Determinants of Capital Flight in Common Market for Eastern and Southern Africa Member Countries: Dynamic Panel Data Analysis
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Date
2012-06
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Addis Ababa University
Abstract
Numerous of studies in recent years have focused attention on the determinants of capital
flight in the developing countries. This paper contributed to this body of knowledge by
filling a noticeable gap. Principally, this paper examines the determinant of capital flight
from 13 member countries of COMESA for the period 1990-2009.
The paper employed first difference General Method of Momentum (GMM) and system
GMM to find out the determinant of capital flight from COMESA member countries. The
study found that capital flight has a tendency to persist over time, which may reflect that
habit-formation effect or contagion effect. The study also found that Foreign Direct
Investment (FDI) has a positive and significant effect which may reflect existence of
discriminatory-treatment for domestic investors. Capital flight from COMESA member
countries is also fueled by the increase of Gross Domestic Product of the country which
may reflect money laundering and a high return for investment in the foreign country
particularly in advanced countries. Furthermore the study found that budget deficit has a
negative impact on capital flight which may reflect that corrupted government officials
are the main actors of capital flight from COMESA member countries. The study
suggested the need for the policy makers to adopt an investment policy which doesn’t
discriminate foreign investor from the domestic investors, adjusting the domestic interest
rate in accordance with the international market and apply tight control on corrupted
government officials to repatriate capital flight from COMESA member countries.
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Determinants of capital flight in Common Market for Eastern