Honest Accounts 2017 – How the world profits from Africa’s wealth

by Mark Curtis , Tim Jones

Profiting from Africa’s wealth

Africa is rich – in potential mineral wealth, skilled workers, booming new businesses and biodiversity. Its people should thrive, its economies prosper. Yet many people living in Africa’s 47 countries remain trapped in poverty, while much of the continent’s wealth is being extracted by those outside it.

Research for this report calculates the movement of financial resources into and out of Africa and some key costs imposed on Africa by the rest of the world. We find that the countries of Africa are collectively net creditors to the rest of the world, to the tune of $41.3 billion in 2015. |1| Thus much more wealth is leaving the world’s most impoverished continent than is entering it.

African countries received $161.6 billion in 2015 – mainly in loans, personal remittances and aid in the form of grants. Yet $203 billion was taken from Africa, either directly – mainly through corporations repatriating profits and by illegally moving money out of the continent – or by costs imposed by the rest of the world through climate change.
- African countries receive around $19 billion in aid in the form of grants but over three times that much ($68 billion) is taken out in capital flight, mainly by multinational companies deliberately misreporting the value of their imports or exports to reduce tax. |2|
- While Africans receive $31 billion in personal remittances from overseas, multinational companies operating on the continent repatriate a similar amount ($32 billion) in profits to their home countries each year.
- African governments received $32.8 billion in loans in 2015 but paid $18 billion in debt interest and principal payments, with the overall level of debt rising rapidly.
- An estimated $29 billion a year is being stolen from Africa in illegal logging, fishing and the trade in wildlife/plants.

There are other ways in which the rest of the world extracts resources from Africa, but for which figures are not available; for example, trade policies mean that unprocessed agricultural goods are often exported from African countries and refined elsewhere, causing the vast majority of their value to be earned abroad.

The figures show that the rest of the world is profiting from the continent’s wealth – more so than most African citizens. Yet rich country governments simply tell their publics that their aid programmes are helping Africa. This is a distraction, and misleading.

Our figures comprise both the movement of financial resources and two categories of costs imposed on African countries by the rest of the world. First, there is the cost to African countries of adapting to climate change: a process which has been overwhelmingly caused by richer industrialised and industralising countries, not Africa – amounting to $10.6 billion a year. Then there is the cost to Africa of mitigating climate change – to reorient African economies onto a low carbon path – again due to the need to tackle climate change: the annual cost here is even greater, at $26 billion. These costs are included since they entail expenditure – a loss of resources – by Africa for processes which it has largely not been responsible. |3|


Summary of the figures

INFLOWS Latest available annual figure OUTFLOWS Latest available annual figure
Net private grants $11.8 billion Debt payments by governments $18.0 billion
Decrease in international reserve holdings $20.7 billion Debt payments by private sector $9.8 billion
Loans to governments $32.8 billion Increase in international reserve holdings $0.0 billion
Loans to private sector (FDI and non-FDI) $20.6 billion Multinational company profits $32.4 billion
Net portfolio equity $7.2 billion Illicit financial outflows $67.6 billion
Net FDI equity $15.8 billion Outward remittances $3.8 billion
Inward remittances $31.2 billion ‘Brain drain’ $6.0 billion
Official aid from OECD $19.1 billion Illegal logging $17.0 billion
Official aid from non-OECD countries $0.6 billion Illegal fishing $1.7 billion
Debt interest received $1.8 billion Illegal trade in wildlife/plants and poaching $10.0 billion
Climate change adaptation costs $10.6 billion
Climate change mitigation costs $26.0 billion
TOTAL $161.6 billion TOTAL $202.9 billion


Time to rethink

Those claiming to help Africa need to rethink their role. Their priority should be: ‘first do no harm’. Yet much harm is currently being done. In particular, billions continue to be stolen from African citizens through insufficient global action to curb tax dodging. The British government bears special responsibility in this since it sits at the head of a giant network of overseas tax havens (perhaps more accurately described as secrecy jurisdictions) facilitating this theft – something that could easily become a greater problem post-Brexit. Other rich countries are also failing to curb the tax dodging practices of their multinational companies. |4|

