Academic journal article The European Journal of Comparative Economics

Fighting African Capital Flight: Empirics on Benchmarking Policy Harmonization

Academic journal article The European Journal of Comparative Economics

Fighting African Capital Flight: Empirics on Benchmarking Policy Harmonization

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Acknowledgements

This author is highly indebted to the editor and referees for useful comments.

1. Introduction and motivation

A key constraint to African growth and development is the shortage of financing (Boyce & Ndikumana, 2012a). The continent is facing substantial and growing financing gaps, hindering public investment and, poor social service delivery. Paradoxically, it is the source of large-scale capital flight1 which has escalated during the last decade. According to the recent report by Boyce & Ndikumana, 33 sub-Saharan African (SSA) countries lost a total of 814 billion (constant 2010 US$) from 1970 to 2010. This far surpasses the amount of official development aid ($659 billion) and foreign direct investment ($306 billion) received by these countries. Consistent with Boyce & Ndikumana, assuming that the capital flight has earned (or could have earned) the modest interest rate measured by the short-term United States Treasury Bill rate, the corresponding accumulated stock of capital flight from the 33 countries would have stood at $ 1.06 trillion in 2010. This far exceeds the external liabilities of the group of countries of $189 billion (in 2010), giving the sub-region a paradoxical status of a "net creditor" to the rest of the world. This recent evidence has debunked the stereotyped perspective that SSA countries are severely indebted and heavily aid-dependent.

In light of the above, the present study contributes to existing literature by providing a feasible timeframe for policy harmonization in the battle against capital flight. The motivation for this scope and positioning is fourfold: current disturbing trends in African capital flight, missing link in the literature, availability of a new dataset and, recent methodological adaptations to policy harmonization. Firstly, current issues on African capital flight are earthshaking and heartbreaking2. Accordingly, a common denominator from concerned African scholars based on a recent bulk of 'African flight focused' theoretical and empirical studies, is the need for urgent policy action (ACAS, 2012). Hence, in response, this paper is geared towards providing benchmarks for policy harmonization, with particular emphasis on the feasibility of and ideal timeframe for the harmonization process. Secondly, as far as we have searched the absence of studies that have addressed the concern of policy harmonization represents an important missing link in the literature. This paper is an attempt to bridge this scholarly gap. Thirdly, the publication of a new database in October 2012 by Boyce & Ndikumana (2012a) provides a unique opportunity of assessing the phenomenon of capital flight that has not received the much needed scholarly attention owing to the absence of relevant data. More so, while providing for the possibility of more fine-tuned empirical analysis with updated policy implications, the richness of the dataset (in appealing time series properties) provides the much needed degrees of freedom essential for robust estimations. Fourthly, the study employs a methodological innovation from recent empirics in policy harmonization. The improvement is based on theoretical underpinnings of the convergence literature, which appear relevant in tackling some of the key questions in the battle against capital flight in developing countries. Hence, employment of the methodology also substantially contributes to the empirics of capital flight.

Cognizant of the above motivations, upholding blanket policies in the battle against capital fight may not be effective unless they are contingent on fundamental characteristics and prevailing trajectories of capital flight in the African continent. Hence, policy makers are most likely to ask the following questions before benchmarking policy harmonization. Is capital flight converging within Africa? (2) If so, what is the degree and timing of the convergence process? …

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