Abstract
The study examines the role of governance in modulating the effect of capital flight on industrialisation in Africa. The empirical evidence is based on Generalised Method of Moments and governance is bundled by principal component analysis, namely (i) political governance from political stability and “voice and accountability”; (ii) economic governance from government effectiveness and regulation quality; and (iii) institutional governance from corruption-control and the rule of law. First, governance increases industrialisation whereas capital flight has the opposite effect; and second, governance does not significantly mitigate the negative effect of capital flight on industrialisation. Policy implications are discussed.
Highlights
1 Introduction This study examines the role of governance in modulating the effect of capital flight on industrialisation in African countries
On the nexus between capital flight and institutional governance, we argue that the rule of law and corruption-control affect the confidence of investors within an economy on the one hand, and on the other hand, the ability of officials in government to create mechanisms that siphon and deposit funds in tax havens
Three investigated hypothesis are examined, notably governance increases industrialisation (Hypothesis 1); capital flight decreases industrialisation (Hypothesis 2) and the positive effect of governance dampens the negative effect of capital flight (Hypothesis 3)
Summary
This study examines the role of governance in modulating the effect of capital flight on industrialisation in African countries. It is motivated by three main factors, namely the (i) growing trend of capital flight in Africa; (ii) relevance of governance in dampening negative macroeconomic signals such as capital flight; and (iii) lagging position of Africa in industrialisation.. Approximately 814 billion US Dollars (in constant of 2010 US Dollars) was lost by 33 sub-Saharan African (SSA) countries during the period 1970–2010. The lost sum to capital flight is higher than foreign direct investment and foreign aid which during the same period stood at respectively 306 billion and Asongu and Odhiambo Economic Structures (2019) 8:36. This mismatch is important because lack of finance has been established to be a principal constraint to the development of the continent (Asongu 2013; Adu and Asamoah 2016; Charles and Mori 2016; Nyasha and Odhiambo 2017; Amponsah 2017; Danquah et al 2017; Asongu and Odhiambo 2019a)
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