The Determinants and Roles of Capital Flight in the Growth Process of Nigerian Economy: Vector Autoregressive Model Approach

Abstract

A plethora of studies in recent years have focused attention on the determinants and roles of capital flight in the development process. This paper contributed to this body of knowledge by filling a noticeable gap. Principally, the paper examined the extent and magnitude of contributions of external debt and corruption to capital flights plus other factors that have been examined in the literatures. The paper employed standard methodological approach, Vector Autoregressive Model, to determine the sources of shock to capital flight in Nigeria. The study found that the greatest shock to capital flight came from external debt and corruption. Nevertheless the debt relief of 2005 minimized the capital flight in Nigeria. The findings of the study demonstrated that, capital flight limits growth potential, crowds-out investment, and worsens capital formation. The study suggested the need for the policy makers to encourage growth, and reverse the negative distributional effects of capital flight. Specific policies might include repatriation of flight capital to boost the growth initiatives with selective controls on capital outflows, changes in Nigeria tax laws, and a bias toward poor wages. More generally, a new overall strategy that would encourage Nigerians abroad to come back home and invest in the country was recommended.