The second priority of outsiders should be to reconfigure aid as ‘reparations’ for the ongoing extraction of wealth and other damage being done. The level should be set at the level of the damage, not some arbitrary rate set by governments out of their own ‘generosity’. Beyond that, redistribution of wealth is important for any society, as a means of addressing injustices and ensuring everyone can live a dignified life. A current problem with ‘aid’ is that it casts Western countries in the role of benevolent benefactors, giving their wealth to poor countries. But exactly the opposite is true. As Jason Hickel of the London School of Economics has written, aid currently does not exist in any meaningful sense, given the actual flows of wealth. |5|

The current extraction of wealth from the poor to the rich world is a continuation of historical trends. In his book Capitalism and Colonial Production, Hamza Alavi estimates that the resource flow from India to Britain between 1793 and 1803 was around £2 million a year, the equivalent of many billions today. |6| The British academic theologian Robert Beckford has given a rough estimate that Britain extracted an astronomical £7.5 trillion in wealth from African countries due to the slave trade. |7|

The 2017 and 2014 reportsThis updated Honest Accounts follows the first version published in 2014. This calculated, for the first time, the movement of all the main financial resources into and out of Africa, mainly using 2012 figures. It found that $134 billion entered the continent this year, mainly in the form of loans, foreign investment and aid. However, some $192 billion was taken out, mainly in profits made by foreign companies, tax dodging and the costs of adapting to climate change. Africa was found to suffer a net deficit of $58 billion a year. |8|

The figure in the present report is slightly smaller, largely because of the fall in international prices for raw materials, the main export of most African countries, since mid-2014. This has led to reductions in government holdings of international reserves and lower (but still significant) multinational company profits taken out of the continent. In addition, there are now more loans to African governments, another inflow, although this of course comes at the cost of future debt payments and possibly debt crises (Ghana and Mozambique are countries already back in debt crisis).


Africa is rich

Africa is not poor. Whilst many people in African countries live in poverty, the continent has considerable wealth. A key problem is that the rest of the world, particularly Western countries, are extracting far more than they send back. Meanwhile, they are pushing economic models that fuel poverty and inequality, often in alliance with African elites.

Africa is generating large amounts of wealth and, in some ways, is booming. For example, the largest 500 African companies recorded a combined turnover of $698 billion in 2014. |9| In 2015, countries in Africa exported $232 billion worth of minerals and oil to the rest of the world. |10| The value of mineral reserves in the ground is of course even larger – South Africa’s potential mineral wealth is estimated to be around $2.5 trillion |11| while the untapped mineral reserves of the Democratic Republic of Congo are estimated to be worth an astronomical $24 trillion. |12|

These are very large numbers but various reasons explain why the majority of people in Africa do not benefit from them, and why the present mode of minerals extraction actually leads to impoverishment.

These include:


Foreign companies take most of the profits generated by Africa’s natural wealth

When multinational companies export commodities such as minerals from African countries, their governments often benefit only marginally, receiving very little tax revenue from those companies. In key sectors such as mining and oil and gas, companies tend to pay low taxes, and/or are given tax incentives that reduce them still further. Companies are anyway easily able to avoid paying the taxes that are due, because of their use of tax planning through tax havens. Many African tax policies are the result of long standing policies of Western governments insisting on Africa lowering taxes to attract investment.

Money is leaving Africa partly because Africa’s wealth of natural resources is simply owned and exploited by foreign, private corporations. In only a minority of foreign investments do African governments have a shareholding; even if they do this tends to be small, usually around 5-20%. |13| A recent report for War on Want found that 101 companies listed on the London Stock Exchange control an identified $1.05 trillion worth of resources in Africa in just five commodities – oil, gold, diamonds, coal and platinum. These 101 companies have mineral operations in 37 African countries and are mainly British, with 59 incorporated in the UK. However, some 25 of the 101 LSE-listed companies are incorporated in tax havens, principally the British Virgin Islands, Guernsey and Jersey. |14|

Corporations stealing wealth The $68 billion stolen from Africa in illicit financial flows amounts to around 6.1% of the continent’s entire GDP. Multinational companies are stealing $48.2 billion alone through ‘trade misinvoicing’ |15|, according to figures produced by Global Financial Integrity. |16| Previous research by the UN Economic Commission for Africa found similar figures – that multinational companies stole around $40 billion a year from African countries through trade misinvoicing in the decade up to 2010. |17|

