The Institutional Environment and the Link between Capital Flows and Capital Flight in Cameroon

Abstract

AbstractThis paper explores the ‘financial revolving door’ hypothesis in Cameroon over the 1970–2010 period by extending the analysis to other types of capital flows such as Official Development Assistance (ODA) and Foreign Direct Investment (FDI). The paper shows that a one‐dollar increase in external debt leads to an increase in capital flight of 47–62 cents. This increase in capital flight mainly stems from changes in the private component of external debt. Capital flight is twice more sensitive to an increase in oil revenues than external debt. The paper further underscores the importance of the political and institutional environment. Even though corruption exacerbates the relationship, political and institutional stability helps to mitigate illicit capital outflows arising from an increase in external debt. With regard to the effect on ODA and FDI, the paper found it to be of little significance.