The Political Economy of Capital Flight: Governance Quality and Capital Flight in East Africa Community
[1]
Zerayehu Sime Eshete, PhD in Economics, Collaborative Masters Program in Economic Development, Debre Markos University, Addis Ababa, Ethiopia.
Capital flight is one of the daunting challenges that weakening capital formation and domestic resource mobilization in the East Africa Community. According to the data estimated by the Global Financial Security, the Community has lost a huge amount of foreign capital that tends to exceed the investment. This study, therefore examines the impacts of political economy factors on an illicit capital outflow from the Community. It employs robust panel data models of both fixed effect and random effect. 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 effective governance and regulatory qualities, political stability and controlling power of corruption in order to enhance efficiency and effectiveness of foreign resources and domestic resource mobilization. It also suggests that a series economic policy reforms that create a fertile ground for domestic investors in the Community.
Capital Flight, Governance Quality, Political Stability Index, Regulatory Quality Index, Government Effectiveness, Control of Corruption, World Bank Residual Methods
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