Liberalization of trade in services could lead to increased capital flight in African which in-turn could curtail the developments efforts. Capital flight I am addressing here is the movement of money from investments in one country to another in search of better returns or as a way of avoiding country’s risks such as high inflation, overvaluing or undervaluing of exchange rates, political turmoil, very low or very high interest rates. Unlike investments in the production of goods, trade in services does not require capital intensive investments. Because trade in services includes transaction with a large cross section of society, if the capital account is not well managed, the resulting capital flight could lead to loss of investments especially in infrastructure, plant and equipment, and human capital. Given that capital is so scarce in Africa than in developed countries, the impact of capital flight is likely to be higher in Africa than in the West.
Taking an example of my country in as far liberalisation of trade in services is concerned, out of 23 commercial banks, only one is indigenous and 50% of market share is in the hands of the three foreign banks. In the insurance sector, three foreign companies out of more than 27 in the country control the market. The airline industry is fully liberalized with more than 23 airlines serving both the domestic and international routes and out of this only 3 of are indigenous. All the five main telecommunication companies serving 8.555 million are not indigenous. A similar situation exists in the other sectors such the retail chains, construction services, foreign exchange bureaus and in hotel and tourism sectors.
The above situation presupposes that my country is doing well on foreign direct investments in the area of trade in services. But we also run an open capital account implying that investor are free to transfer their returns to investment back to their countries or to other countries where they feel that they can fetch more. Although an open capital account is favoured because it incentivizes and attracts foreign direct investment, in the absence of an effective regulation on how much should be repatriated, my country may find itself being used just as a market and a center for accessing inputs. It could end up being used to provide labour, utilities and market to the service providers but without them contributing much to growth and development of the country. An open capital account along with liberalization of trade in services could increase capital flight and create a situation where the returns to investment benefit other countries which are the source of the investment, that is, the developed or more developed developing countries.
Like the name presupposes, people require services in their day-to-day lives and therefore trade in services is a process of satisfying that need. But unlike trade in goods, trade in services tends to involve a clientele of a bigger portion of society. In a situation where the majority people are clients to a service provider, failure to plough back returns to investment can result into disenfranchising the population and thus derailing poverty reduction efforts.
Africa is already in worse situation in as far as capital flight is concerned and therefore there is need to curtail this practice. James K. Boyce and Léonce Ndikumana estimated that between 1996 capital flight from Africa totaled more than $193 billion . Dev Kar and Sarah Freitas in their report on “Illicit Financial Flows from developing countries” indicate that over the decade ending 2009 capital outflows increased at least by 10.2% over the decade with Africa’s rate growing the fastest at 22.3%. Dev Kar and Devon Cartwright-Smith in their report on “Illicit Financial Flows from Africa: Hidden Resource for Development” show that over the 39-year period Africa lost an astonishing US$854 billion in cumulative capital flight—enough to not only wipe out the region’s total external debt outstanding of around US$250 billion (at end-December, 2008) but potentially leave US$600 billion for poverty alleviation and economic growth. Instead, cumulative illicit flows from the continent increased from about US$57 billion in the decade of the 1970s to US$437 billion over the nine years 2000-2008. In other words, Africa is a net creditor and not a debtor of the rest of the world as we are made to believe.
But being a net creditor does not help because the debt is never going to be paid back. The solution therefore is to apply prudential measures and effective controls over the capital account. There is need for effective capital management techniques to help stop capital flight. In the face of liberalization of trade in services capital flight seem to be increasing instead of reducing. According to Kari Heggstad and Odd Helge Fjeldstad capital flight in Africa is mainly done through methods such as; carrying-cash-out of the country and change it into other currencies abroad, smuggling of money through easily convertible valuables across borders such as precious items (like gold, silver, art and jewellery), transfer pricing where the foreign buyer puts the difference in the price which is then put on foreign bank account in the exporter’s name, transferring money overseas through commissions and agent fees paid by foreign contractors into foreign bank accounts of residents and bank transfers from a local affiliate of a foreign institution to a designated recipient abroad . All these are trade in services related activities and so there is need to regulate against these methods with the aim of reducing capital flight and its effect. Africa must fight capital flight if the continent it to attain the desired economic development.
