Capital flight: the nexus with external debt and institutional quality in SADC
Date
2022
Authors
Kamupira, Faith
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Abstract
The relationship between capital flight and external debt has been described as bi-directional and it has attracted a lot of attention from researchers and policymakers. Due to the observed incidence of high capital flight and external debt in SADC, the study’s main objective is to establish the mechanism through which capital flight manifests with special interest on political institutions and external debt. The study employs the panel autoregressive distributive lag model (ARDL) approach to investigate both long-run and short-run relationships among the variables. Furthermore, the granger causality test is employed in order to attest the level of causality between capital flight, external debt and institutional quality. The study finds a long-run causal relationship between external debt and capital flight, concluding the existence of flight-driven external debt phenomenon. The results reveal that resource-endowed economies with relatively poor quality institutions drive capital flight in the SADC region resulting in countries accumulating debt to offset the loss of domestic savings associated with capital flight. The results obtained herein further shows that capital flight persist overtime, thus if capital flight remains unabated, it will continue to lead to massive capital flight in the region. Thus there is need for authorities to set up powerful legal frameworks on transparent and responsible management of natural resources so as to abate trade mis-invoicing and other forms of illegal capital flight. Moreso, policies that lead to repatriation of capital flight need to be implemented, to ensure adequacy of capital resources required for sustainable growth in the long-run.
Description
A research report submitted in partial fulfilment of the Degree of Master of Economic Science to the Faculty of Commerce, Law and Management, School of Economics and Finance, University of the Witwatersrand, Johannesburg, 2022