Capital Flight and Poverty Reduction in Africa

Abstract

This paper investigates the impact of capital flight on poverty reduction through the investment and growth channel. It uses two approaches. First, the Incremental Capital-Output Ratio (ICOR) approach is used to estimate additional income that would have been generated if all capital flight had been invested domestically. The second approach uses capital stock to derive the potential effect of capital flight on income per capita and on poverty. The effect on poverty reduction is computed by taking into account country-specific and time-varying income-growth elasticity of poverty. The ICOR method suggests that the average annual rate of poverty reduction over the period 2000-2010 could have been 1.9 percentage points higher. The capital stock method generates an additional 2.5 percentage points per year above the current rate of poverty reduction. The evidence in this paper confirms that capital flight has significantly undermined African countries' efforts to reduce poverty.

New Analysis of Capital Flight from Saudi Arabia: The Relation with Long-Term Economic Performance

“…This section outlines the methodology used to quantify the potential effect of capital flight on socioeconomic conditions based on the Financing Gap Model following Nkurunziza (2014). The main assumption is that Saudi Arabia has a resource gap that needs to be filled in order to grow at higher rates.…”

“…As such, the Financing Gap Model is used to determine the potential growth in GDP that could result from additional investment represented by the amount of capital flight. Despite criticisms against this approach, the Financing Gap Model is widely used in international financial institutions, planning ministries, and central banks (Nkurunziza, 2014).…”

“…For developing countries in general, several research papers have estimated and analyzed capital flight in different settings (e.g. Boyce and Ndikumana 2000, 2010, Epstein 2005and Nkurunziza 2014). For Saudi Arabia, only two previous studies by the same author (Almounsor 2005;2008) have provided estimates of capital flight and drawn some policy implications in the context of the resource-based Middle Eastern economies.…”

“…The Incremental Capital Output Ratio (ICOR) is defined as the amount of marginal capital investment needed to produce one additional unit of output (Nkurunziza (2014). Over a specific time period, ICOR is approximated as the ratio of average investment to average GDP growth.…”

“…Although straightforward, the computation of ICORs is associated with two major issues as outlined in Nkurunziza (2014). First, when rates of economic growth are negative, as has been the case for several years in many developing countries, the ICOR turns negative.…”