The extractive sector and illicit financial flows in Africa: mechanisms and policy implications for transparency and governance

Abstract Empirical research on the drivers of illicit financial flows (IFFs) in Africa has largely overlooked the significant role of the extractive mining sector. This article aims to address this gap by rigorously examining the relationship between extractive mining and IFFs in Africa. Utilizing panel data from 27 African countries over the period 2004–2018 and employing the system Generalized Method of Moments (GMM) estimator, our findings reveal that the extractive sector significantly fuels IFFs, thereby substantiating a contemporary manifestation of the natural resource curse. Furthermore, our analysis of the transmission mechanisms indicates that trade misinvoicing and corruption act synergistically to exacerbate this relationship. Finally, our investigation into the impact of the Extractive Industries Transparency Initiative (EITI) suggests that its implementation has mitigated the adverse effects of the extractive sector in African countries. These results strongly suggest that the EITI represents an effective policy instrument in combating this issue.