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Ethiopia: The illicit financials outflow in perspective

The United States-based non-profit research body, Global Financial Integrity(GFI), released a report, titled ‘Illicit Financial Flows from Developing Countries Over the Decade Ending 2009‘.

The report claims that Ethiopia lost US$ 7.9 Billion (conservative estimate) to 11.7 Billion (high-end estimate) to illicit financial outflows between 2000 and 2009.

However, six months ago GFI indicated that Ethiopia lost lost about 8.3 Billion in two 1990-2008 in its report released six months ago. (See Trade mispricing cost Ethiopia $8.3 bn in two decades). It is not clear if there is an explanation to the discrepancy between the two data.

Explaining the term Illicit Financial Flows, the report states:

‘Illicit flows involve capital that is illegally earned, transferred, or utilized and covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks. Hence, illicit flows may involve capital earned through legitimate means such as the profits of a legitimate business. It is the transfer abroad of that profit in violation of applicable laws (such as non-payment of applicable corporate taxes or breaking of exchange control regulations) that makes the outflows illicit.’

The report indicates that the major player to be Trade mispricing - when imports are overpriced and exports underpriced on customs documents. The propensity for mispricing increases along with increasing external trade, the report notes.

It should be noted, however, GFI came up with the data using a new method other than the one conventionally used by economists to compute Illicit Financial Flows. The conventional method, which GFI calls ‘the traditional method’, estimates Illicit Financial Flows from Ethiopia at less than US$ 2 Billion.

In a media comment on the report’s claim regarding Ethiopia, Stefan Dercon, chief economist of U.K.’s Department for International Development, commented last week:

‘The calculations are largely picking up measurement errors and differences in weak data collection methodologies between countries, even though they will also include smuggling, underreporting to avoid customs duties and capital flight. But it’s extremely naive to assume that this is just capital flight.’

* See the table at the bottom for the latest GFI data on illicit financial flows from 53 African countries – according to the latest Global Financial Integrity(GFI) report.

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Days before the release of the report, one of the authors, Sarah Freitas, wrote an article on Ethiopia. The article prompted a sharp response from David Shinn, former US Ambassador to Ethiopia. I posted both articles here below given their informative value.

Illegal Ethiopian Capital Flight Skyrocketed In 2009 To US$3.26 Billion

December 5, 2011. By Sarah Freitas – [Sarah Freitas is an Economist at Global Financial Integrity in Washington, DC and a co-author of "Illicit Financial Flows from Developing Countries over the Decade Ending 2009," a December 2011 report from GFI.]

An upcoming report by Global Financial Integrity finds that Ethiopia, which has a per-capita GDP of just US$365,lost US$11.7 billion to illicit financial outflows between 2000 and 2009.  More worrying is that the study shows Ethiopia’s losses due to illicit capital flows are on the rise.  In 2009, illicit money leaving the economy totaled US$3.26 billion, which is double the amount in each of the two previous years.

The report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, shows that the vast majority of the rise in illicit financial flows is a result of increased corruption, kickbacks, and bribery while the remainder stems from trade mispricing.

Ethiopia is one of the poorest countries on earth.  Plagued by famine, war, and political oppression, 38.9% of Ethiopians live in poverty, and life expectancy in 2009 was just 58 years.   In 2008, Ethiopia received US$ 829 million in official development assistance, but this was swamped by the massive illicit outflows.  The scope of Ethiopia’s capital flight is so severe that our conservative US$3.26 billion estimate greatly exceeds the US$ 2 billionvalue of Ethiopia’s total exports in 2009.

The people of Ethiopia are being bled dry.  No matter how hard they try to fight their way out of absolute destitution and poverty, they will be swimming upstream against the current of illicit capital leakage.  The global shadow financial system happily absorbs money that corrupt public officials, tax evaders, and abusive multi-national corporations siphon away from the Ethiopian people.

What can be done?  The first step the international community should take is to hamper the ability of corrupt and tax-evading Ethiopians to launder their money in the global financial system.  This could be accomplished by establishing a global system of automatic exchange of tax information. In this way, Ethiopian authorities could much more easily track the bank accounts their tax evaders have established around the world. Furthermore, the G20 governments could push for an end to shell companies by calling for beneficial owners of all companies, trusts and foundations to be known to government authorities.  This would make it far more difficult for the corrupt and the criminal to hide their ill-gotten gains behind a wall of corporate secrecy.

These two measures would immediately curtail the flow of billions of dollars leaving the country each year.  And, by preventing the flow of so much money, countless lives will benefit.

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Ethiopia and 2011 Global Financial Integrity Report

Dec. 16, 2011. By David Shinn – [David Shinn who served as US Ambassador to Ethiopia is Currently an Adjunct Professor at Elliott School Of International Affairs, George Washington University.]

The Washington, D.C.-based organization, Global Financial Integrity (GFI), released on 15 December 2011 its report on Illicit Financial Flows from Developing Countries over the Decade Ending 2009. The co-authors of this carefully designed study were Dev Kar and Sarah Freitas. You can access the report on the GFI website at www.gfintegrity.org.

In a separate statement dated 5 December, which you can access at www.financialtaskforce.org/2011/12/05/illegal-ethiopian-capital-flight-skyrocketed-in-2009-to-us3-26-billion/, co-author Sarah Freitas singled out Ethiopia for criticism. The piece by Freitas states: “Ethiopia, which has a per capita GDP of just US$365, lost US$11.7 billion to illicit financial outflows between 2000 and 2009. More worrying is that the study shows Ethiopia’s losses due to illicit capital flows are on the rise. In 2009, illicit money leaving the economy totaled US$3.26 billion, which is double the amount in each of the two previous years.” The commentary by Freitas concludes that “the people of Ethiopia are being bled dry” and notes that Ethiopia is a country “plagued by famine.”

