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Potential gains from capital flight repatriation for Sub-Saharan African countries

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  • Fofack, Hippolyte
  • Ndikumana, Leonce

Abstract

Despite the recent increase in capital flows to Sub-Saharan Africa, the region remains largely marginalized in financial globalization and chronically dependent on official development aid. And with the potential decline in the level of official development assistance in a context of global financial crisis, the need to increase domestic resources mobilization as well as non-debt generating external resources is critical now more than ever before. However, the debate on resource mobilization has overlooked an important untapped source of funds consisting of the massive stocks of private wealth stashed in Western financial centers, a substantial part of which left the region in the form of capital flight. This paper argues that the repatriation of flight capital should take a more prominent place in this debate from a moral standpoint and for clear economic reasons. On the moral side, the argument is that a large proportion of the capital flight legitimately belongs to the Africans and therefore must be restituted to the legitimate claimants. The economic argument is that repatriation of flight capital will propel the sub-continent on a higher sustainable growth path while preserving its financial stability and without mortgaging the welfare of its future generations through external borrowing. The analysis in the paper demonstrates quantitatively that the gains from repatriation are large and dominate the expected benefits from other sources such as debt relief. It is estimated that if only a quarter of the stock of capital flight was repatriated to Sub-Saharan Africa, the region would go from trailing to leading other developing regions in terms of domestic investment, thus initiating a ‘big-push’-led sustainable long-term economic growth. The paper proposes some strategies for inducing capital flight repatriation, but cautions that the success of this program is contingent on strong political will on the part of African and Western governments and effective coordination and cooperation at the global level.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5024.

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Date of creation: 01 Aug 2009
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Handle: RePEc:wbk:wbrwps:5024

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Keywords: Access to Finance; Economic Theory&Research; Investment and Investment Climate; Debt Markets; Emerging Markets;

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References

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  1. Ndikumana, Leonce & Boyce, James K., 2003. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," World Development, Elsevier, Elsevier, vol. 31(1), pages 107-130, January.
  2. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
  3. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, Elsevier, vol. 30(10), pages 1677-1696, October.
  4. Larrain, F. & Velasco, A., 1990. "Can Swaps Solve The Debt Crises? Lessons From The Chilean Experience," Princeton Studies in International Economics, International Economics Section, Departement of Economics Princeton University, 69, International Economics Section, Departement of Economics Princeton University,.
  5. Sebastian Edwards, 1992. "Capital Flows, Foreign Direct Investment, and Debt-Equity Swaps in Developing Countries," NBER Working Papers 3497, National Bureau of Economic Research, Inc.
  6. James Boyce & Léonce Ndikumana, 2008. "New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp166, Political Economy Research Institute, University of Massachusetts at Amherst.
  7. Theodore H. Moran & Edward M. Graham & Magnus Blomstrom, 2005. "Does Foreign Direct Investment Promote Development?," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 3810, July.
  8. Cardoso, Eliana A. & Dornbusch, Rudiger, 1989. "Foreign private capital flows," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 26, pages 1387-1439 Elsevier.
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Cited by:
  1. Shafaeddin, Mehdi, 2009. "The Impact of the Global Economic Crisis on Industrialization of Least Developed Countries," MPRA Paper 18788, University Library of Munich, Germany.
  2. Fofack, Hippolyte, 2009. "Africa and Arab Gulf states : divergent development paths and prospects for convergence," Policy Research Working Paper Series 5025, The World Bank.

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