Corruption, institutions and capital flight: evidence from Sub-Saharan Africa

Abstract

Purpose

The purpose of this paper is to investigate the effect of corruption and institutional governance indicators on capital flight in Sub-Saharan Africa. Design/methodology/approach

Using a Portfolio Choice Framework, the study employs two different estimation techniques as Generalized Method of Moment and Fixed Effect Regression on panel data sets of 32 countries in Sub-Saharan Africa over the period 2000-2012. Findings

The variable of interest, corruption, retains its expected positive sign and statistically significant across all the estimations. The relationship remains very strong even when other equally important institutional variables such as regime durability, rule of law and independence of the executive are taken into account. This suggests that a higher perception of corruption among public authorities as in bribery, kickbacks in public procurement, embezzlement of public funds, among others facilitates an increase in capital outflow from SSA. The findings further indicate that regime durability and rule of law are important institutional variables that also significantly influence capital flights in SSA. Practical implications

The findings imply that institutional reforms should be encouraged if SSA is to win the war against corruption and by extension against capital flight. There should be a creation of democratic environment and good governance practices that foster stronger governance institutions, decline in corruption and better domestic investment climate to help reverse the high spate of capital flight in the region. Originality/value

The main value of this paper is using the portfolio choice framework to analyze the relationship between capital flight and corruption in the Sub-Saharan African context.