New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options

The first objective of this paper is to provide a comprehensive set of estimates of capital flight for a sample of 40 African countries over the period of 1970-2004 to help in assessing the magnitude of the capital fight phenomenon. Second, the paper reviews the literature on the causes of capital flight from sub-Saharan Africa as a way of identifying the factors that may be reversed by appropriate policy responses. Third, we provide new econometric evidence on the linkages between external borrowing and capital flight, one of the key relationships identified in the empirical literature. We confirm the robustness of the debt-capital flight relationships by estimating the capital flight equation using a proxy of capital flight that is independent of debt in its construction. This proxy is bank deposits held by African non-bank private agents in Western banks. Bank deposits are one of the means by which smuggled funds are held abroad and thus are related to our measure of capital flight. Thus we are able to confidently conclude that the strong relationship between capital flight and external borrowing is not a spurious relationship arising from the definition of capital flight that we use in the paper. Fourth, the paper discusses strategies to prevent and reverse capital flight with a special emphasis on the rationale for advocating the doctrine of odious debt for the repudiation of illegitimate debts. The paper closes with a summary of the evidence and the arguments