Africa: A continent of wealth, a continent of poverty

24 June 2015 - 3:00pm

by Tom Lebert, senior international programme officer (Resources & Conflict) at War on Want. This article was first published by New Internationalist.

There has been much talk of an African renaissance in recent years. Thabo Mbeki, South Africa's second post-apartheid president has spoken of a 'rebirth that must encompass all Africans'.

So as African politicians and mining companies convene in London this week for 'Mining on Top' - Africa's annual mining summit - where are the voices of civil society? Their absence speaks volumes.

Africa is blessed with a rich bounty of natural resources. The continent holds around 30% of the world's known mineral reserves. These include cobalt, uranium, diamonds and gold, as well as significant oil and gas reserves.

Given this natural wealth, it comes as no surprise that with the tripling of global mineral and oil prices in the past decade, mining has exploded on the African continent.

Over the period 2000 to 2008 resource extraction contributed more that 30 percent of Africa's GDP, while the annual flow of foreign direct investment into Africa increased from $9 billion to $62 billion (most of this into extractive industries).

However, despite being so richly endowed, and despite the mining boom of the past decade, Africa has drawn little benefit from this mineral wealth and remains one the poorest continents on the globe, with almost fifty per cent of the population living on less than $1.25 per day.

Exploitation and corruption

So, why is it that a continent with such vast potential wealth can remain so poor? It's in large part down to 'Illicit financial flows'. The illegal movements of money or capital from one country to another.

The exploitation of mineral resources has all too often led to corruption, and a large proportion of the continent's resources and revenues benefitting local and foreign elites rather than the general population.

Trade mispricing (and in particular transfer pricing and trade misinvoicing) is the most common way of transferring illicit funds abroad.

Through trade mispricing companies seek to maximise profits artificially through maximising expenses in high tax jurisdictions and maximising revenue and income in low tax jurisdictions. This enables corporations to minimise tax payments illegally and transfer the funds abroad.

Such illicit flows undermine social development and stymy inclusive economic growth. Instead of investing resource revenues into improving infrastructure, health and education, political elites, often in collusion with mining companies, have siphoned off proceeds from the continent's mineral and oil wealth – lining their own pockets, to the detriment of ordinary Africans.

The biggest culprit: the mining industry

Zambia on the face of it is a wealthy country – the largest producer of copper in Africa and the seventh largest globally. Yet Zambia is one of the poorest countries in the world with 74 percent of the population living on less than $1.25 a day and 43 percent of the population being undernourished. This is in part due to a haemorrhaging of wealth mainly to multinational mining companies.

According to the Zambian Deputy Finance Minister, in 2012 the country was losing $2 billion a year from tax avoidance, around 10 per cent of Zambia's GDP.

The mining industry was the biggest culprit and the bulk of the loss was attributed to transfer pricing - where parts of the same company trade with each other at prices determined by themselves - and to the over-reporting of costs and under-reporting of production. The situation is compounded by overly-generous tax incentives provided to companies by the Zambian government.

The Zambian example is not an isolated case. Such corporate practices in the mining sector are common right across the continent. In South Africa, illegal capital flight through trade-misinvoicing (a means to evade tax) is rife in the ores and metals sector.

Over the period 1995 to 2006, trade misinvoicing alone amounted to US$ 167 million. And when it comes to fuel exporting countries, over the period 1970 to 2008, states were losing on average US$ 10 billion per year because of misinvoicing - the sum accounting for nearly half of all illicit financial flows from Africa during this time.

Moreover, statistical data generated through the Kimberly Process Certification Scheme, which was introduced in 2003, revealed that diamond production was nearly twice as large as estimated indicating massive smuggling, underreporting and tax evasion in the sector. The list goes on.

Transparency and playing by the rules

So, what is to be done? At the heart of any solution must be transparency. Countries need to be more open in their dealings with mining companies, put in place and enforce fairer tax regimes and anti-corruption rules, and pursue economic policies that promote diversified economies and reduce dependence on revenues from mineral wealth.

International mining capital of course would also have to play by the rules or be held to account for their indiscretions. Such measures would go some way to ensuring that the continent's wealth benefits ordinary people and puts Africa onto a path to greater prosperity.

Mining routinely disrupts and destroys people's livelihoods while damaging their health and the environment. It is local communities right across the continent that are most affected by the extractives industry. 'Mining on Top' should be the perfect opportunity to bring these communities into the very discussions that will affect their lives. Shamefully, they've not been invited.

So while the mining elite discuss how best to exploit a continent, ordinary Africans continue to lose out.

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