Capital flight, institutional quality and real sector in sub-Saharan African countries
| Date | 09 February 2024 |
| Pages | 944-961 |
| DOI | https://doi.org/10.1108/JMLC-07-2023-0123 |
| Published date | 09 February 2024 |
| Author | Taiwo Akinlo,Busayo Olubunmi Aderounmu |
Capital flight, institutional quality
and real sector in sub-Saharan
African countries
Taiwo Akinlo
Department of Economics, Faculty of Arts and Social Science,
Adeyemi Federal University of Education, Ondo, Nigeria, and
Busayo Olubunmi Aderounmu
Department of Economics and Development Studies, Covenant University, Ota, Nigeria
Abstract
Purpose –This study aims to provide an empirical investigation into risingcapital flight and the role of
institutionalquality to mitigate its effect on the real sector in sub-SaharanAfrica (SSA).
Design/methodology/approach –The study uses thesystem generalized method of moments and uses
data spanningfrom 1989 to 2020 from 26 SSA countries.
Findings –The findings show that capitalflight has no direct impact on the real sector while institutional
quality adversely impacted the agricultural and industrial sectors.The study also found that institutional
qualityisunable to mitigatethe effect of capital flight on the industrial sector.
Originality/value –This study investigatesif institutional quality mitigatesthe impact of capital flight on
the real sectorproxied by industrial value-added and agriculturevalue-added.
Keywords Capital flight, Real sector, Institutional quality, GMM
Paper type Research paper
1. Introduction
Capital flight (CF) has remained an economic issue of great concern for several decades in
many developing countries. CF contributes to the macroeconomic problem in any society,
affects the activities in the real sector and influences income distribution and welfare of the
populace of the affected country. A CF can impede economic progress in developing
countries, as the resources that should be used in financing the growth of an economy have
been repatriated to another country. Osei-Assibey et al. (2018) define CF as the outflow of
financial assets and capital on a largescale from one country to another as a result of
activities such as political and economic instability, devaluation of the currency or the
imposition of capitalcontrols. Some studies have also highlighted the causes of CF including
external debt, erosionof the tax base and foreign direct investment, among others. Thus, the
issue of CF has therefore been a greatconcern to researchers, policymakers, the government
and the economy at large.
Institutional quality, on the other hand, is a broad concept that addresses humanrights,
high-quality government rules and regulations, law and order, political stability and the
absence of violence among others. Empirical evidence has proven that good institutional
quality is a catalyst for the domestic investment climate while weak institutions aggravate
CF (Osei-Assibey etal.,2018)and also wreak great havoc on the economy.
An increase in capital/funds in the domestic economy will boost domestic investment
through adequate financing of the various sectors of the economy. This can be achieved
JMLC
27,5
944
Journalof Money Laundering
Control
Vol.27 No. 5, 2024
pp. 944-961
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-07-2023-0123
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
through an increase in capital inflow and a reduction in capital outflow. However, strong
institutions can help mediate the effect of CF in the economy, which can help improve the
activities in the real sector. This assertion is supported by Ngono (2022),Adegboye et al.
(2020) and Osei-Assibey et al. (2018) who found that strong institutions discourage CF. In
addition, economieswith strong institutional quality are more likely to have strongfinancial
policies and stable macroeconomic environments that would reduce the effect of CF on the
real sector. On the contrary, weak institutional quality will promote weak financial
regulations and weaken the policies targeted at limiting CF in the economy. This situation
will worsen the effect of CF on the real sector. Thus, the effect of CF on the real sector might
likely depend on the level of institutionalquality. The focus of this research work, therefore,
departs from existing literature,as it incorporates the impact of CF and institutional quality
into real sector activities. Furthermore, knowing the joint effect of CF and institutional
quality on the real sector in sub-SaharanAfrica (SSA) is vital for developmental strategies.
The real sector activities in SSA region have been faced with several challenges which
impede the growth and developmentof the region.
To the best of our knowledge, severalstudies have examined institutional quality and
growth (Akinlo, 2016;Wandeda et al.,2021;Adegboye et al., 2020), CF and growth (Sodji,
2022), CF and institutional quality (Kollamparambil and Gumbo, 2018;Osei-Assibey et al.,
2018). However, as regarding CF, institutional quality and the real sector, the most related
study is by Asongu and Odhiambo (2019) who examined whether governance can mitigate
the effect of CF on industrialization. This implies that no existing literature has linked CF,
institutional qualityand real sector in SSA. Hence, this study will contribute to the literature
in the following ways. First, it will provide evidence of the effect of CF on the real sector in
SSA countries. Second, the findings from this study will help the policymakers in
formulating policiesto strengthen institutional quality and minimizeCF.
The main objective of this study is to examine the effect of CF and institutional quality on the
real sector in selected SSA countries. This research work is divided into six sections. Section 1
presents the introduction to the work; Section 2 comprises the existing literature; Section 3
presents the data description and sources; Section 4 deals with methodology; Section 5 shows
the analysis and interpretation of the study; Section 6 provides the conclusion and implication
of findings.
2. Literature review
On the empirical literature, this studyprovides an empirical review under two sub-sections.
The first section focuses on the studies that examined the connection between CF and
institutional quality, whereas the second subsection reviews studies that investigated CF
and the real sector.
2.1 Capital flight and institutional quality
Some studies haveexamined the relationship betweencapital flight and institutionalquality.
For instance, Kollamparambil and Gumbo (2018) used a system generalized method of
moment (GMM) estimator to analyze the macroeconomic and institutional determinants of
CF in 29 selected SSA countries between 1996 and 2010. The result of the study shows that
external debt,inflation and economic growth are thekey determinants of CF. Also, the study
found that all the institutional quality measures except corruption have a significant impact
on CF. Osei-Assibey et al. (2018) examined the effect of corruption and institutional
governanceon CF using a sample of 32 SSA countries betweenthe period 2000 and 2012. The
study included corruption obtained from CPI of Transparency International and rule of law
obtained from the International Country Risk Guide and World Bank database. The study
Capital flight
945
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