Capital Flight and Institutional Governance in Sub-Saharan Africa: The Role of Corruption

Abstract

Empirical evidence indicates that macroeconomic uncertainty, political and institutional instability, less developed financial system, and higher rate of return differentials in other countries abroad induces capital flight from Sub-Saharan Africa. This research recognizes corruption as an aspect of a weak political and institutional system. However, the relationship between corruption and capital flight has received little emphasis, particularly in Sub-Saharan Africa. The study, therefore, seeks to examine capital flight and institutional governance in Sub-Saharan Africa, the role of corruption. Panel data set of thirty two (32) countries in Sub-Saharan Africa is analyzed over the period 2000-2012 employing three different estimation techniques as Generalized Method of Moments (GMM), Fixed Effect Regression and the pooled-OLS regression models. The research work is based on the portfolio choice framework. The main variable of interest (corruption) entered all eight (8) specifications of the econometric model tested. The result of the empirical estimation established that corruption has a positive and statistically significant effect on capital flight in SSA in all the specifications. Moreover, the interaction between corruption and regime durability resulted in a negative and statistically significant coefficient implying that an increase in regime durability, which also proxy for institutional strength would reduce corruption, hence capital flight. In other words, in the midst of strong institutional governance, the potency of corruption in increasing capital flight is reduced significantly.