Capital Flight Accounting and Welfare Implications in the MENA Region

Abstract

This research brings together the first estimates of capital flight in the MENA countries from 1970 to 2002. In addition, it explains the nature, volume, determinants and growth impact of capital flight in the resource-based and the resource-poor economies of the MENA region on the basis of their respective structural and institutional characteristics. Our findings suggest that capital flight follows a systematic pattern depending on whether a MENA country is resource-based. The resource-based economies are found to be net creditors to the world economy and have experienced more than 273 billion of 1995 USD in capital flight (average of 9.42 percent of GDP). In these economies, capital flight is assisted by natural resource exporting rents, the outward orientation of most economies and the monarchial character of most of their political systems. In assessing the welfare impact, capital flight is shown to negatively and significantly affect economic growth in the resource-based economies. In contrast, the nonresource economies are shown to have experienced a net inflow of an unrecorded foreign exchange of $215 billion in 1995 USD (average of 9.38 percent of GDP). These inflows are mainly reflected in smuggling of imported goods to avoid trade taxes and regulations and are assisted by the inward-looking strategies, one-party or militarily controlled governments and the relatively significant capital controls in these economies. Interestingly, while capital flight is an outcome of government control in resource-based economies, increasing government control induces unrecorded foreign exchange inflows in the resource-poor economies. However, we find no significant effect of unrecorded inflows on economic growth in these economies. Based on these findings, the research provides policy implications for development in the MENA region.