Robbing the Riches: Capital Flight, Institutions and Debt

Valerie Cerra, Meenakshi Rishi and Sweta C. Saxena

The Journal of Development Studies, 2008, vol. 44, issue 8, pages 1190-1213

Abstract: Capital flight undermines economic growth and the effectiveness of debt relief and foreign aid, and sometimes drains more resources from poor countries than does debt service. In an analysis of a large panel of developing and emerging market countries using annual data for 1970-2001, we show that both institutions and macro policies robustly affect capital flight. Our study also supports the existence of a revolving door relationship between debt and capital flight. More notably we find countries with weak institutions have a greater propensity to accumulate debt because weak institutions spur capital flight, which, in turn, creates a financing need.

Date: 2008

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