Another massive problem is corporations buying concessions at falsely knocked-down prices, often linked to corruption and to tax havens. In 2013, the Africa Progress Panel and Global Witness examined five major sales of mining rights in the Democratic Republic of Congo in which each deal involved firms registered in the British Virgin Islands. They found the firms paid at least $1.36 billion below the market value – almost double what the DRC spends each year on health and education combined. |18|

To take one country example, figures from the South African Reserve Bank in 2016 show foreign corporations drawing away profits from South Africa far faster than they were reinvesting or than local firms were bringing home. The net outflow paid to owners of foreign capital reached R174 billion (US$11.9 billion) in the first quarter of 2016 alone. Due to falls in commodity prices, multinational mining companies such as Lonmin, Anglo American and Glencore saw their share values fall and were desperate to please their foreign shareholders; thus they increased their exported profits more rapidly in comparison with the overseas-generated profits that South African corporations paid to local shareholders. The liberalisation of capital controls means there is little that the South African government can do to stop this outward flow. |19|


Those controlling tax havens are enabling the theft of Africa’s wealth

Africa’s people are effectively robbed of wealth by a process that enables a tiny minority of Africans to get rich by allowing wealth to flow out of Africa. Thus, according to a recent report on African wealth, there are now around 165,000 High Net-Worth Individuals living in Africa, with combined holdings of $860 billion. |20| In 2016, there were 24 billionaires in Africa with a combined wealth of $80 billion. |21| Where do these people mainly keep their wealth? In traditional, low tax and secretive offshore holding centres such as the Channel Islands, Switzerland and the UK. |22|

Gabriel Zucman, an academic at the London School of Economics, estimated in 2014 that rich Africans were holding a massive $500 billion offshore (i.e, in tax havens) – amounting to 30% of all Africa’s financial wealth. The fact that this wealth is untaxed means that African elites have stolen $15 billion from their own countries, according to Zucman’s conservative estimate. |23|

Africa’s poverty is much deeper than the World Bank likes to publiciseThe poverty of ordinary Africans is underreported and rising. The figures most widely cited are those from the World Bank, which states that the number of ‘extremely poor’ people in Africa has increased to 388 million now compared with 284 million in 1990 (although the percentage has fallen, from 56% to 43%). |24| However, the World Bank defines the ‘extremely poor’ as those living on $1.90 a day or less. |25| This is misleading since someone living on $2 a day is clearly still extremely poor. Whilst such poverty lines are problematic and essentially arbitrary, when higher thresholds are considered, the scale of poverty becomes much larger:
- The World Bank notes that 67% of Africans live on $3.10 a day or less –
around 670 million people.
- The World Bank has also said that 65% of Africans lived on $3.10 a day or less in 2013 – around 615 million people. This compares to 500 million in 1999. So on this reckoning, more than 100 million Africans have become poor so far in the 21st century. |26|

Others estimate even higher figures. The African Development Bank estimated in 2011 that 82% of Africans lived on less than $4 a day – this would amount to over 800 million people. |27|

The fact that African poverty is this overwhelming – and rising – shows the urgency with which the system of extracting wealth from Africa must be reversed.


Action needed

The key task is to dismantle the system extracting wealth from Africa. This requires action by African civil society organisations to press for change in their countries, and action by civil society organisations in the countries that are enabling this wealth extraction to take place, such as the UK. Global elites have no intrinsic interest in changing a system that benefits them. It is critical for civil society organisations to expose the role of multinational corporations and Northern governments in impoverishing Africa and to step up their work in building coalitions to end tax dodging and other unfair resource transfers out of Africa.

Footnotes

|1| The report uses figures for 2015 where possible. However, some figures are averages over previous years where we believe such average figures are more accurate than single year figures.

|2| This is a practice known as trade misinvoicing (sometimes also called trade mispricing) – a method for moving money illicitly across borders which involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs. ‘Trade misinvoicing’, http://www.gfintegrity.org/issue/tr…

|3| It should also be noted that it is not possible to be strict about what constitutes an ‘inflow’ and an ‘outflow’. Many of the ‘inflows’ counted here may not constitute real inflows of resources. For example, much aid does not ‘flow’ to a country but rather to host countries’ companies or consultants (even if it is not formally tied aid). Also, much foreign investment in African countries may not constitute a flow as such; for example, a gold mining company might ‘invest’ $100m but spend $75m of that on external suppliers of equipment, benefitting non-African countries. This investment might still benefit a country of course (but equally can harm it, since much foreign investment can harm the environment or human rights, for example) but is not a flow to it as such.

