Political and Economic Determinants of Capital Flight: Panel Data Analysis from East African Countries
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Date
2017-06
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Addis Ababa University
Abstract
Capital flight has been a problem among many developing countries. It is more severe among African countries. Given their smaller resource base and limited market, the problem of capital flight justifies a serious attention particularly among East African Economies. Albeit most of these countries are in the ranking list of huge volume of capital flight east Africa has never been considered as a sub- region in the capital related studies. Cognizant of this, this paper intends to contribute to this body of knowledge by filling a noticeable gap. This paper examined the determinant of capital flight from 9 eastern Africa countries for the period 2006 - 2015. The linear regression panel corrected standard errors model was employed and found that absence of political freedom and good institutions to have a positive and significant effect for the prevalence of capital flight. Capital flight is also affected negatively by GDP growth; credit availability and exchange rate. Exchange rate has shown unexpected sign implying the exchange rate can have negative impact on the capital flight through its effect on current account whose value minimize the residual in the formulation of capital flight. Further budget deficit and level of debt have positive relationship with capital flight. The study forwards considerations for the policy makers the need to have easier access for credit facilities for the private sector accelerate economic growth, to devise a mechanism to widen the tax base to finance budget deficit and establish constructive institutions enhancing political freedom and ensuring political and civil liberties of citizens in order to curb current aggravated level of capital flight
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Economic Policy Analysis