Trade mispricing cost Ethiopia $8.3 bn in two decades

A United Nations Development Program (UNDP)commissioned report from Global Financial Integrity (GFI) on illicit financial flows from the Least Developed Countries (LDCs) was presented for discussion on May 12/2011 at the United Nations IV Conference on Least Developed Countries that was held at Istanbul, Turkey.

The report, titled ‘Illicit Financial Flows from the Least Developed Countries: 1990-2008′ claims ‘approximately US$197 billion flowed out of the 48 poorest developing countries and into mainly developed countries, on a net basis over the period 1990-2008’.

Though, theoretically, there could be several causes to illicit financial flows, the report indicates ‘Trade mispricing accounts for most of illicit outflows from LDCs.’

A Press release by UNDP, on the report, states:

The United States-based non-profit research body, Global Financial Integrity, estimates that developing countries collectively lose as much as US$1 trillion in illicit financial outflows, including through corruption, trade in smuggled goods, and criminal activities such as drug trafficking and counterfeiting.

“That is money which could otherwise be helping to get all children into school, helping all mothers give birth safely, and expanding access to basic healthcare, better nutrition, and clean water and sanitation for all,” added Helen Clark.

According to the UNDP-commissioned paper, approximately 65 percent of illicit financial flows from LDCs are through trade mispricing, when imports are overpriced and exports underpriced on customs documents.

To help curb the loss of these funds, the discussion paper recommends that customs and tax reforms in the LDCs should be accompanied with robust legal institutions and regulatory systems to fight corruption.

Watchdogs should also be empowered to provide adequate oversight over the operations of the financial system including the customs authorities, multinational and domestic companies, and the collection of taxes.

The paper notes that these measures can only become reality if supported by political will both in the LDCs and internationally, where the lost revenues end up.
Given that taxes are the most sustainable source of finance for development, the paper emphasises the need for equitable and fair domestic tax systems that do not unduly burden the poor, and could boost economic growth that benefits more than a privileged few.

The international community also has a critical role to play in improving the systematic exchange of tax information between different governments, related to non-resident individuals and corporations.

Here are two graphs from the report that summarizes the illicit financial flow data.

The graphs indicate the illicit financial flow from Ethiopia is among the top ten in nominal terms, but it is among the lowest when compared to the size of GDP.