Out of Africa: Tax evasion, capital flight and debt

28 April 2014 by John Weeks

Though thoroughly documented, the fact that illegal capital flight and tax evasion far exceed inflows of development assistance and direct investment for sub-Saharan countries is rarely noted in the mainstream media. Even modest steps toward limiting capital flight would imply a substantial reduction in external indebtedness. I recently returned from Zambia and Tanzania, where in different ways these losses of potential development finance loomed large.

Zambia is a major exporter of copper and has been since the British established themselves as colonial masters early in the 20th century. In those bye-gone days, the colonial masters had a grand scheme: 1) Southern Rhodesia (now Zimbabwe) would be a white-settler state like the nearby and larger South Africa; 2) Northern Rhodesia (now Zambia) would be a mineral exporter; and 3) Nyasaland (now Malawi) would produce the food for the mines.

To achieve this plan, the colonial authorities severely limited farming by Africans in Zambia, restricting income alternatives and thereby facilitating a low-wage labor supply. By definition Africans did the unskilled work and Europeans held the skilled jobs with astronomical pay differentials that favored the latter. After a struggle involving relatively little violence compared to what would occur in Zimbabwe, independence came in 1964 under the leadership of one of Africa’s great figures, Kenneth Kaunda, whom I was fortunate enough to meet several years ago. In 1969 his government nationalized the mines and so they remained for over twenty years.

As a result of gathering economic woes, “KK”, as he is universally known in Zambia, suffered electoral defeat in 1991 by Fredrick Chiluba. With the enthusiastic backing of the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

Chiluba would preside over one of the world’s great kelptocracies. Among the impressively shady deals of the Chiluba government was the privatization of the mining sector, a privatization designed by the World Bank.

The privatization of mining anywhere brings with it a de facto license for tax evasion unless governments are extraordinarily vigilant. The best known of the tax scams is “transfer pricing”, in which companies under-invoice the export value of the ore. For example, if a month’s production is $10 million at world prices, the company reports it to the host government as seven million. A sharp-eyed government might catch this game by checking out the prices on the London Metals Exchange for the quality of the ore claimed by the company.

Any mildly crooked multinational can transfer-price, and mining companies have tricks unique unto themselves. Their more effective scam is to misrepresent the quality of the ore. For example, recently a British mining expert claimed that the largest copper company in Zambia regularly under-reports by half the copper content of the ore it exports. Getting away with claiming two percent copper content when the true figure is double that amount results in a tidy tax saving. Prevention requires a government official carrying out tests in every company to verify content claims. Thanks to World Bank and IMF budget conditionalities, the Zambia government rendered such officials redundant during the Chiluba years.

So, how much difference does it make? Consider this official statistics report Zambia exporting more than $8 billion in copper ore in 2012. If the copper content of the ore was under-reported by fifty percent - well, we are talking about a lot of tax evasion. My own estimate is that the annual loss of public revenue is as large as the total tax collected by the government from all other sources.

From Lusaka in Zambia I traveled to Arusha in northern Tanzania to attend a conference on capital flight. Capital flight is a multi-faceted scam that includes the false pricing and false reporting of export and import values plus many other corporate tricks. World Bank and IMF pressures on African governments to “liberalize” trade and “de-regulate” cross-border money flows can justifiably claim to facilitate bleeding countries of foreign exchange.

Liberalization and de-regulation are policy “reforms” that legalize financial fraud and money laundering scams. The justification for this legalization of the illegal is that it will encourage investment inflows. By making it easy to send your money out, you are more likely to bring it in. The argument is a close kin to asserting that allowing companies to fire workers more easily prompts those companies to hire more workers. The reality is that when workers are easier to fire, companies fire them. When a company finds it easier to abscond with the capital flight loot, that is what they do.

What can we do to reduce the annual billions of dollars seeking a compliant money laundry that flee countries to escape taxation or come from criminal activities? Several advocacy organizations are on the case. The central approach of these organizations is that policy changes in the high income countries will go far to prevent tax avoidance and capital flight from countries such as Zambia. The world’s largest havens for capital flight are London and New York.

Changing policy in the high income countries serves neither as an effective deterrent nor an enforceable alternative to aggressive policies in the source countries. Farmers do not leave chicken coops open in the hope that no one will let the chickens roost elsewhere. They keep the coop closed. Similarly, the necessary first step to reduce capital flight and tax avoidance in any country, developed or underdeveloped, is strict policies vigorously enforced.

We should all hope that the leaders of the G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. countries will adopt policies to make tax avoidance more difficult, though the likelihood is slim at best. Better is to expose the role of the IMF and World Bank in advocating and even requiring policy changes in developing countries that facilitate tax avoidance. Failing success in changing IMF and World Bank policies, governments throughout the developing world should reject their advice and act on their own.

In February I was in Zambia working with the central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
, Bank of Zambia, on designing policies to limit capital flight. An essential first step, the Zambian government requires that all foreign exchange transactions be reported ot the central bank. However, this is a long way from the most effective measure - re-nationalization of the copper companies.

John Weeks is author of the recently published, Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy, Anthem Press.

John Weeks

Professor Emeritus, SOAS, University of London

Other articles in English by John Weeks (2)

  • What is to be Done with the Banks? Radical Proposals for Radical Changes

    13 April 2016, by Eric Toussaint , Michel Husson , Costas Lapavitsas , Ozlem Onaran , Patrick Saurin , Stathis Kouvelakis , Francisco Louça , Stavros Tombazos , Michael Hudson , Giorgos Galanis , John Weeks , Miguel Urbán Crespo , Pete Green , Gilbert Achcar , Alan Freeman , David Harvey , Andy Kilmister , Philippe Marlière , Thomas Marois , Sabri Öncü , Susan Pashkoff , Alfredo Saad Filho , Benjamin Selwyn , Pritam Singh

  • Brickbats for the BRICS bank?

    23 July 2014, by John Weeks



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