WEALTH and POVERTY

From an article by Tom Lebert, a senior international programme officer (Resources & Conflict) at War on Want.

Africa is blessed with a rich bounty of natural resources. The continent holds around 30% of the world’s known mineral reserves. These include cobalt, uranium, diamonds and gold, as well as significant oil and gas reserves. Given this natural wealth it comes as no surprise that, with the tripling of global mineral and oil prices in the past decade, mining has exploded on the African continent. Over the period 2000 to 2008 resource extraction contributed more than 30% of Africa’s GDP while the annual flow of foreign direct investment into Africa increased from $9 billion to $62 billion (most of this into extractive industries). However, despite being so richly endowed, and despite the mining boom of the past decade, Africa has drawn little benefit from this mineral wealth and remains one of the poorest continents on the globe, with almost 50% of the population living on less than $1.25 per day.

So, why is it that a continent with such vast potential wealth can remain so poor? It is in large part down to ‘illicit financial flows’: the illegal movement of money or capital from one country to another. The exploitation of mineral resources has all too often led to corruption and a large proportion of the continent’s resources and revenues benefiting local and foreign elites rather than the general population. Trade mispricing (and in particular transfer pricing and trade misinvoicing) is the most common way of transferring illicit funds abroad. Through trade mispricing, companies seek to maximize profits artificially through maximizing expenses in high-tax jurisdictions and maximizing revenue and income in low-tax jurisdictions. This enables corporations to minimize tax payments illegally and transfer the funds abroad.

Such illicit flows undermine social development and stymy inclusive economic growth. Instead of investing resource revenues into improving infrastructure, health and education, political elites, often in collusion with mining companies, have siphoned off proceeds from the continent’s mineral and oil wealth – lining their own pockets to the detriment of ordinary Africans.

Zambia presents as a wealthy country – the largest producer of copper in Africa and the 7th-largest globally. Yet Zambia is one of the poorest countries in the world, with 74% of the population living on less than $1.25 a day and 43% of the population being undernourished. This is in part due to a haemorrhaging of wealth, mainly to transnational mining companies. According to the Zambian Deputy Finance Minister, in 2012 the country was losing $2 billion a year from tax avoidance – around 10% of Zambia’s GDP. The mining industry was the largest culprit and the bulk of the loss was attributed to transfer pricing – where parts of the same company trade with each other at prices that they determine on their own – and to the over-reporting of costs and under-reporting of production. The situation is compounded by overly generous tax incentives provided to companies by the Zambian government.

The Zambian example is not an isolated case. Such corporate practices in the mining sector are common right across the continent. In South Africa, illegal capital flight through trade-misinvoicing (a means to evade tax) is rife in the ores and metals sector. Over the period 1995 to 2006 trade misinvoicing alone amounted to $167 million. And when it comes to fuel-exporting countries, over the period 1970 to 2008 states were losing on average $10 billion per year because of misinvoicing – the sum accounting for nearly half of all illicit financial flows from Africa during this time. Moreover, statistical data generated through the Kimberly Process Certification Scheme, which was introduced in 2003, revealed that diamond production was nearly twice as large as estimated, indicating massive smuggling, under-reporting and tax evasion in the sector. The list goes on.