Determinants of Capital Flight and its Impact on Economic Performance: A Study of  Developing Economies

Farah Nasreen; Dr. Ashfaq Ahmed Mirza; Dr. Abdul Rehman

doi:10.33897/fujbe.v7i1.537

Farah Nasreen PhD-Scholar (Management Sciences), University of Gujrat, Pakistan
Dr. Ashfaq Ahmed Mirza Assistant Professor & Head, Department of Management Sciences, University of Gujrat, Pakistan
Dr. Abdul Rehman Professor & Dean, Faculty of Management Sciences, International Islamic University, Islamabad, Pakistan

DOI: https://doi.org/10.33897/fujbe.v7i1.537

Keywords: Capital flight, financial inclusion, country Risk, Economic Freedom, Governance institution and Corruption index, Exchange rate, External Debt, Interest rate, Inflation, Exports, Generalized Methods of Moments, and Generalized Least Square

Abstract

Capital flight imposes a great danger to the developing economies by lowering their
economic activity, devaluing the currency, and hindering 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-step 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 57
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
suggested that all included indices are significant along with all macroeconomic
variables. Country risk, external debt, and exports have a negative coefficient, and others
have a positive coefficient value. Capital investment, foreign direct investment, and
Gross domestic product are 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.