Determinants of Capital Flight in the East African Community

Abstract

The region has lost an immense amount of capital that has led to sluggish regional integration in terms of capital formation and productive capabilities. Albeit most of these countries are in the ranking list of the huge volumes of capital flight, East Africa has never been considered as a sub-region in the capital-related studies. Cognizant of this, this paper intends to contribute to this body of knowledge by filling a noticeable gap. This paper examined the determinant of capital flight from East African Community countries that include Kenya, Tanzania, Uganda, Rwanda, and Burundi using panel data for the years 1988 to 2018 using the real gross domestic product, interest rate differential, external debt, corruption index, and exchange rate as explanatory variables. Secondary data obtained from EAC member countries National Bureau of Statistics. Levin-Lin-Chu panel unit root test was carried out and capital flight and Exchange rate found to be stationary at level. The fixed effect regression results showed that corruption, external debt, and the exchange rate had a positive and statistically significant effect on capital flight while real GDP had a negative and statistically significant effect on capital flight. Thus, policymakers should endeavor to achieve a broad investor base for its domestic and foreign obligations, with due regard to cost and risk, and should treat investors equally. In addition, there is a need to harmonize the judiciary and the executives in EAC to facilitate the fight against corruption which is a major concern for a capital flight.

Keywords: Capital flight, External debt, Exchange rate, GDP, Corruption, EAC

DOI: 10.7176/JESD/12-10-01

Publication date:May 31^st 2021