Determinants of Campital Flight and its Impact on Economic Performance: A Study of Developming Economies

Abstract

Capital flight imposes a great danger to the developing economies by lowering their economic activity, devaluing the currency, and hindering economic growth.  This paper contributes to the literature by investigating the determinants of capital flight of developing economies. Determinants are studied as indices, and these indices are calculated by using the Arithmetic Mean approach. There is a two-steps model; in the first part, determinants are discussed, and in the second part, capital flight is used as an independent variable, and its impact on economic performance is measured in 59 Developing Economies. GMM (Generalized Method of Moments) is used for the determinants of capital flight, and panel GLS (Generalized least square) is used to check the impact of capital flight on economic performance. Macroeconomic variables (external debt, inflation, exports, interest rate, and exchange rate) are also part of the study with four indices as determinants (Country Risk Index, Economic Freedom Index, financial inclusion index, and Governance institution and corruption index). Results suggest that all included indices were significant along with all macroeconomic variables. Country risk, external debt, and exports have a negative coefficient, while others have a positive coefficient value. Capital investment, foreign direct investment, and Gross domestic product were used as proxies of economic performance. Results of GLS have shown there is a significant and negative impact of capital flight on economic performance. Capital flight is measured by using the residual methodology.