Developing countries lose $16.3tr to capital flight through tax havens – Report

Increasing focus by way of studies and debates on illicit financial flows and their negative impacts on developing countries continues to show the depth of loss to these countries.

A new report by the Global Financial Integrity (GFI), the Centre for Applied Research at the Norwegian School of Economics and a team of global experts shows that since the late 1990s developing countries lost $16.3 trillion dollars through broad leakages in the balance of payments, trade misinvoicing, and recorded financial transfers.

According to the report, these resources represent immense social costs that have been borne by the citizens of developing countries around the globe.

The report titled, “Financial Flows and Tax Havens: Combining to Limit the Lives of Billions of People” which was funded by the Research Council of Norway, with research assistance provided by economists in Brazil, India, and Nigeria demonstrates that developing countries have effectively served as net-creditors to the rest of the world with tax havens playing a major role in the flight of unrecorded capital.

“For example, in 2011 tax haven holdings of private sector developing country wealth were valued at $4.4 trillion, which exacerbated inequality and undermined good governance and economic growth.

For instance, the study pays special attention to the role of China’s capital flows in the analysis of Net Resource Transfers (NRT) for all developing countries, which affects the magnitude of cumulative net transfers but not the overall conclusion.

However, it notes that if China is excluded from the developing world total, the magnitude of cumulative net resource transfers from the remaining developing countries reduces to about $11.7 trillion.

“This reduction is due to China’s large current account surpluses, associated capital and reserve asset outflows, and considerable unrecorded outflows,” the report said.

Joseph Spanjers, an Economist at the GFI said, “Though China has had significant recorded and unrecorded financial flows, the data shows that net resource transfers are a concern for all developing countries.”

The report defines NRT as net recorded flows into or out of a country inclusive of outflows of illicit and unrecorded capital. While previous studies on NRT have limited their analysis to recorded financial flows, this paper includes in its measure of NRT non-financial transactions (such as debt forgiveness and write-offs), unrequited transfers (such as remittances), and unrecorded capital outflows.

“Our methodology does not distinguish between recorded (i.e. licit) and unrecorded, or mostly illicit, capital because the financial institutions themselves cannot distinguish between the two,” Dev Kar, the Chief Economist at GFI and the report’s lead author explained.

By Emmanuel K. Dogbevi
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