Abstract
Using the residual method of capital flight estimation, this paper estimates Nigerian capital flight over the period 1970 - 2001 and finds a close correlation between external debt and capital flight flows. This phenomenon suggests a paradoxical revolving door of a bi-directional flow of capital, i.e. where capital enters the country in the guise of external borrowing and simultaneously slips out of the country as private capital flight. The research question addressed by this paper is whether such a financial revolving door relationship exists in Nigeria, just as previous empirical researches had established in a number of countries. The paper utilises a simultaneous equation model and three stage least square estimation technique (3SLS), in addition to two-way Granger causality tests, to obtain statistical evidence that confirms the existence of a financial revolving door relationship between the two endogenous variables. In addition, existence of stronger causality from debt to capital flight is instrumental in showing that growing public deficit and the resulting increase in external debt is being used as a transfer mechanism for capital flight.
Highlights
The most pronounced concern among policy makers, researchers and key stakeholders in economic development is that most developing countries, especially in the Sub Sahara Africa (SSA), are riddled with heavy debt burdens, foreign exchange shortages, transient and chronic poverty
Capital flight amounts to a substantial proportion of the very resources, which are essential for financing economic growth to reverse the perverse economic trends
Where KFr is capital flight according to the residual method; ∆ denotes change in a variable, ED is stock of gross external debt reported in the World Bank data; FI is the net foreign investment inflows; CAD is the current account deficit and FR is the stock of official foreign reserves
Summary
The most pronounced concern among policy makers, researchers and key stakeholders in economic development is that most developing countries, especially in the Sub Sahara Africa (SSA), are riddled with heavy debt burdens, foreign exchange shortages, transient and chronic poverty. Activities and actions of political office holders, especially the military elite, in Nigeria in the last three decades perfectly fit into the mechanisms by which resources are channelled abroad as capital flight These include embezzlement of borrowed funds, kickbacks on government contracts, trade misinvoicing, misappropriation of revenues from state-owned enterprises and smuggling of natural resources. Given the foregoing background of large magnitudes of debt and flight flows in Nigeria, this paper seeks an empirical understanding and an addition to current literature on the association between capital flight and external debt by examining the debt-flight linkage for the Nigerian economy Exploration of this fact will have important implications for economic policy formulation, especially as it affects the legitimacy of efforts to service external debts.
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