The Political Economy of Capital Flight: Governance Quality and Capital Flight in the East Africa Community

Abstract

This paper examines the impacts of political economy factors on an illicit capital outflow in the East African Community using robust panel data models. 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 control capital flight.

Keywords: Capital flight, governance quality, political stability index, regulatory quality index, Government Effectiveness, Control of Corruption, World Bank Residual Methods