Greed of the elite; capital flight from a fragile country: case of Burundi
| Published date | 08 May 2018 |
| Pages | 598-618 |
| DOI | https://doi.org/10.1108/JFC-11-2016-0075 |
| Date | 08 May 2018 |
| Author | Arcade Ndoricimpa |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Greed of the elite; capital
flight from a fragile country:
case of Burundi
Arcade Ndoricimpa
Faculty of Economics and Management, University of Burundi,
Bujumbura, Burundi
Abstract
Purpose –This study aims to undertake aninstitutional analysis of capital flight and examine the drivers
of capital flightfrom Burundi.
Design/methodology/approach –Given the episodes of politicalinstability and poor governance which
have characterized Burundi’s landscapein the past decades, coupled with macroeconomic instability which
has been prevailing, political,economic and institutional factors are used to explain the trend and magnitude
of capital flight which were recorded. An econometric analysis using robust least squares is also used to
examine the determinantsof capital flight from Burundi.
Findings –The estimation results seem to be sensitiveto capital flight measurement used, but in general,
they suggest that external debt, political instability and wars, as well as exports, are the main drivers of
capitalflight from Burundi.
Research limitations/implications –The findingsof this study imply that to discourage capital flight,
the government of Burundi should promote peace and political stability. In addition, more responsibility,
more transparency and accountabilityare required from the government of Burundi in managing resources
from external debt. Moreover, some actions are neededto fight trade misinvoicing, which wasseen to be a
major channel of capitalflight from Burundi. It is however to be acknowledged that our econometricanalysis
results mightnot be robust because of data limitations related to data availabilityon capitalflight for only the
period 1985-2013.
Originality/value –This study contributes to the existing capitalflight literature in two ways. First, by
undertaking the first ever country-specific study focusing on Burundi, and second, by undertaking an
institutional analysis of capital flight to understand the political, economic and institutional issues behind
capital flight from Burundi. The focus in thisstudy is on Burundi because of the burden that capital flight
imposeson the country already impoverished.
Keywords Burundi, Capital flight, Drivers of Capital flight, Fragile country
Paper type Research paper
1. Introduction
Capital flight[1] has been the subject of considerable theoretical and empirical research since the
late 1980s and in the 1990s (see among the pioneers, Cumby and Levich, 1987;Ajayi, 1992,1995;
Ojo, 1992;Boyce, 1992). According to Ajayi (1992),Ndikumana and Boyce (2003,2011a,2011b)
JEL classification –C22, F21, O16
The author wishes to express deep appreciation to African Economic Research Consortium
(AERC) for the financial support to carry out this research and is also grateful to the resource persons
and members of AERC’s thematic group C for various comments and suggestions that helped the
evolution of this study from its inception to completion. The findings made and opinions expressed in
this paper are exclusively those of the author. The author is also solely responsible for content and
any errors.
JFC
25,2
598
Journalof Financial Crime
Vol.25 No. 2, 2018
pp. 598-618
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2016-0075
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
and Ndiaye (2014), both private actors and public authorities are responsible for capital
flight. Because of macroeconomic uncertainty, political instability, less developed
financial system and higher rate of return differentials abroad, private actors prefer to
hold their savings abroad, while because of corruption, public authorities embezzle
funds and transfer them to overseas banks. Burundi, a small landlocked and resource-
scarce economy recovering from a civil war, has not escaped the capital flight problem.
For the period 1985-2013, Burundi is reported to have lost resources amounting to
$3.7bn[2] (constant 2013 prices) in form of capital flight, of which $799m (21.6 per cent)
went through balance of payment (BoP) leakages and $2,894m (78.4 per cent) through
trade misinvoicing (import and export misinvoicing). In spite of being a small poor
country, non-resource-rich, the phenomenon of capital flight seems to be sizeable.
Compared to most East African Community countries, capital flight from Burundi is
higher. For the period 1985-2010, capital flight from Burundi was $4.1bn, $492.6m from
Rwanda, $6.2bn from Uganda, while Kenya and Tanzania experienced capital flight
reversal of $109.8m and $1.5bn, respectively[3]. While in absolute terms it might seem
that the capital flight problem is not alarming, in relative terms, the magnitude of
capital flight from Burundi is large. Over the period 1985-2013, compared to the size of
the economy, total capital flight represents on average 10.2 per cent of gross domestic
product (GDP), and even reached 19 per cent in the second half of the decade 1990s and
in the first half of the 2000s (Table III).
Capital flight from Burundi can be considered as a paradox given the poverty prevalence[4]
and the low level of human development[5]. While majority of Burundians especially in rural
areas, are deprived of the essential services such as access to health care, education, clean water
and proper sanitation large sums of money flee the country in form of capital flight instead of
being invested domestically and help the citizens meet the very basic needs. As Nkurunziza
(2015) points out, capital flight reduces the stock of financial resources available for financing
growth-enhancing investments such as in agriculture and infrastructure. In fact, while the
unmet financing need is large in Burundi given the saving-investment gap of 17.7 per cent of
GDP[6], total capital flight from Burundi for the period 1985-2013 represents 149 per cent of
total domestic investment in that period (see Table I). The loss of investment because of capital
flight hampers economic growth and poverty reduction. As Ndikumana (2014) points out, one
of the major constraints to growth in Africa and one of the reasons as to why most of African
countries are still trapped in poverty is low domestic investment.
Burundi presents an interesting case study of capital flight because of its history of
political risk and wars. Since its independence in 1962, Burundi has experienced five
military coups in 1966, 1976, 1987, 1993 and 1996, leading to three military regimes during
the period 1966-1993. In addition, Burundi has recorded five episodes of civil war
respectively in 1965, 1969,1972, 1988 and 1993. The 1993 civil war was the most devastating
and went on for more than a decade, up to 2005. All these events created political and
macroeconomic instability which encourage capital flight (Ndikumana and Boyce, 2003).
Indeed, Burundi has been experiencing macroeconomic instability characterized by high
inflation rates up to more than 30 per cent and low growthrates with an average growth rate
of 2.2 per cent for the period 1980-2013. Infact, Burundi experienced negative growth rates
for a number of years [see the World Bank’s World DevelopmentIndicators (WDI), 2015]. In
addition, Burundi is characterized by high corruption and poor governance, which can be
clearly seen from the World Bank’s Worldwide Governance Indicators, 2013[7]. In fact,
Transparency International in its corruption perception index ranks Burundi among the
most corrupt countries in the world[8]. As Ndiaye (2011) points out, in a context of poor
governance and weak institutions, corrupt elites embezzle public funds and transfer them
Flight from a
fragile country
599
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