Effect of capital flight on domestic investment: Evidence from Africa

Figures & data

Table 1. The first and last 10 countries with the lowest and highest mean of KF_GDP, GCF, and FIL

S.No.	Country	KF_GDP	GCF	FIL	Country	KF_GDP	GCF	FIL
1	Madagascar	−0.027	20.384	−0.467	Nigeria	.040	21.915	−.693
2	Burkina Faso	−0.006	19.244	−1.218	Uganda	.047	25.802	2.333
3	Algeria	−0.004	38.811	−1.218	Ethiopia	.058	36.970	−1.218
4	Zimbabwe	−0.004	9.129	−1.001	Rwanda	.076	19.518	−.225
5	Egypt	−0.003	17.409	0.974	Mozambique	.080	34.406	−1.218
6	Cote d’Ivoire	−0.003	14.440	−1.218	Mauritania	.109	33.944	−1.218
7	Angola	0.007	24.257	−1.920	Zambia	.137	36.330	2.333
8	Tunisia	0.010	23.406	−1.218	Seychelles	.185	30.844	1.561
9	Sudan	0.020	22.021	−0.556	Congo, Rep.	.254	39.874	−1.218
10	Botswana	0.028	31.548	2.084	Sierra Leone	.334	15.402	−1.579

Source: Author’s computation.

Table 2. Specific summary statistics

Variable		Mean	Std. Dev.	Min	Max	Observations
GCF	overall	23.749	0.606	1.096	77.890	N = 541
	between		8.395	9.129	39.874	n = 30
	within		6.677	-.6513	61.764	T-bar = 18
KF_GDP	Overall	.0563	.1527	-.4673	1.700	N = 541
	between		.0791	-.0268	.3343 1.422	n = 30
	within		.1298	-.5968		T-bar = 18
Pc	Overall	23.508	27.852	.4913	160.124	N = 541
	Between		27.730	3.732	136.208	n = 30
	Within		6.703	-1.981	78.143	T-bar = 18
GDS	Overall	18.455	16.403	-21.460	64.927	N = 541
	Between		15.071	-6.530	52.298	n = 30
	Within		5.939	-1.292	49.698	T-bar = 18
TOT	Overall	127.094	40.890	47.892	290.930	N = 541
	Between		30.827	70.513	187.176	n = 30
	Within		26.788	39.918	230.848	T-bar = 18
Trade	Overall	67.827	33.991	16.668	225.023	N = 541
	Between		31.184	30.410	185.181	n = 30
	Within		12.452	31.002	113.297	T-bar = 18
FIL	Overall	-.643	1.230	-1.920	2.333	N = 541
	Between		1.251	-1.920	2.333	n = 30
	Within		.4810	-2.836	.9212	T-bar = 18
GDPG	Overall	4.259	4.327	-20.598	26.417	N = 541
	Between		2.049	-0.882	9.471	n = 30
	Within		3.943	-22.277	24.738	T-bar = 18
Inflation	Overall	14.846	114.833	-21.165	2630.123	N = 541
	Between		26.598	0.856	149.783	n = 30
	Within		111.508	-136.092	2495.186	T-bar = 18
Debt	Overall	48.626	38.091	2.551	244.775	N = 541
	Between		21.655	10.806	94.068	n = 30
	Within		31.313	-23.361	199.333	T-bar = 18

Source: Author’s computation.

Table 3. Effect of capital flight and financial liberalization on gross domestic investment

	Regression without financial liberalization index		Regression with financial liberalization index
Variables	SGMM	Fixed effect	Fixed effect	SGMM
Lagged gross capital formation	0.644***(0.106)			0.613***(0.114)
Gross domestic saving (% of GDP)	0.306*(0.162)	0.310***(0.058)	0.318***(0.058)	0.198(0.245)
Capital flight (% of GDP)	−0.087***(2.519)	0.043**(1.702)	0.041**(1.710)	−0.077***(2.779)
Bank Private credit (% GDP)	0.017(0.044)	0.157(0.096)	0.166*(0.097)	0.020(0.040)
Term of trade index	−0.119**(0.047)	−0.047***(0.014)	−0.048***(0.014)	−0.112**(0.052)
Trade openness (% of GDP)	0.351***(0.127)	0.035(0.024)	0.037(0.024)	0.306**(0.144)
Financial liberalization index			−0.773(0.749)	−1.861(3.037)
Constant	−1.216(8.072)		18.543***(4.045)	1.026(8.814)
Within R^2		0.155	0.159
Between R^2		0.244	0.214
Overall R^2		0.234	0.207
AR(1)	0.022			0.003
AR(2)	0.949			0.877
Hansen test	0.242			0.257
Number of Instruments	26.000			26
Observations	511			511
Number of countries	30			30

Note: Hansen test (null: instruments are valid).The dependent variable is gross capital formation as % of GDP. Standard errors in parentheses SGMM mean two-step system GMM; AR (1) First order autocorrelation test, AR (2) second order autocorrelation test. Significance values are: *** p < 0.01, ** p < 0.05, * p < 0.1.

