Political cycles, fiscal policy and capital flight in Africa

Abstract

PurposeThis paper examined the interactive role of Political Cycles on the relationship between Fiscal Policy and Capital Flight in Africa.Design/methodology/approachA two-step System Generalized Methods of Moment empirical estimator was employed. This study used data on 40 African countries from 2009 to 2018.FindingsThe findings revealed that the interaction between political structures and fiscal policy is positive and significant, indicating that fiscal policies during election periods or different regimes would increase capital flight. The study found that political cycles positively affect capital flight, indicating that election periods and possible government changes promote capital flight activities. The tension and volatile atmosphere characterizing election periods in most African countries cause investors to use all alternatives, including illegal systems, to fly funds to a potentially stable economy.Practical implicationsThis study recommends that government and policymakers maintain fiscal discipline during election years and enact pragmatic policies to ensure the continuity of critical fiscal policies to promote business climate and economic stability, especially when there is a change in government.Originality/valueThis study contributes to capital flight literature in two forms. One, the study, to the best knowledge of the authors, is the first to proxy tax with corporate tax (a sound proxy for tax within the business space). Also, this study is the first to empirically show that elections worsen the effect of fiscal policy on capital flight in Africa.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-02-2024-0130