Development aid and illicit capital flight: Evidence from Nepal

Steinkamp, Sven; Westermann, Frank

doi:10.1111/twec.13208

Cited by 4 publications

(10 citation statements)

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“…This is in line with similar findings by Calì and TeVelde (2011) and Helble et al (2012). More important indeed is to remark that there is evidence that development aid in the form of foreign exchange may, as a side effect, drive trade-related IFFs by import overinvoicing in Nepal, a lower-middle-income country according to UN (Steinkamp and Westermann, 2021).…”

Section: Discussionsupporting

confidence: 88%

“…Thus, IFFs may be stimulated by the foreign exchange cash component of received international aid, given that this kind of inflow represents, in a great number of cases, a substantial share of the foreign exchange available to central governments in L&MICs (Reuter, 2012). For example, Steinkamp and Westermann (2021) found that development aid in Nepal in the form of foreign exchange may, as a side effect, drive trade-related IFFs by import overinvoicing.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Among the economic factors, the primary drivers of IFFs are mainly those addressed in “investment diversion theory” (Ajayi, 1995; Lensink et al , 1998; Beja, 2006; Le and Rishi, 2006), which basically highlights the investors’ search for higher risk-adjusted returns to assets. Research on the determinants of IFFs has also focused on two areas, not well developed, that are especially relevant for L&MICs: how FDI flows are related to illicit capital outflows (Perez et al , 2012; Ndikumana and Sarr, 2019); and possible links between development aid inflows and IFFs (Asongu, 2012; Asongu and Jellal, 2013; Steinkamp and Westermann, 2021; Ensminger and Leder-Luis, 2022). …”

Section: Literature Reviewmentioning

confidence: 99%

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Relationships between foreign direct investment and official development assistance with trade-related illicit financial flows. Evidence from low- and middle-income countries

Ortega

Sanjuán

2023

JMLC

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Purpose This paper aims to analyse empirically the association between flows of foreign direct investment (FDI), net official development assistance (ODA) inflows and trade-related illicit financial outflows. Design/methodology/approach With this purpose, a linear model was estimated, using different panel-data estimators, and using a database for a sample of 49 countries spanning the period 2008–2017. The used measure of illicit financial outflows was based on the estimates by Global Financial Integrity of deliberate misinvoicing in merchandise trade. Findings Research findings show a significant and positive association between changes in both relative lagged net FDI flows and relative FDI outflows (as % of gross domestic product) and changes in the ratio of trade-related illicit capital outflows to total trade. However, these positive associations were only observed in the case of low-income countries. Also, the positive association of net ODA inflows on the IFFT outflows were restricted to the cluster of lower-middle-income countries. Originality/value To the best of the authors’ knowledge, this is one of the first studies to empirically estimate the association between FDI and ODA flows and trade misinvoicing at a macroeconomic level. Research findings may contribute to substantiate the concerns expressed in previous research about the potential unintended effects of aid on illicit capital flight in the case of lower-middle-income countries. They also shown that FDI flows could be an additional conduit for trade-related illicit financial flows in these countries

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Section: Discussionsupporting

confidence: 88%

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Relationships between foreign direct investment and official development assistance with trade-related illicit financial flows. Evidence from low- and middle-income countries

Ortega

Sanjuán

2023

JMLC

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“…7 Recent research considers the links between remittances and aid flows and illicit capital outflows. While flows such as development aid are found to be positively correlated with illicit outflows in the presence of capital controls, remittances are negatively correlated with illicit outward capital flight (Steinkamp and Westermann, 2021). Aid may be susceptible to being diverted by the recipient governments, but a similar behavior is unlikely to be tolerated by foreign workers supporting their families back home through remittances.…”

Section: Introductionmentioning

confidence: 93%

What types of capital flows help improve international risk sharing?

Islamaj

Köse

2022

Journal of International Money and Finance

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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“…Some researchers find that global risk is also an important factor in explaining hot money dynamics [24,25]. Steinkamp and Westermann (2021) find that capital flight is positively correlated with development aid in Nepal [26]. Fratzscher et al (2018) find that the Federal Reserve's quantitative easing increased the procyclicality of international portfolio flows [27].…”

Section: Introductionmentioning

confidence: 99%

Evaluation of Hot Money Drivers in China: A Structural VAR Approach

Zhou

Jun

2022

Complexity

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This paper investigates the drivers of hot money in China. It develops a model based on expectation-variance utility theory in the theoretical analysis section. The model considers a foreign investor who faces the question of how to distribute his wealth between foreign and domestic assets. The model’s analysis suggests that economic variations, such as expected domestic currency appreciation, rise in domestic asset return, drop in foreign asset return, domestic economic growth, decrease in domestic inflation, and rise in foreign asset risk will cause foreign investors to distribute more wealth in domestic assets. Therefore, hot money flows in, and vice versa. In the empirical analysis section, the paper estimates structural VAR models using data from 2000 to 2019 in China. The impulse response functions are consistent with the theoretical predictions: when there is a positive domestic inflation shock, hot money outflows increase (inflows decline) in the current period, but the response is not significant. When there is a positive domestic growth rate shock or positive domestic asset return rate shock, hot money inflows increase (outflows decline) in the current period, and the response reaches its peak in the next period. Furthermore, when there is a positive expected exchange rate shock, hot money outflows increase (inflows decline) in the current period. Of these drivers, the expected exchange rate has the largest impact on hot money, and the domestic growth rate has the most enduring effect.

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Development aid and illicit capital flight: Evidence from Nepal

Abstract: This is an open access article under the terms of the Creat ive Commo ns Attri bution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

Cited by 4 publications

References 77 publications

Relationships between foreign direct investment and official development assistance with trade-related illicit financial flows. Evidence from low- and middle-income countries

Relationships between foreign direct investment and official development assistance with trade-related illicit financial flows. Evidence from low- and middle-income countries

What types of capital flows help improve international risk sharing?

Evaluation of Hot Money Drivers in China: A Structural VAR Approach

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