Capital flight and diamond exports in the Central African Republic: The role of political governance crisis

Abstract

AbstractThe purpose of this paper is to examine the relationship between capital flight, diamond exports and political governance crisis in the Central African Republic. To achieve this, use is made of multiple correspondence analysis to construct a political governance crisis index, and the Autoregressive Distributed Lag Model and Bound test for co‐integration are employed to establish short‐run and long‐run relationships. The short‐run results show political governance crisis and diamond exports have a significant and negative effect on capital flight. The interaction term between diamonds exports and political governance crisis is found to be positively related to capital flight in the short run. The long‐run equilibrium shows a significant and negative relationship between political governance crisis, diamond exports, and gross domestic product growth even though the interaction between political governance crisis and diamond exports show a positive and significant relationship. The total natural resource rent is found to be positively related to capital flight but not statistically significant. It is then recommended that a combination of stable political governance associated with reducing corruption in public affairs and promoting transparency in the management of the diamond sector be strengthened to effectively reduce the flight of capital.