South Sudan, Illicit Financial Flows, and (the Maddening Task of) Asset Recovery

June 7th, 2012

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In December of 2011, nearly a year after South Sudan voted overwhelmingly in favor of independence from its northern neighbor, I asked a very important question. Will South Sudan defy the resource curse?

The “resource curse” is the tragic phenomenon that countries well-endowed with natural resources tend to have slower economic growth and poorer development than those without. According to an analysis of developing countries by Jeffrey Sachs and Andrew Warner, the more an economy relies on mineral wealth, the lower its growth rate. Countries with significant natural resource endowments also tend to have an increased likelihood of experiencing war and violence and a decreased likelihood of having a democratic system of governance.

South Sudan faces many predispositions that make it susceptible to the curse. First and foremost it holds over 75% of what was the united country’s 500,000 barrels per day of crude oil output. As a new nation coming from 50 years of conflict and marginalization, South Sudan is exposed to a variety of other exacerbating factors, including weak, ineffectual institutions and government inefficiency and mismanagement. The country derives nearly 98% of its budget from oil, which is another red flag. A government which is dependent on oil revenue has little accountability to its citizens through taxation.

Of the oil in South Sudan, Secretary of State Hilary Clinton has said: “We know that it will either help your country finance its own path out of poverty or you will fall prey to the natural resource curse which will enrich a small elite, outside interests, corporations and countries and leave your people hardly better off than when you started.”

Though the relationship has not been fully examined the economics literature, the resource curse is also highly related to, and intertwined with, illicit financial flows. In one of the few papers on the subject, Ndikumana and Boyce (2011) find a statistically significant positive relationship between oil exports and illicit financial flows among sub-Saharan African nations. They find that each extra U.S. dollar a country has in oil exports is associated with an additional 11 to 26 cents in illicit capital flight.

It will seem, in answer to my question last year, Sudan will defy neither. Last month, President of South Sudan Salva Kiir sent a letter to seventy five current and former upper-level government officials revealing an estimated $4 billion of public money has been stolen. He wrote: “Most of these funds have been taken out of the country and deposited in foreign accounts. Some have purchased properties, often paid in cash.” The letter offers amnesty for anyone who returns the money.

Extractive industries, particularly in oil, often lead to illicit financial flows because they are subject to high-level discretionary political control among a small group of individuals at the upper levels of governments. This means there’s a high concentration of power over the money and a whole lot of secrecy. The fact that Kiir sent the letter to only 75 officials is highly indicative that this condition holds in South Sudan. As he said, “corrupt individuals with close ties to government officials” were the ones responsible.

Since Kiir sent the letters, $60 million has been returned, about 1.5% of the total. It betrays the other side of this heavy coin: the difficulty of asset recovery. As Tom Cardamone, Managing Director of Global Financial Integrity, has said: “The opportunity costs of trying to locate, let alone recover, corrupt proceeds are just too frustratingly, maddeningly, horribly high. Given their complexity and difficulty, efforts to recoup stolen funds are Sisyphean in the extreme.”

To prevent his country from falling victim to the resource curse, Kiir must, first and foremost, put a cap on the outflow of illicit financial flows and address transparency in the upper levels of government. Asset recovery, whether done by compulsion or request, may be a piece of the puzzle, but it will not solve the problem. The only long-term strategy that really works is to prevent the money from going out in the first place.

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Written by Ann Hollingshead

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