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Giving What We Can

A Look at Capital Flight from the Developing World

Despite the economic growth of emerging countries over the past years, quality of life has not been improving proportionally in every country. 

 lies at the heart of this issue by depriving the states of the desperately needed financial resources. In this post, we will look at the issue of broad-scale corruption and how it affects the progress of developing countries. You can read about the related issue of small-scale corruption and how it impacts international development organisations 

the movement of assets or money out of a country or region

, as when foreign investors decide to withdraw capital from a country as a result of an event of political or economic significance; or illegal, in the form of illicit financial flows (IFFS). The 

increase of illicit financial flows (IFFs)

 is a pressing issue for many developing countries. The sheer scale of the problem is striking when estimates of capital flight are put side by side with the amount of foreign aid flowing into Africa, and the countries’ debts. 

Capital flight is estimated to be 10 times the annual foreign aid flow

 and twice the amount of the debt being repaid by the emerging countries every year.

Peter Reuter’s report on IFFs, 'Draining Development?'

 depicts how capital flight has impacted on the social development of the emerging countries. Corrupt heads of state illicitly move state funds, very often received from developed countries, international development organisations or NGOs, into their private accounts to enrich themselves.The stories of Sese Seko of Zair, who is believed to have amassed more than $4 billion, or General Sani Abacha of Nigieria who looted the Nigerian Central Bank stealing nearly $2 billions, are just the tip of the iceberg.

Capital flight has a strongly negative effect on the economy, as 

capacity to finance social services and other public investments is greatly eroded

 due to such drains on the resources. Moreover, 

the tax burden is being shifted on the middle class and the poor

 who effectively have to subsidize social services due to tax evasion- a form of capital flight - by high-earning organisations.

It is undoubtedly true that not all of the state revenue which would have been accrued by curbing money launderings, IFFs and the like would be channelled into priority areas (such as education or health). Nevertheless, 

 if, for example, the same proportion of the tax revenues had been spent on health care since 2000, with the added tax revenue from avoiding capital flight, the lives of 350,000 children could have been saved every year. Furthermore, given the high correlation between corruption, IFFs and money laundering, it could well be that the attempts to tackle capital flight would have a spillover effect on other problematic areas.

Illegally acquiring public funds that would have been spent on running the country is the direct corollary of pervasive corruption scandals in Africa. Another strongly negative effect of capital flight is 

undermining the belief of people in the developed world in the effectiveness of foreign aid

, reducing their willingness to donate. The multitude of stories about flamboyant political leaders, immune to the rule of law, the example being the son of Equatorial Guinea’s leader who was granted the position of a vice president to obtain immunity, provides the critics with ammunition to substantiate their view of foreign aid as a futile endeavour.

However, such a conclusion is misguided: the fact that some aid is misused does not mean that aid has little or no impact. In fact, the many success stories in international aid and the improvement in living standard across the developing world over the past decades show that 

. Further, we can increase the impact of our donations and avoid the impact of corruption by 

, to charities with a proven track record of 

As an example of how disastrous the effects of capital flight can be, consider the case of Equatorial Guinea. The economic data indicate that Equatorial Guinea has sufficiently large domestic resources to manage poverty reduction. Since the discovery of its vast off-shore oil resources in 1995, the state revenue has sky-rocketed, and the country currently tops the list of African countries in terms of GDP per capita.

Despite having a population of less than 1 million people, which should further facilitate the poverty reduction, the living conditions have not dramatically improved, as one might have hoped. The Obiang government has moderately increased spending on health care and other social services, yet the infant mortality rate remains among the highest in the world, while the living expectancy is only 52.6 years. The alleged appropriation of part of oil revenues by the ruling elite in Equatorial Guinea plays an important role in the failure to use resources to improve the lives of people in the country.

The largest oil exporters in Africa, such as Nigeria, Angola, Gabon or Congo, feature on the top of the list in terms of volume of capital flight, implying a 

potential correlation between the incidence of capital flight and high resource endowment

 is a strongly contributing factor and should be considered in conjunction with natural resource wealth. Poor governance is inextricably linked with endemic corruption, lack of transparency and ineffectiveness of the legal system, facilitating capital flight and impunity of perpetrators; most of the aforementioned countries were among the countries with highest level of corruption, according to 

 suggests that, given existing evidence, 

extractive industries are often associated with high levels of IFFs

high discretionary control over the extraction sector

lesser pressure on developing a system of scrutiny

The significance of oil revenues for many of the African countries puts them into a position where international players can leverage their position to maximize their revenues. 

Western governments have been very reluctant to improve the transparency of commodity trading

, which is one of the main channels of capital flight. Such an initiative would not only help to curb the amount of capital, which leaves Africa, but could also stimulate the reduction in corruption and tax evasion by improving transparency of the economic system.

Countries such as Switzerland, one of the world’s leading commodity trading hubs, refuse to implement payment disclosure regulations. These countries appear to profit from this lack of transparency: for example, in all the oil-rich countries apart from Angola, Swiss traders were the buyers in at least 30% of identified national oil companies’ (NOCs) sales.

