Abstract

Many studies have attempted identifying the determinants of capital flight in the Sub Sahara African region. Most of them have focused on testing the portfolio choice theory while assuming that capital inflows meant for public investment are diverted by political elites and politically exposed persons and firms to foreign countries’ bank accounts or asset markets. Empirical evidence on the role of capital inflows and politics on capital flight is limited. Using Malawi as a case study, this study investigates the determinants of capital flight by extending the portfolio choice model to include the foreign capital source as an incentive for capital flight. The study employed the Autoregressive Distributed Lag (ARDL) framework on annual time series data from 1980-2020.The study found that external debt inflows are the most significant determinant of capital flight from Malawi. Contrary to expectation, foreign aid inflows are associated with a decrease in capital flight, implying that a decline in foreign aid triggers capital flight from Malawi instead. The evidence found does not link capital flight to the political elites through elections and transitions of executive power of government. The portfolio choice variables such as interest rate differentials, real GDP, and real effective exchange rate are also significant, though with relatively weaker influence. Thus, the result implies that some capital flight from Malawi responds to investment opportunities and macroeconomic policy risk variations. In this regard, there is a need to strengthen transparency and accountability mechanisms, especially concerning acquiring and utilising external debt. Additionally, the government needs to focus on policies that ensure long-term economic growth and avoid depreciation or accelerated devaluations of the Malawi Kwacha to stop capital flight from Malawi.

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School	: School of Law, Economics and Government
Issued Date	: 2023

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