Growth in Africa undermined by rapidly increasing inequality

May 7, 2014
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Ahead of the World Economic Forum on Africa May 7-9, Oxfam International executive director Winnie Byanyima said “inequality will endanger progress in Africa. Africa's precious resources must benefit ordinary Africans.”

She said Africa’s economic profile was “schizophrenic”, with sharp growth occurring while stubbornly high numbers of people remain locked into poverty. The result is ballooning inequality.

“Africa’s economic growth is capturing the headlines and there is much to build upon,” she said. The average growth rate of the region excluding South Africa is very high at six per cent. This growth is enriching some more than others. Africa has the fastest rising number of dollar millionaires of any other region in the world. It now has 29 billionaires – up from just two in 2003. The wealth of the three richest Africans, at $39 billion, is more than Kenya’s entire GDP in 2012.

The flip side to this wealth creation is that six out of the ten most unequal countries in the world are in sub-Saharan Africa. The region is the only one where the numbers of poor people has actually increased, to more than double what it was at the beginning of the 80s.

Rising inequality can be reversed

“These trends are reversible. African countries must crack down on corporate tax dodgers and invest far more in free healthcare and education and in industries that can create more and decent jobs,” she said.

“One of the simplest things that governments can do to help diffuse the inequality time-bomb is to invest more in public services. Public services redistribute by putting virtual income into everyone’s pockets.”

The case of Latin America gives us hope that the global trend of rising inequality can be reversed. Brazil has had significant success in reducing inequality, through spending on public health and education, wide-scale cash transfers, and a surge in the minimum wage.

Investment on public services is key to reduce inequality

Reinvestment of resource revenues into free public services is crucial if African countries are to achieve strong public systems for delivering education and health to their citizens. Sierra Leone is an example of what can be achieved. Within a year of health user fees being removed, the fatality rate for malaria in hospitals was reduced by 90%, and free mosquito nets distributed across the country to help prevent malaria had saved the lives of nearly 4500 children.

Ghana is expected to receive more than $20 billion in oil revenues over the next decade. This could help pay for universal health care for all Ghanaians as well as investment in agriculture to boost food production.

Illicit flows and tax dodging

Much of Africa’s growth over the last decade has been driven by new discoveries of oil, natural gas, and mineral reserves. However it is estimated that Africa loses $63 billion a year to illicit flows and tax dodging. The resource drain from Africa over the last 30 years is almost equivalent to Africa’s current GDP.

Ms Byanyima said: “As long as most of Africa’s natural wealth continues to hemorrhage from the continent, inequality will continue to rise and all this spectacular growth will not do enough to help ordinary Africans. Where wealth is concentrated in this kind of extreme way, there is a real threat to democracy. When wealth shapes government policy-making, the rules bend to favour the rich. This trend is clear in much of Africa.”  

Inequality is being driven by factors including tax dodging, capital flight, reliance on private healthcare and education, mismanagement of extractive industries and failure to invest adequately in sectors that will increase employment such as agriculture.

Extractive industries compound the trend because they create comparatively few jobs and are susceptible to tax avoidance. Without strong regulation and scrutiny, much of the financial benefit of these industries fails to translate into tax revenues or well-managed expenditures. Oxfam has successfully campaigned with allies for new laws in the US and EU to ensure that extractive industries payments from companies to governments are made transparent.

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Illicit financial flows:

A joint report by the AfDB and Global Financial Integrity (GFI) last year revealed that the African continent has been a long-term net creditor to the rest of the world: Africa suffered between $597 billion and $1.4 trillion in net outflows between 1980 and 2009.

Mr Thabo Mbeki, Former President of South Africa and Chair of the High-level Panel on Illicit Financial Flows from Africa, has revealed that estimated annual outflow of illicit finance from Africa through trade mispricing alone was between $50-60 billion. Illicit outflows through trade mispricing from Africa grew at a real rate of 32.5 per cent between 2000-2009, the highest rate of any developing country regions in the world.
The Republic of Congo is estimated to have lost almost half of its GDP in cumulative outflows between 2000-2009.

The resource drain from Africa over the last 30 years is almost equivalent to Africa’s current GDP. Sub-Saharan Africa—whose illicit outflows averaged 5.7 per cent of GDP each year—suffers the most due to such outflows.  


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