MP, Zitto Kabwe
By Zitto Kabwe
A young influential African writer, Chimamanda Adichie, warns about the ‘The Danger of a Single Story’. Although she writes from literature perspective, this warning is valid to our development discourse in Africa. For more than five decades now, Africa development discourse has been dominated by a single story titled – Foreign Aid. Both proponents and critics of foreign aid revolve around this same story.
The proponents argue for increased aid and the positive role of aid, while critics argue on the weaknesses of foreign aid and/or against foreign aid. The positive and/or negative roles of foreign aid to Africa’s development are part of only one story- the single dominating story! But there are other stories to Africa’s development. In fact these other stories are more appealing as they have better explanatory power to our paradox situation. This brief article is not about whether foreign aid works or not, it is about another story- the story of illicit financial flows from Africa.
This story is not rosy and many do not like it. Data of illicit financial flow out of Africa are kept secret. Efforts to address the situation are often discouraged to maintain the status quo. Revelations of the data shows that the amount of illicit money flowing out of Africa doubles the amount of foreign aid earnings.
Global Financial Integrity estimates that up to 1.4 trillions USD was transferred from Africa over a period of three decades (from 1970 to 2009). During the same period of time, Africa’s foreign debts were less than illicitly transferred money. This makes Africa a net creditor to the world. It is estimated that each year Africa losses USD 50 Billions through tax avoidance. In connection to that, Nicholous Shaxson wrote in his book “Treasure Islands” that: you cannot understand poverty in Africa without understanding the role of offshore (Tax Havens).
The case of Tanzania further clarifies this story. Between 2001 and 2011 Tanzanian economy grew by an average of 7% per annum but poverty was cut by only 2%. The high growth is explained by growing extractive (mining) sector and service industry. Unfortunately the growth has not been pro-poor- i.e. it has not benefitted the poor population.
Findings revealed that tax revenues from investors were minimal and local jobs such as small-scale miners were suppressed for the benefit of Multinational Companies. While Tanzania exported minerals valuing 11.3 billions USD between 2001 and 2011, government revenues were 440m millions USD, just below 4% of the total value of minerals exported. IMF delegation visiting Tanzania in early 2011 remarked, “the growing mining sector has little net fiscal impact due to significant losses contributed by tax incentives abuse and structure”.
The country collects just 19% of GDP as domestic revenue while an industrialized country collects around 35% of its GDP as tax revenues. With such figures, it is not a surprise that Tanzania is forced to kneel down for aid in order to finance its development plans including the most basic public services – education and health. Of course there are other challenges that hamper our country development such as corruption and the domination of informal economy sector, which accounts for estimated 53% of its GDP. However, illicit financial flow through tax evasion and avoidance is a powerful explanation to development setbacks in Tanzania.
The country loses 5% of its GDP to tax avoidance, 4% to tax exemptions given to multinationals and almost 3% to tax evasion at Customs department. A number of well-to-do Tanzanians evade tax in by shifting their undeclared assets abroad. These assets are sometimes legally obtained, but most of the time the assets are illegally acquired through corruption.
In 2012 Switzerland National Bank issued a report showing that Tanzanians held USD 197m in Swiss Banks. Other unpublished reports, unfortunately inaccessible to the public, show that this figure could be higher. Last week, as I was on an official fact finding trip about Tanzanian money in Switzerland, a Swiss Banker complained to me that Tanzania is making so much noises about Switzerland while much more money owned by Tanzanians is in London, Jersey, British Virgin Islands and Cayman Islands. These are mostly British offshore territories. Secrecy and lack of transparency denies us an opportunity even to know the amounts held in these other jurisdictions.
Much more money is lost from Africa through tax avoidance by MNCs investing in Africa. They use legal channels to transfer their profits to low-tax areas such as Switzerland, City of London, Cayman Islands and the likes. It is estimated that Tanzania losses average of USD 560 million each year.
Even with all those losses, we are still blinded by the single narrative of foreign aid. African governments are still suffering from ‘The Danger of a Single Story’. They are being forced to agree to some conditionality for them to get aid on various matters. Talking only about foreign aid and foreign direct investment is the dangerous single story that Africa is suffering from. The danger of this single story is that we don’t see other stories. Now we must see Africa holistically. Africa is a victim of illicit flow.
African countries are far from the only victims of tax fraud and tax avoidance. The developed world is losing resources through the same tax haven-mechanisms that are damaging Africa. Consequently, the US and EU countries have now increased the pressure on tax havens to share information about the fortunes hidden within their jurisdictions, and not without result. Several of the most central secrecy jurisdictions, including Switzerland, are gearing up to increase their transparency and share information.
However, my recent fact-finding trip to Switzerland revealed a very serious problem: The increased transparency and cooperation is currently happening between and to the benefit of developed countries, and meanwhile developing countries are at the risk of being left in the dark with no access to the information about the financial resources taken from our countries.
We need to change to the benefit of developed as well as developing countries, and this is how we can start:
* The developed world needs to agree to an automatic and unconditional exchange of information about tax matters with developing countries.
* Global rules on tax to ensure country-by-country reporting by Multinational Companies so that they pay the right amount of taxes to the right places.
* African governments must renounce all double taxation treaties, which make them surrender tax revenues to developed countries and instead insist on global convention on tax matters. The UN experts committee on tax matters is currently discussing new rules on Model Double Taxation Treaty between developing countries and developed ones. We do not only need an expert committee but a real inter- governmental body to deal with this matter and a global convention on taxation rather than having bilateral treaties amongst countries.
Commitment from the UK and other OGP participant countries to create public registries of the beneficial owners of companies, trusts and foundations.
We cannot talk of open government without opening offshore jurisdictions. We cannot insist on opening data by government without opening up these tax havens, which impoverish Africa. Africa shall not continue to be a beggar of its own resources illicitly transferred and coming back as aid with strings. Aid to Africa is a single story. Illicit flow is the other story explaining Africa’s poverty.