|4| See especially ‘Narrative Report on the United Kingdom’, http://www.financialsecrecyindex.co…

|5| Jason Hickel, ‘Aid in Reverse: How Poor Countries Develop Rich Countries’, 18 December, 2013, http://www.newleftproject.org/index…

|6| Cited in George Monbiot, ‘Outsourcing Unrest’, 17 June 2009, http://www.monbiot.com/2009/06/17/o…

|7| BBC Documentary, The Empire Pays Back

|8| Health Poverty Action et al, Honest Accounts: The True Story of Africa’s Billion Dollar Losses, 2014, https://www.healthpovertyaction.org…

|9| ‘Top 500 companies: How to thrive in 2016’, 24 March 2016, http://www.theafricareport.com/Nort…

|10| Calculated from Table 2.1A, p.26, UNCTAD Handbook of Statistics 2016, http://unctad.org/en/PublicationsLi…

|11| South Africa’s Minerals Worth Trillions of US Dollars – Committee Told’, 11 June 2015, http://www.parliament.gov.za/live/c…

|12| ‘UNEP Study Confirms DR Congo’s Potential as Environmental Powerhouse but Warns of Critical Threats’, 10 October 2011, http://www.unep.org/newscentre/Defa…

|13| War on Want, The New Colonialism: Britain’s Scramble for Africa’s Energy and Mineral Resources, July 2016, http://curtisresearch.org/publicati…

|14| Ibid.

|15| This is a practice known as trade misinvoicing (sometimes also called trade mispricing) – a method for moving money illicitly across borders which involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs. ‘Trade misinvoicing’, http://www.gfintegrity.org/issue/tr…

|16| Global Financial Integrity, Illicit Financial Flows from Developing Countries: 2004-2013, 2015, pp.12, 37 http://www.gfintegrity.org/wp-conte…

|17| Africa Progress Panel, Illicit Financial Flows, 2015, p.33, http://www.uneca.org/sites/default/…

|18| Caroline Kende-Robb, ‘Africa is rich in resources – but tax havens are keeping its people poor’, 17 May 2016, https://www.weforum.org/agenda/2016…

|19| Patrick Bond, ‘That Whooshing Sound is Corporate Profits Leaving South Africa’, 22 June 2016, http://en.economywatch.com/features…

|20| ‘Africa Wealth Report 2016 – Research and Markets’, 15 March 2016, http://www.businesswire.com/news/ho…

|21| ‘Africa’s 50 Richest’, http://www.forbes.com/africabillion…

|22| Africa Wealth Report 2016 – Research and Markets’, 15 March 2016, http://www.businesswire.com/news/ho…

|23| Gabriel Zucman, ‘Taxing across Borders: Tracking Personal Wealth and Corporate Profits’, Journal of Economic Perspectives, 2014, p.140, http://gabriel-zucman.eu/files/Zucm…. Global Financial Integrity estimates that residents of Africa held £263 billion in offshore financial centres in 2011. Global Financial Integrity, Financial Flows and Tax Havens, 2015, p.63, http://www.gfintegrity.org/wpconten…

|24| World Bank, Ending Extreme Poverty and Sharing Prosperity: Progress and Policies’, Policy Research Note, 2015, p.6, http://pubdocs.worldbank.org/en/109…

|25| In fact, the World Bank quietly admits that ‘it is also important to point out that living conditions well above the International Poverty Line can still be characterized by poverty and hardship’
and that ‘it would be wrong to think that a person living on a little more than 1.90 international dollars is not poor.’ ‘World Poverty’, https://ourworldindata.org/world-po…

|26| The World Bank says the percentage of people living on less than $3.10 a day has fallen from 77% in 1999 to 65% in 2013. World Bank, World Development Indicators database.

|27| African Development Bank, ‘The Middle of the Pyramid: Dynamics of the Middle Class in Africa’, Market Brief, April 2011, http://www.afdb.org/fileadmin/uploa…

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