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Africa's Exodus: Capital Flight and the Brain Drain as Portfolio Decisions

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  • Paul Collier
  • Anke Hoeffler
  • Catherine Pattillo

Abstract

We build a data set on financial and human capital flight for 48 countries for the period 1970--98 and analyse capital flight as a portfolio choice. Financial capital flight is measured as the stock of capital flight relative to domestically held private net wealth and human capital flight as the proportion of a country's educated population that is living outside the country. Our results suggest that the same economic factors influence human and financial portfolio decisions, namely the relative returns and the relative risks in the competing locations. We focus on the estimated model's implications for Africa, finding that the severe financial capital flight that Africa experienced until the late 1980s has started to be reversed. The factors that have accounted for this repatriation are probably the reduction in the parallel market premium and African indebtedness, the reduction in the incidence of civil war (a phenomenon true only of our sample countries, rather than a general African phenomenon) and the decline in real US interest rates. In contrast, we find that human capital flight is rapidly increasing, as the emigration of the educated is subject to much more powerful momentum effects than financial capital flight. Finally, we find that for both types of capital flight policy changes only affect outcomes with long lags, suggesting that Africa's human capital exodus will be an increasingly important problem. Copyright 2004, Oxford University Press.

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Bibliographic Info

Article provided by Centre for the Study of African Economies (CSAE) in its journal Journal of African Economies.

Volume (Year): 13 (2004)
Issue (Month): 02 (December)
Pages: ii15-ii54

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Handle: RePEc:oup:jafrec:v:13:y:2004:i:02:p:ii15-ii54

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Cited by:
  1. Christopher Blattman & Edward Miguel, 2009. "Civil War," NBER Working Papers 14801, National Bureau of Economic Research, Inc.
  2. Areendam Chanda & Debajyoti Chakrabarty & Chetan Ghate, . "Education, Growth, and Redistribution in the Presence of Capital Flight," Departmental Working Papers 2006-10, Department of Economics, Louisiana State University.
  3. Patrick Honohan & Thorsten Beck, 2007. "Making Finance Work for Africa," World Bank Publications, The World Bank, number 6626, February.
  4. Asongu, Simplice A, 2013. "Fighting African Capital Flight: Empirics on Benchmarking Policy Harmonization," MPRA Paper 48469, University Library of Munich, Germany.
  5. Ratha, Dilip & Mohapatra, Sanket & Plaza, Sonia, 2008. "Beyond aid : new sources and innovative mechanisms for financing development in Sub-Saharan Africa," Policy Research Working Paper Series 4609, The World Bank.
  6. Jomo Kwame Sundaram & Rudiger von Arnim, 2008. "Economic liberalization and constraints to development in sub-Saharan africa," Working Papers 67, United Nations, Department of Economics and Social Affairs.
  7. Davies, Victor A. B., 2007. "Capital flight and war," Policy Research Working Paper Series 4210, The World Bank.

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