Capital Flight in Developing Economies: A Panel Analysis of Nigeria and South Africa

Abstract

Capital flight portends great danger to any nation as it represents foregone investments, a reduction in a country's tax base, and a contributor to the debt problem, among others. This paper investigates the determinants of huge capital flight in Nigeria and South Africa using panel data from both countries. We investigated the determinants of capital flight utilizing the common coefficient and fixed effect models. Capital flight is caused by the trade balance, domestic economic performance, one-year lag of external debt and political stability. Dooley's debt-flight revolving door, which observed that unrecorded capital outflows from developing countries take place simultaneously with external borrowing, is empirically found to be true in the two countries. Governments of developing countries must therefore strive towards reducing country risk or macro-economic risk so as to stop the tide of capital flight. They must create an enabling environment that motivates asset-holders to keep their wealth in domestic currency while repatriating streams of flows from foreign assets among others.