I agree with Freitas that the increase in 2009 in Ethiopian illicit financial outflows is a serious problem that the government of Ethiopia must confront. There is no excuse for this. At the same time, singling out Ethiopia is curious. The report itself does not single out Ethiopia.

More important, this problem, and it is a problem, needs to be put in perspective. For an African country, Ethiopia has a relatively high GDP, although the per capita figure is low in part because of its large population.

Of Africa’s 54 countries, Ethiopia is the second most populous after Nigeria. According to the World Bank, its real GDP in 2009 was $16.6 billion. This exceeded the GDP of all but the following eleven African countries in 2009: Angola, Kenya, Nigeria, South Africa, Sudan, Tanzania, Algeria, Egypt, Libya, Morocco and Tunisia.

According to the GFI report, Ethiopia’s cumulative (2000-2009) illicit financial flows (IFF) based on conservative estimates were $7.9 billion. Ethiopia’s cumulative (2000-2009) IFF based on high-end estimates was $11.7 billion.

Now what about the situation for other African states?

Using the conservative GFI estimates, Ethiopia AVERAGED for the years 2000-2009 $794 million annually in IFF. Eight countries (Nigeria, Egypt, South Africa, Libya, Angola, Republic of the Congo, Côte d’Ivoire and Tunisia) had higher average IFF amounts. The only countries that in 2009 had higher GDPs than Ethiopia but did better on the average IFF ranking were Kenya, Sudan, Tanzania, Algeria and Morocco.

Now let’s look at GFI’s high-end estimate. Ethiopia AVERAGED for the years 2000-2009 $1,169 million annually in IFF. Nine countries (Nigeria, South Africa, Egypt, Libya, Angola, Algeria, Morocco, Republic of the Congo and Côte d’Ivoire) had higher average IFF amounts. The only countries that in 2009 had higher GDPs than Ethiopia but did better on the average IFF ranking were Kenya, Sudan and Tanzania.

This is not to excuse the problems facing Ethiopia and the point of the statement by Sarah Freitas is to highlight the deterioration of Ethiopia’s situation in 2009. If this trend has continued into 2010 and 2011, then Ethiopia has a real problem. But the singling out of Ethiopia in what is a bad news story affecting many countries without putting it into perspective is strange, especially when a professional economist uses language such as “the people of Ethiopia are being bled dry” and Ethiopia is “plagued by famine.” Ethiopia has experienced chronic food shortages since the early 1970s; it has not experienced “famine” in recent years, including 2011 when famine only impacted parts of Somalia in the Horn of Africa.

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Data of Illicit financial flows from 53 African countries – data from Global Financial Integrity(GFI) Dec. 2011 report – titled ‘Illicit Financial Flows from Developing Countries Over the Decade Ending 2009‘.

[Note that data is incomplete for the following countries. Benin, Botswana, Central African Rep., Chad, DR Congo, Djibouti, Equatorial Guinea, Eritrea, Liberia, Libya, Namibia, São Tomé & Príncipe, Somalia, Swaziland.]

Table: Cumulative Normalized and Non-Normalized Illicit Financial Flows by Country 2000-2009 (millions of U.S. dollars)

Country

Cumulative Normalized
(conservative) IFFs
2000-2009

 

Cumulative
Non-Normalized
(high-end) IFFs
2000-2009

“X” – indicates incomplete data

1.

South Africa

59,409

85,449

2.

Egypt

59,938

60,147

3.

Libya

40,786

43,315

X

4.

Angola

16,673

26,379

5.

Algeria

6,944

23,138

6.

Morocco

4,889

15,953

7.

Congo, Rep.

14,439

15,327

8.

Cote D’Ivoire

9,792

11,764

9.

Ethiopia

7,944

11,694

10.

Tunisia

8,734

9,067

11.

Gabon

7,479

8,268

12.

Botswana

7,034

7,620

X

13.

Namibia

7,503

7,597

X

14.

Guinea

6,222

6,504

15.

Mali

6,055

6,278

16.

Equatorial Guinea

5,862

6,273

X

17.

Sudan

0

6,271

18.

Zambia

3,955

5,980

19.

Zimbabwe

3,901

4,965

20.

Uganda

3,061

4,295

21.

Madagascar

4,023

4,227

22.

Congo, DR

0

3,649

X

23.

Tanzania

937

2,572

24.

Cameroon

0

2,433

25.

Kenya

0

2,055

26.

Togo

1,776

1,894

27.

Mauritania

1,183

1,773

28.

Seychelles

1,756

1,772

29.

Liberia

1,115

1,510

X

30.

Burkina Faso

1,159

1,159

31.

Rwanda

927

952

32.

Swaziland

0

920

X

33.

Ghana

0

907

34.

Mozambique

0

903

35.

Mauritius

301

848

36.

Lesotho

0

832

37.

Somalia

0

758

X

38.

Djibouti

667

667

X

39.

Cen Afr Republic

596

596

X

40.

Chad

0

567

X

41.

Gambia, The

485

485

42.

Sierra Leone

270

465

43.

Niger

280

449

44.

Burundi

248

446

45.

Guinea-Bissau

306

321

46.

Malawi

0

313

47.

Solomon Islands

274

302

48.

Benin

0

112

X

49.

Comoros

28

80

50.

Senegal

0

78

51.

Eritrea

32

X

52.

Sao Tome and Principe

0

1

X

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