While inefficient tax systems and poor government structure, which facilitate the illegal practices, are important factors of the problem of capital flight, it would be out of proportion to blame only African governments. Countries which receive exorbitant cash flows from Africa should have to report it, much as the African countries have to adhere to the rule of law and accountable governance. The issue is unlikely to be addressed effectively unless there is 

a world-wide consensus about tackling the problem of capital flight

As an example, the following practices are used to facilitate capital flight and would be good candidates for tighter regulation:

 – an importer may inflate the price so they can record lower profits, and, as a result, pay less tax. Conversely, an exporter might devalue the asset for the same purpose.

 – transactions between the affiliates of the same TNC are mispriced to move the money around to minimise tax

 – intra-corporate meddling with financial transactions to move the capital illicitly. This includes, for example, exaggerating the interest rate payable to a parent or subsidiary company

Poor governance, inefficient tax systems and corruption are at the heart of the problem of capital flight from African countries. Nevertheless, it is the failure of the global community to find a consensus on the matter, and to strive towards finding a solution, that is the biggest block in solving this problem. Illicit financial flows, as well as tax evasion by the TNCs, are enormous drags on the African economies, depriving them of much-needed revenue. Despite the calls of the G20 summit to crackdown on the tax havens, the world’s reluctance to take decisive steps suggests that the problem of capital flight will not be eradicated in the foreseeable future, but even starting to take steps in that direction could have a very high impact.

The source of much of the information in this article is 

Triple Crisis: Savings, Capital Flight, and African Development

Olivia Goldin

Tuberculosis: The Potential for Cost-Effective Intervention

In 2012, an estimated 9 million people were newly diagnosed with active TB [1], and 1.5 million people died of TB [2]. Despite this, the vast majority of TB is fully curable [3].

Up until January 2012, Giving What We Can recommended the 

 as a top charity. This recommendation was withdrawn due to concerns about their capacity to use additional funds to effectively deliver cheap and effective antibiotic treatments - though this does not mean that they are not doing fantastic work.

This blog post provides a summary of our report (forthcoming), which gives an update on whether cost-effective interventions for TB still exist.

Tuberculosis (TB) is a disease caused by bacteria of the Mycobacterium Tuberculosis complex [4]. It is airborne and primarily spread by inhaling microscopic droplets through another person’s coughing or sneezing [5].

In approximately a third of the world’s population TB is latent (i.e. not yet manifesting symptoms or causing harm to the patient, and not contagious). In 2013 there were approximately 

 (i.e. harmful, symptomatic and contagious) 

 (Disability Adjusted Life Years) are lost 

: the average adult suffering from TB loses 3-4 months of work time, resulting in a loss of 20-30% of annual household income. The families of people who die from the disease lose about 15 years of income, on average. TB costs approximately 

$12 billion to the global economy annually

 or families, even once they have been cured. Women in particular may be more vulnerable given that they are less likely to earn money in developing countries and be more dependent on their husbands or male relatives. [10]

There are several factors that increase the incidence of TB. These include:

, such as prisons. TB is rendered inactive by UV light which comes from the sun, so lack of light facilitates its spreading. [11]

, which may be due to the correlation with other risk factors such as the likelihood of living in slums or being incarcerated. [12]

, as it makes the body more vulnerable to TB by weakening the immune system. [13]

Factors that increase the likelihood of death from the active stage are often of a social nature. They include a 

disbelief in the population in the benefits of TB medical treatment

 the disease, or indirectly target prevalence through 

The most cost-effective direct intervention appears to be treatment of drug-susceptible TB through short-course chemotherapy, a standard treatment regimen that forms part of the WHO's 

) strategy. In DCP2, the authors estimate that it 

 (2001 USD) to treat non-drug-resistant TB, where the patient is HIV-negative. [20]

We also recommend that charities focus direct interventions in 

areas where there is a high concentration of TB sufferers and high-risk groups

, in order to minimise extra costs, such as transportation.

There are other interventions besides direct medical treatment that may help combat TB and be cost effective. Worthy of note is that the World Bank rates the intervention of 

 [21] suggesting that there are interventions that reduce indoor air pollution that may be highly cost-effective.

Excitingly, there are several charities working in these areas that appear to be highly cost-effective. Although exact figures are not currently available, 

 appears to be averting DALYs at a cost of less than $50 per DALY. A calculation of this figure, along with discussion of other promising organisations, is included in the report, but it is important to note that our analysis of these organisations is very preliminary and so this estimate may be subject to substantial revision as we learn more about Target TB.

 as promising initiatives working to alleviate the risk factor of indoor air pollution.

Much more research is needed in this area. However, some TB interventions appear very promising, and we look forward to seeing further exploration of these.

