A fix to resolve the rich country-poor people paradox

Foreign assistance has thoughtlessly been downgraded. But someday, the realization of the vital role aid has played in the exercise of foreign policy will require that it be resurrected. When the day returns for the recognition of the importance of foreign assistance, greater attention should be given to illicit financial flows, or IFFs. IFFs are the cross-border movement of money that is illegally earned, transferred, or used. Assessing, redirecting, and ultimately halting IFFs will be necessary if foreign assistance programs are to be built back better. When I was ending my tour as USAID director in Tanzania in July 1996, I gave a farewell speech to my national colleagues. I recall saying, “Your country is rich, but it’s populated by poor people. It’s up to you as citizens of Tanzania to work to resolve this contradiction.” I have thought about these words for almost 30 years, but I did not know then how true they were until recently. A few weeks ago, I read that more funds exited sub-Saharan Africa illegally in 2022 than the total annual combined amounts of official development assistance and private foreign direct investment that entered the continent in the same year. The situation surrounding IFFs is much worse than I previously imagined. This finding added to my concerns as to why decades of assistance to most of the 32 least developed countries in Africa have made so little difference. According to reports of the Organization for Economic Cooperation and Development and the United Nations Conference on Trade and Development, it is estimated that in 2022, about $34 billion was provided to Africa by donor countries and $45 billion in private investment. In the same year, it was also reported that an estimated total of $89 billion in IFFs flowed outside of Africa. In millions of U.S. dollars, the top five offending countries in Africa during the period of 1980 to 2018, as reported by the Brookings Institution’s Africa Growth Initiative in March 2020, were South Africa, the Democratic Republic of Congo, Ethiopia, Nigeria, and the Republic of Congo. According to this report, these five countries represent over 50% of IFFs in Africa. This report also indicates, as a percentage of trade, the top five offending African countries are São Tomé and Príncipe, Sierra Leone, Ethiopia, Togo, and Lesotho. Where can illicit financial flows be found? The degree of IFFs will vary from one country to another, but the types of activities where IFFs usually occur are: extractive industries; cash crop exports; over-billing on host government contracts; trade mis-invoicing; organized crime networks; drug trade revenue; commercial sex trade; human trafficking; tax avoidance; and natural resource pillaging. The identification of possible IFFs in one or more of these or other areas should result in a comprehensive plan for reducing these IFFs to tackle the negative impacts on the host country’s economic growth. Examining the balance sheets of recipient countries The balance sheets of host countries, those receiving official assistance, should be examined to see, at least in a cursory fashion, all the funds going out versus all those going in, legally and illegally. These balance sheets need to include an estimate of remittances sent to the host country by labor migrants working abroad and any other private transfers of money. Also, on the income side of the host country’s financing, the money earned from the sale of national bonds should be counted. Not to be overlooked are funds brought into the host country independently by charitable and religious organizations. This type of exercise would involve close consultations with the host country offices of the World Bank and the International Monetary Fund. Perhaps a place to start is with an examination of a country’s officially published balance of payments reports. A close examination of these reports might indicate any underbilling of goods imported and under-reporting for exports. Of course, such a report that includes an estimate of unrecorded IFFs would give a more complete picture of the host country’s financial status. Also to be noted are the amounts paid by the host country to manage the debts it has incurred by agreeing to foreign loans. Many African countries are struggling to make regular payments on the debt they have contracted with foreign entities. Perhaps the most significant indicator of a country’s level of fiscal responsibility is its capacity to manage its debt burden. The percentage of its gross domestic product that its external debts represent is usually a key indicator. Also, a comparison of the amount a host country pays annually in debt service with the amounts it invests in key sectors of the economy may be illuminating. “The achievement of development assistance goals can … be thwarted by corrupt, clandestine collaboration among host government officials and wealthy businesspeople who conspire to defraud their country and its people.” --— Negative impact on development A key part of any plan to address IFFs is an analysis of any suspected illicit funding channel. It would be appropriate to see how any of these IFFs negatively impact specific sectors of the economy. Key sectors could include education and health. The extent to which the performance of these sectors is constrained by IFFs should be brought to the attention of host government officials. Their consequent acts to curb IFFs and underlying corruption should be monitored to the extent possible. Major development assistance partners should meet to discuss the breadth of IFFs’ impact in their host country. External partner agencies can form a task force to report on how IFFs are affecting the host country’s development progress and what they can do about it. Analyzing off-the-books financial outlays will not be easy, as information on this subject is deliberately hidden. And ferreting out information on this subject may disturb diplomatic relationships with some host government officials. Still, the decision-makers of foreign assistance should discuss the impact of IFFs on the development prospects of their host country. The question of whether to provide development — not humanitarian — assistance funds to a host country that allows its scarce resources to escape accountability should involve serious discussions with top host country officials. The achievement of development assistance goals can, in my experience, be thwarted by corrupt, clandestine collaboration among host government officials and wealthy businesspeople who conspire to defraud their country and its people. Every donor country must adjust its development assistance strategy in the poorest countries to incorporate IFFs, thereby ensuring development funding has a more significant positive impact on poverty alleviation.