Is Capital Flight Decisive in Explaining Economic Growth Performance in the African Franc Zone?

Dr. Ameth Saloum Ndiaye

Department of Economics

& Centre de Recherches Economiques Appliquées (CREA)

University Cheikh Anta Diop of Dakar, Senegal


The investigation into the implications of capital flight for economic growth has received increasing attention from several researchers. In recent years, considerable interest has arisen in the extent to which capital flight has a detrimental impact on economic development (UNDP, 2011). By taking part in the debate on this issue, this paper aims to test the impact of capital flight on economic growth, and contributes thus to a better understanding of the role of capital flight in explaining economic growth performance. The motivation of this study is related to the fact that capital flight reduces resources that could have been invested to create wealth in the originating countries. Therefore, capital flight has a potentially negative effect on economic growth. The issue of investigating the impact of capital flight on the economic growth of the Franc Zone (FZ) countries deserves serious attention due to one of the characteristic of the FZ related to the principle of free circulation of capital. This capital account openness increases the FZ countries’ vulnerability to fluctuations in capital flows, especially by providing legal channels of capital flight (Ariyoshi et al., 2000).

 The free circulation of capital in the FZ therefore facilitates capital flight from this zone. Using the Adjusted World Bank method and the Adjusted Morgan Guaranty method for exchange rate fluctuations, trade misinvoicing, and inflation (Boyce and Ndikumana, 2001), real capital flight from the FZ countries for the period 1970 to 2010 is found to be positive and massive with a magnitude of respectively US$86.8 billion and US$80.1 billion, representing respectively 122.1% and 112.6% of GDP, and 5.3 times and 4.9 times domestic investment. At the same time, the FZ countries experienced low and very volatile investment and growth rates. The econometric analysis shows that capital flight significantly reduces economic growth in the FZ. Capital flight thus poses a huge threat to high and sustainable economic growth in the FZ. This result is consistent with previous findings in the literature (Bakare, 2011; Lan, 2009; Gusarova, 2009; Forgha, 2008; Beja, 2007; Cervena, 2006). The results also reveal that domestic investment, credit to the private sector, the quality of institutions, and domestic savings play an important role in explaining the influence of capital flight on economic growth in the FZ, and are therefore important channels that affect the growth effect of capital flight in this zone. The key implication of these results is that capital flight repatriation contributes to raise significantly the volume of investment in the FZ, credit to the private sector, the quality of institutions, and domestic savings, implying that this can help FZ countries sustainably increase their economic growth. 

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