Global Policy Forum

Why Ignore Capital Flight?

Bill Gates’ long-awaited speech to the G20 leaders in Cannes was “something of a shopping list” of different options to finance future development. There was, however, a glaring omission from Gates' list: capital flight. Due to capital flight, developing countries lose billions of dollars every year—$700bn in sub-Saharan Africa alone in the past 40 years. Gates’ simple formula of “money available for development = domestic resources + inflows - outflows” omits a key part of the equation and hints at the prevailing political reluctance to tackle structural issues.

By Jonathan Glennie

November 4, 2011

Bill Gates has just given a long-awaited speech to G20 leaders in Cannes on the future of development finance. The address made an important and broadly positive contribution to the debate, both in analytical and political terms (with long- and short-term implications respectively).

Billed as an overview of financing options for development, it was inevitably something of a shopping list. But even on a shopping list, some items are always more essential than others. The headlines have been grabbed by Gates's strong endorsement of a tax on financial transactions, as well as his focus on keeping aid budgets strong.

His stance that aid is a good thing, pure and simple, is frustrating, given what we know about the harm it can also do in some contexts, but his focus on the role of aid in piloting projects and in technological investment – precisely the areas where it does work – rather than filling country exchequers is welcome. If the broader debate follows this lead, we will be having a more realistic discussion about aid in the years to come.

But some of the Gates analysis that journalists passed over is more interesting, and demonstrates a shifting consensus over the future of development finance.

First, he emphasised the key features of this era of development: the steps forward in terms of development indicators, relative to previous decades. He calculated that, by focusing on good news rather than calamity, he would inspire world leaders to continued action. Gates gave great examples of change, and his intention was clear – to inspire people at a time of economic gloom. In this sense, he has moved from businessman to statesman.

Gates affirmed the G20 as the right forum for the development debate, and his vision of complementary public and private, external and domestic, financing is convincing.

Second, he underlined what he called the "paramount importance of innovation" – his calling card. As Charles Kenny has argued, technological advancement is as important in development as growth and political leadership, and that fact should influence major money-spending decisions in aid agencies. The model of the Advanced Market Commitment guaranteed purchases of a pneumonia vaccine, should one be invented. It is being rolled out in 37 countries. This kind of use of philanthropic or public aid money can surely be scaled up for climate change technology, among other areas.

Gates's support for innovation and knowledge transfer makes him a natural supporter of south-south style development co-operation, which emphasises mutual learning as much as financial transfers. His explanation of how triangular co-operation works will be one of the key things many western leaders – still mostly illiterate in the ways the south is helping itself – take from his speech.

Third, he noted that some countries are emerging from aid dependence, which shifts focus firmly on to revenue mobilisation. In my view, the legally binding transparency requirements he endorsed for extractive industries are far more important for development than the transaction tax that has won all the headlines. These requirements would generate resources and greater accountability in poor countries, the crucial link to institutional progress.

But there was a glaring omission from Gates's shopping list – capital flight. Development finance can be easily understood with this simple equation: money available for development = domestic resources+inflows-outflows. But Gates omitted the last part of the equation. According to most analyses, capital flight is responsible for billions of dollars being lost to developing countries every year, far more than most of his ideas for increased capital inflows.

Why no mention? It may reflect a lack of confidence in the available information. But while the data collection on this issue is admittedly still in its infancy in official circles, it is no longer a hidden issue. Léonce Ndikumana and James K Boyce, who have led this debate for years, recently published a brilliant book investigating the extent of the losses, which they claim amount to $700bn in sub-Saharan Africa alone in the past 40 years. Global Financial Integrity has documented the evidence in great detail. NGOs such as Christian Aid and ActionAid have developed policy recommendations, including changes in accounting practices and clamping down on tax havens.

The more likely reason is a political reluctance to tackle structural issues, which is understandable but ultimately unsatisfactory. It is indicative of the way the fundamental focus on giving poor countries money as the mainstay of development finance was not sufficiently challenged by Gates. He urged emerging powers at the G20 to increase their aid. This is right, but it is not very sensible to pour water into leaky buckets. This was an opportunity lost to lay this issue squarely in front of the world's leaders, who are doing their best to ignore it. The international community's contribution to development finance is not just about raising money, or even spending it better, but about remaking the global financial architecture to benefit the poorest people and the poorest countries. On that, Gates was largely silent.


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