September 1, 2013

Capital Flight Risk

Natural-resource-rich countries risk capital flight as multinational corporations seek to avoid taxes

The Democratic Republic of the Congo, widely considered among the world’s richest countries in terms of mineral deposits, also regularly sits high on various lists of the world’s poorest countries. Each year, it loses billions of dollars in tax revenue as wealthy individuals and multinational corporations take advantage of weak tax legislation and enforcement to funnel profits abroad, including to foreign financial centers. A similar situation plays out repeatedly in many countries in Africa and other parts of the world.

Natural resources are indeed a window of opportunity for economic development. In principle, revenues derived from their exploitation can help alleviate the binding constraints that governments in developing countries often face when attempting to transform their economies, boost growth, and create jobs. The experiences of resource-rich countries (especially those rich in hydrocarbon and minerals), however, suggest that resource wealth is not always a blessing. It can, in fact, be a curse. Over the past few decades, economic growth in resource-rich countries has, on average, been lower than in resource-poor ones (Frankel, 2012).
Blessing or curse?

There are several explanations as to why the exploitation of natural resources could have negative consequences for the economy (Frankel, 2012). One is the corruption of political and public administration elites. Because revenues derived from natural resources in many cases flow directly through the government’s coffers, these elites may be able to take advantage of weak checks and balances to misappropriate those riches for themselves and channel them abroad.

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