Table 4. The effect of capital flight on domestic investment when additional macroeconomic variables added to models

Variables	Fixed effect	Fixed effect	SGMM
Lagged gross capital formation	-	0.560***(0.053)	0.784***(0.023)
Gross domestic saving (% of GDP)	0.134***(0.047)	0.083***(0.024)	0.054***(0.010)
Capital flight (% of GDP)	0.442***(0.152)	0.122 (0.098)	−0.131***(0.030)
Bank Private credit (% GDP)	0.140**(0.056)	0.043(0.037)	0.018(0.005)
Term of trade index	−0.226*(0.120)	−0.152**(0.061)	−0.065**(0.028)
Trade openness (% of GDP)	0.363**(0.155)	0.216***(0.076)	0.108***(0.012)
Financial liberalization index	−0.030(0.032)	−0.031(0.020)	−0.005(0.005)
Lag of real GDP growth rate (%)	0.011*(0.006)	0.006*(0.003)	0.010***(0.001)
External debt stocks (% of GNI)	−0.202*(0.100)	−0.096*(0.053)	−0.010(0.021)
Inflation, GDP deflator (annual %)	−0.001(0.001)	−0.001(0.001)	−0.001*(0.001)
Constant	2.226**(0.818)	0.994**(0.426)	0.434***(0.151)
Within R^2	0.369	0.604
Between R^2	0.243	0.834
Overall R^2	0.271	0.734
First order autocorrelation test (AR(1))			0.079
Second order autocorrelation test (AR(2))			0.849
Hansen test			0.322
Number of Instruments			21
Observations	432	432	425
Number of countries	30	30	30

In this table, the effect of capital flight is shown by incorporating additional macroeconomic variable to justify and augment the efficiency and consistency of results in Table 3 and to justify the value of R² computed from fixed effect regression following reviewers’ comments. Note: Hansen test (HO: instruments are valid). The dependent variable is gross capital formation as % of GDP. Standard errors in parentheses SGMM means two-step system GMM, significance values are: *** p < 0.01, ** p < 0.05, * p < 0.1.

Table A. Correlation matrix

Variables	Lngcf	KF_GDP	FIL	Inflation	GDPG	lnpc	lngds	lntot	lntrade	lndebt
lngcf	1.000
KF_GDP	0.276	1.000
FIL	0.070	−0.015	1.000
Inflation	−0.074	−0.022	−0.016	1.000
GDPG	0.194	0.070	0.061	−0.144	1.000
lnpc	0.091	−0.092	0.167	−0.185	−0.137	1.000
lngds	0.488	0.027	0.063	−0.038	−0.104	0.022	1.000
lntot	0.191	0.127	−0.155	−0.032	−0.018	−0.017	0.409	1.000
lntrade	0.338	0.179	−0.067	−0.108	−0.129	0.201	0.224	−0.055	1.000
lndebt	−0.180	0.116	−0.179	0.046	−0.138	−0.181	−0.191	−0.259	0.153	1.000

Source: Author’s computation.

Table B. Definition of variables and sources of data

Variables	Definitions	Sources
GCF	Total Gross fixed capital formation (%GDP)	World development indicator (WDI) (Online Edition)
PC	Ratio of domestic bank credit to Private credit as %GDP	International Monetary Fund, International Financial Statistics and data files.
GDS	Gross domestic savings as % of GDP	World Bank national accounts data.
TOT	Net barter terms of trade index (2000 = 100)	Handbook of Statistics and data files, International Monetary Fund, and International Financial Statistics.
Trade	[Import + export]/GDP+100	World Bank national accounts data.
L.GCF	Lagged value of the three capital formations (%GDP)	Author’s computation based on data from WDI (Online Edition)
FIL	Financial liberalization	Chinn and ITO (2006) index (−2.5 to 2.5)
KF	Capital flight, in current US$	New edition of Ndikumana and Boyce (2021)
KF_GDP	KF/GDP*100	Author’s computation based on data from the new edition of Ndikumana and Boyce (2021) and author’s update World Bank, WDI (Online Edition): https://peri.umass.edu/capital-flight-from-africa
Inflation	Inflation measured by GDP deflator annual percentage	WDI
Debt	External debt stock (%GNI)	WDI
Growth	Real GDP growth rate, annual	WDI

Source: Author’s compilation

Table C. Summary statistics: capital flight, gross capital formation, and FIL index

S.no.	Country	Capital flight (% GDP)	Gross capital formation (%GDP)	Financial liberalization index
1	Algeria	−.004	38.811	−1.218
2	Angola	.007	24.257	−1.920
3	Botswana	.028	31.548	2.084
4	Burkina Faso	−.007	19.244	−1.218
5	Burundi	.039	12.294	−1.709
6	Cameroon	.028	22.633	−1.218
7	Congo, Dem.Rep.	.031	16.587	−1.192
8	Congo, Rep.	.255	39.874	−1.218
9	Cote d’Ivoire	−.003	14.440	−1.218
10	Egypt	−.003	17.409	.974
11	Ethiopia	.059	36.970	−1.218
12	Gabon	.028	25.319	−1.218
13	Ghana	.039	22.595	−1.499
14	Kenya	.033	19.056	1.055
15	Madagascar	−.027	20.384	−.467
16	Malawi	.032	15.333	−1.464
17	Mauritania	.109	33.944	−1.218
18	Morocco	.031	33.349	−1.218
19	Mozambique	.081	34.406	−1.218
20	Nigeria	.040	21.915	−.693
21	Rwanda	.076	19.518	−.225
22	Seychelles	.186	30.844	1.561
23	Sierra Leone	.334	15.402	−1.579
24	South Africa	.036	19.128	−1.218
25	Sudan	.020	22.021	−.556
26	Tanzania	.032	30.365	−1.218
27	Tunisia	.010	23.406	−1.218
28	Uganda	.047	25.802	2.333
29	Zambia	.138	36.330	2.333
30	Zimbabwe	−.004	9.1293	−1.001

Source: Author’s computation.

Ndikumana, L. (2014). Capital flight and tax havens: Impact on investment and growth in Africa: De Boeck Supérieur | Revue d’économie du développement, HS02. 22, 99 à 124.

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