade taxes.

The report reveals that countries can have positive or negative trade gaps even within the continent. The intra-African trade gap (expressed as a percentage of total export value) varies widely by country (Figure 2). At nearly 50 percent, Mali has the largest negative trade gap (that is, reported exports are higher than reported imports) of any country studied, which could be the result of companies overstating their invoices to qualify for subsidies or tax breaks according to the authors. Indeed, the next highest country, Ghana, has a negative trade gap less than half that of Mali. On the flip side, several countries have large positive trade gaps, which suggests that there may be export underinvoicing to reduce their tax burden. Benin and Togo both have negative trade gaps exceeding 30 percent.

Figure 2. Intra-African trade gap, 2000-2018

Figure 2. Intra-African trade gap, 2000-2018

Source: UNCTAD (2020), “Tackling Illicit Financial Flows for Sustainable Development in Africa”

Excessive capital leaving the country, whether illicit or otherwise, has harmful social and economic consequences for the country of origin. Curtailing misinvoicing and incentivizing more illiquid forms of investment like FDI could free up fiscal space to finance spending toward important human development priorities, including the Sustainable Development Goals. Importantly, the report notes that the countries with high levels of capital flight have historically devoted less to health care and education on a per capita basis than countries with low levels of capital flight (Figure 3).

Figure 3. Total health and education expenditure, median by level of capital flight (Africa)

Figure 3. Total health and education expenditure, median by level of capital flight (Africa)

Source: UNCTAD (2020), “Tackling Illicit Financial Flows for Sustainable Development in Africa”

For further discussion on illicit financial flows and emerging market capital flows more broadly, read “Illicit financial flows in Africa: Drivers, destinations, and policy options” or “Emerging market capital flows and U.S. monetary policy.” For further discussion on financing the Sustainable Development Goals, see “Approaches for better resource mobilization to finance Africa’s Sustainable Development Goals.”

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