La Mesure de la Fuite des Capitaux et son Impact sur l’Investissement Domestique: Cas des Pays Émergents

Measurement of capital flight and its impact on domestic investment in emerging countries

Hajer Dachraoui and Mounir Smida

MPRA Paper from University Library of Munich, Germany

Abstract: One of the main challenges faced by developing countries is to stimulate investment for achieving higher growth rates. On the other hand, the capital flight phenomenon, which is defined as unrecorded capital outflows by the residents of a capital-scarce country, causes detrimental outcomes on the economies of many developing countries. In this work, we investigate the potentially devastating effects of capital flight on investment in presence of financial liberalization policies. To do so, first, we calculate the capital flight magnitude for 19 emerging market economies during the period 1984-2010 based on the residual method of the World Bank. Afterwards, we employ a dynamic panel methodology that allows controlling for country-specific effects as well as accounting for the potential endogeneity of the explanatory variables. The results suggest that capital flight has a negative and significant effect on total domestic investment. This finding is still robust after disaggregating the total sample into Latin American countries, Asian countries and Mena countries. The results reveal also that capital flight reduces significantly the private investment while its effect on public investment is found to be insignificant. Therefore, the negative impact of capital flight on total domestic investment operates through the private investment channel more than that of public investment. If developing countries can repatriate capital and prevent it from fleeing by implementing sound macroeconomic policies, these funds could be used to enhance domestic investment.

Keywords: Capital flight; Domestic investissement; emerging countries; GMM. (search for similar items in EconPapers)
JEL-codes: E0 E5 G32 (search for similar items in EconPapers)
Date: 2014-02-09
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