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Causality between external debt and capital flight in Sub-Saharan Africa

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Author Info
Fofack, Hippolyte
Abstract

Over the past few decades, the foreign liabilities of the majority of countries in Sub-Saharan Africa have grown dramatically, propelling most nations into the status of Highly Indebted Poor Countries, when these liabilities reached unsustainable levels in the 1990s. At the same time, increases in capital flight from the region followed a parallel trend, leading scholars to draw on"revolving door"models to explain the apparent positive covariation of external debt and capital flight in the region. This paper investigates the causality between external debt and capital flight in a cross-section of Sub-Saharan African countries using co-integration and error-correction models. Although dual causality, which is consistent with the revolving door hypothesis, cannot be rejected for the majority of countries, empirical evidence highlights the lead of external debt over capital flight. The significance of error-correction terms points to a long-run co-integrating relationship between external debt and capital flight in a large number of countries.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5042.

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Date of creation: 01 Sep 2009
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Handle: RePEc:wbk:wbrwps:5042

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Keywords: Economic Theory&Research; External Debt; Debt Markets; Deposit Insurance; Currencies and Exchange Rates;

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  1. James Boyce & Léonce Ndikumana, 2001. "Is Africa a net creditor? new estimates of capital flight from severely indebted sub-Saharan African countries, 1970-96," The Journal of Development Studies, Taylor and Francis Journals, vol. 38(2), pages 27-56, December. [Downloadable!] (restricted)
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  2. Lensink, Robert & Hermes, Niels & Murinde, Victor, 2000. "Capital flight and political risk," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 73-92, February. [Downloadable!] (restricted)
  3. Arvind Subramanian & Xavier Sala-i-Martin, 2003. "Addressing the Natural Resource Curse: An Illustration from Nigeria," IMF Working Papers 03/139, International Monetary Fund. [Downloadable!]
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  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July. [Downloadable!] (restricted)
  6. Boyce, James K., 1992. "The revolving door? External debt and capital flight: A Philippine case study," World Development, Elsevier, vol. 20(3), pages 335-349, March. [Downloadable!] (restricted)
  7. Ndikumana, Leonce & Boyce, James K., 2003. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," World Development, Elsevier, vol. 31(1), pages 107-130, January. [Downloadable!] (restricted)
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  8. Hiro Toda & Peter Phillips, 1994. "Vector autoregression and causality: a theoretical overview and simulation study," Econometric Reviews, Taylor and Francis Journals, vol. 13(2), pages 259-285. [Downloadable!] (restricted)
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  9. Hirotugu Akaike, 1969. "Fitting autoregressive models for prediction," Annals of the Institute of Statistical Mathematics, Springer, vol. 21(1), pages 243-247, December. [Downloadable!] (restricted)
  10. Seema Jayachandran & Michael Kremer, 2006. "Odious Debt," American Economic Review, American Economic Association, vol. 96(1), pages 82-92, March. [Downloadable!]
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  11. Dornbusch, Rudiger, 1991. "Credibility and Stabilization," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 837-50, August. [Downloadable!] (restricted)
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  12. Yan Sun, 2004. "External Debt Sustainability in HIPC Completion Point Countries," IMF Working Papers 04/160, International Monetary Fund. [Downloadable!]
  13. James Boyce & Léonce Ndikumana, 2008. "New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options," Working Papers wp166, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  14. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October. [Downloadable!] (restricted)
  15. Agenor, Pierre-Richard & Taylor, Mark P, 1993. "The Causality between Official and Parallel Exchange Rates in Developing Countries," Applied Financial Economics, Taylor and Francis Journals, vol. 3(3), pages 255-66, September. [Downloadable!] (restricted)
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