The Political Economy of Capital Flight: Governance Quality and Capital Flight in the East Africa Community

Zerayehu Sime Eshete

doi:10.7176/jesd/10-11-02

Abstract

This paper examines the impacts of political economy factors on an illicit capital outflow in the East African Community using robust panel data models. The main findings of the study are as follows: An increase in Gross Domestic Product is a statistically significant variable and reduces an illicit flow of illegal capital outflow from the Community. However, foreign direct investment, total grant and exchange rate statistically significant and aggravate the outflow of capital. This is due to poor governance and economic policies that governments favor foreign investors over local investors. An aggregate index of poor regulatory quality and government ineffectiveness, state fragile index, and the political instability index are statistically significant and positively influence an illicit capital flight from the Community. However, the existed perceived corruption level does not positively contribute to capital flight, but an intensive corruption level positively influences capital flight overtime, bringing a mixed sign of negative and positive depending on the level of corruption that affects capital flight overtime in the Community. The study, therefore, recommends that member countries in the Community need to undertake an effective governance and regulatory qualities, political stability and controlling power of corruption in order to control capital flight. Keywords : Capital flight, governance quality, political stability index, regulatory quality index, Government Effectiveness, Control of Corruption, World Bank Residual Methods DOI : 10.7176/JESD/10-11-02 Publication date :June 30 th 2019

Highlights

The East African Community that comprises the Burundi, Kenya, Rwanda, Tanzania and Uganda was formerly found in 1967 and latterly revived in 2000 with the objective of Political Federation
It makes the financial sector to lose potential resource and negatively affect the balance of payment as well as develop rent-seeking behaviors. These place persistent adverse effects on development program of the Community as an illegal capital flight weakens the domestic asset of the African countries (Abdilahi and Bernard, 2011)
Institutional factors like constraints on power exercising, poor governance and lack of political confidence receive a special attention in search of sustainable growth nowadays as economic and political elites distort the system of economy in general and capital market in particular (Acemoglu et al, 2003 and Dornbusch, 1990)

Summary

Introduction

The East African Community that comprises the Burundi, Kenya, Rwanda, Tanzania and Uganda was formerly found in 1967 and latterly revived in 2000 with the objective of Political Federation. The East African Community (EAC) has lost USD 1.2 billion in 2000-2008 in aggregate, showing that capital flight is a chronic problem It weakens capital formation, and it causes economic slowdown, leading to a sluggish rate of regional integration and productivity capacity of member countries. It makes the financial sector to lose potential resource and negatively affect the balance of payment as well as develop rent-seeking behaviors These place persistent adverse effects on development program of the Community as an illegal capital flight weakens the domestic asset of the African countries (Abdilahi and Bernard, 2011). Institutional factors like constraints on power exercising, poor governance and lack of political confidence receive a special attention in search of sustainable growth nowadays as economic and political elites distort the system of economy in general and capital market in particular (Acemoglu et al, 2003 and Dornbusch, 1990).

Governance and Capital Flight in East Africa Community

Findings

Conclusion and Policy Implications