US Center for Disease Control: Education Resources on TB

US Center for Disease Control: fact sheet on TB

Governmental report on TB control in India in 2011

Perception and social consequences of tuberculosis: a focus group study of tuberculosis patients in Sialkot, Pakistan

WHO and UN: Policy guidelines for collaborative TB and HIV services for injecting and other drug users

Linking TB and the environment: an overlooked mitigation strategy

Stop TB Partnership: World TB day brochure

Friends for International Tuberculosis Relief: Treatment Default

World Bank: indoor air pollution at a glance

Charlie Satow

Donating in the face of corruption

Corruption exists in developing countries. Transparency International’s 

 indicates that in a list of 23 countries, including those among the world’s poorest such as the Democratic Republic of the Congo and Ethiopia, 

almost every second person reported paying a bribe for a public service

. In two of these, Sierra Leone and Liberia, this figure was over 75%, while 

This gives rise to justifiable concerns when donating to charities working in developing countries where reported corruption is high, and governance and institutions are weak. Won’t our money, or the goods it buys, just be stolen? Faced with this challenge, how should a prospective donor respond?

Corruption is common in many countries across the world. Source: Transparency International Global Corruption Barometer 2013

First, what do we mean by corruption, and why don’t we like it? Here I’m not referring to ‘grand corruption’, large-scale looting by those taking advantage of their position in public office (e.g. 

 and others); what’s most relevant for Giving What We Can is 

theft of inputs or money designated for improving the lives of the poor

This is clearly a bad thing: the poorest are totally deprived of the benefits of an intervention, and the donation that funds it is wasted. This sort of graft can also undermine confidence in the organisation concerned, and, on a macro level, the “psyche and moral fiber” of local society, according to 

Corruption deprives the poorest of the benefits of an intervention. Credit: futureatlas.com

One response might be to avoiding donating altogether, which certainly ensures zero corruption in the use of your donations. But it also ensures zero impact; ideally we want to find some way of giving responsibly and still contributing to the alleviation of poverty.

Alternatively, you might demand a ‘zero tolerance’ approach to corruption from organisations you support. In fact, this has been the attitude of World Bank president Jim Kim, who in December 2013 

 corruption to be “public enemy number one,” adding, “we will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”

Certainly, from a practical point of view, it’s a good idea to ensure that the charity you are giving to is aware of the risks of theft and corruption and has processes in place to avoid them. For example, the 

 and places a high priority on ensuring nets are indeed distributed to beneficiaries through 

. It also claims to work only with reputable distribution partners.

all transfers are checked and accounted for

 against a budget agreed jointly with the local Ministry of Health, regularly commissions 

 with those with whom they work in country (as well as having the advantage of distributing a drug with little to no market value). These sorts of procedures, in line with MANGO’s 

 to financial management for NGOs, can help to give a donor confidence in the integrity of a charity’s operations.

a ‘zero tolerance’ attitude is misguided

you can never be certain of eliminating corruption

. If corruption is actually an unfortunate fact of life in all societies to a certain extent (witness ample examples of corruption in ‘developed’ countries like 

, where the cost of corruption may be up to £99bn), then it is fruitless to try to avoid it entirely.

, corruption is not going away anytime soon. In this context, a genuine ‘zero tolerance’ attitude is impractical: the standards would be so high as to render any work on the ground impossible.

 of the Center for Global Development (whose argument is about public sector corruption but is still relevant for our purposes) you recognise that corruption is “almost always a symptom of a broader problem of weak systems of control, entrenched patronage, insider rents and privileges,” then it follows that stringent formal reporting requirements imposed from outside aren’t likely to be totally successful in avoiding the problem.

a single-minded focus on corruption potentially overstates the threat it poses, and is itself a waste of resources

. Above I mentioned that corruption is present in all societies. But that does not mean it is always present: because corruption stories in nonprofits make a good story, they often garner disproportionate press attention, giving the false sense that all charities inevitably suffer immense losses from corruption.

, arguing that, given our ignorance of how representative corruption cases are, stories of corruption in aid organisations are more likely to reflect better reporting of allegations than an actual greater fraud or corruption risk. Likewise but more generally, Olken and Pande, in 

, find that “estimated levels of corruption are remarkably heterogeneous [in low-income countries]”.

Given this uncertainty, Professor Alan Fenwick, director of the Schistosomiasis Control Initiative, 

 “prejudices and fears of corruption and wastage” as a distraction and obstacle to SCI’s work. Corruption is a key concern when working in certain societies, but some organisations may find it less of a problem than others. Witness the Against Malaria Foundation, which, fortunately, has experienced 

no material loss of nets through theft”

This leads to an alternative point of view: as Savedoff 

, ‘how much money is wasted?’ might not even be the right question when we think about aid interventions. Rather, if our aim is to improve school attendance through deworming, for example, 

the first question should be ‘does the money that gets through have the desired impact?’

 This chimes with the increasing interest in 

Blog

A Look at Capital Flight from the Developing World

Tuberculosis: The Potential for Cost-Effective Intervention

Donating in the face of corruption

Open Philanthropy Project: looking at hard questions on how to do good

Female Genital Mutilation: what is the problem and what can be done?

Eight ways you can use your time to improve the world

WHO-CHOICE: a look at the effectiveness of different health interventions

How to make the most of tax deductibility in the US

Can schistosomiasis be eliminated? Lessons from Coca-Cola and other stories.

The World's Hidden and Deadly Hunger