The Effect of Capital Flight on Nigerian Economy

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the study

Over the years, the issue of capital flight from developing countries,

including Nigeria, has received appreciable attention from researchers.

Concerns have been expressed about the magnitude, causes and

consequences of these capital outflows, not least because the lack of

financial resources for appropriate economic development has pushed

Nigerian and most other sub-Saharan African (SSA) countries into external

borrowing to augment domestic resources in their quest for economic

growth. Acquisition of foreign assets by residents has escalated even as

developing counties search for external borrowings to enhance the inflow of

resources. Authors like Cuddington (1987) and Pastor (1990) have shown

that developing countries borrowing is substantially diverted into private

assets abroad.

1

Capital flight has been regarded as a major factor contributing to the

mounting external debt problems and inhibiting developmental efforts in the

third world, Cuddington (1986). External debt in Nigeria, for example,

increased by 700 percent from $3.5million in 1980 to $28.0 billion in 2000.

Most analyst have attributed sluggish growth and persistent BOP deficits to

most developing countries including Nigeria, despite private transfers and

long term capital flows to capital flight Ajayi (1996). Capital flight in turn is

caused by so many factors such as speculation that any of the vehicle

currencies will fall e.g. Dollar, unfriendly investment climate facing both the

local and foreign investors, inflation, repressive financial system (under

developed financial structure) etc.

Capital flight, in economics, occurs when assets and/or money rapidly

flow out of a country, due to an economic event that disturbs investors and

causes them to lower their valuation of the assets in that country, or

otherwise to lose confidence in its economic strength. This leads to a

disappearance of wealth and is usually accompanied by a sharp drop in the

2

exchange rate of the affected country. It also refers to all private capital

outflows from developing countries, be they short term or long-term

portfolio or equity investments, Oloyede (2002, pp160).

Conceptually, divergence views on what really constitute capital flight

has led to concern about the need for policy intervention to stem it and about

the interaction between economic policies in developing and industrial

countries. Capital flight also raises question about the role of International

financial institutions which lend to developing countries and act as

depositors for the capital exports from the developing countries.

Views on the concept of capital flight are largely unsettled. While

some analysts view it as a symptom of a sick society characterized by break

down of social cohesion, reduction in growth potentials, erosion of tax base,

failure to recover from debt problems, and a redistribution of wealth from

poorer to richer social groups, others consider the very use of the word

Capital flight as unnecessarily pejorative description of natural,

economically rational responses to the portfolio choices that have confronted

3

wealthy residents of some debtor countries in recent years . Economic theory

explain the so-called “capital flight” from developing countries as a product

of natural and economically rational behavior of wealthy residents of these

debtor countries to diversify their portfolio in order to protect themselves

against riskiness of any one particular investment.

Thus, the arguments makes the concept more complex to define and

given the present magnitude of Nigeria’s external debt, the possible impact

of capital flight on her debt-servicing capability and following the words of

Nigeria’s former minister of finance and external affairs, Iweala (2006)

“Nigeria may benefit from remittance form Diaspora funds as a result of

what is described as anecdotal evidence of high levels of capital from the

Nigerian economy”, a study of capital flight is appropriate at this time.

Relating this concept of capital flight to the Nigerian economy, she is a

sleeping giant with a lot of potentials to develop and emerge as a world giant

because of its natural endowments in human and natural resources in terms

of production, investment and in general, but in terms of economic

4

development she’s still crawling. The question is what is the cause(s) of the

sluggish growth and development?

Capital flight is an academic issue and difficult to understand. It is a

serious problem particularly in the third world counties. The primary reason

for the sluggish growth in Nigeria is not lack of raw materials, markets or

labour rather, it is the result of the institutional obstacles that had their origin

in the colonial economic structure, controlled by foreign trading houses

which saw industrialization as a threat to their commercial activities. That is,

the colonial master neglected the development of manufacturing sectors

instead, they encouraged rapid improvement in the production of cash crops

such as cocoa which they take to their countries to feed industries. They sell

their outputs e.g. cars to developing nations then repatriate their profit, this

is an ugly situation that Nigeria emulated as a way of sending stolen money

to a safer economy (secret foreign account). Besides that, there is also, large

movement of Nigerian intellectuals, highly skilled manpower and

professionals to foreign countries (Brain drain).

5

1.2 STATEMENT OF THE PROBLEM

In most developing nations such as Nigeria which is characterized by

foreign exchange shortage, chronic poverty and heavy debt burden, capital

flight constitutes a large proportion of resources which are useful for

financing economic growth and normalizing the adverse economic trends.

Taking Nigeria as a case study, large percentage of people that engage in

capital flight are economic and political groups who seize the opportunity of

their position to acquire both legal and illegal funds and siphoned them

abroad. Such illegal funds consist of kickbacks on public and private sectors

contracts, diversion of export revenue to private accounts and the likes.

At this point, given the complex nature of capital flight and its sever

effect on Nigerian economy one needs to ask questions as to:

(i) Where to draw the line between “what is” and “what is not” capital

flight?

(ii) What are the major causes of and how do we measure the

magnitude of capital flight?

6

(iii) Is capital flight something bad, which requires policy intervention

to stem or reverse?

(iv) What major effect does capital flight have on the growth and

development of the Nigerian economy?

(v) What are the measures that can be employed to reverse the

problem of capital flight?

(vi) Is their any relationship between the concept of capital flight and

investment instruments?

This study intends to investigate the above-itemized questions.

1.3 RESEARCH QUESTION

The questions to be answered are:

1. Is Capital flight something bad which requires policy intervention to

stop or reverse it?

2. Is it not true that Capital flight would deter policy makers from

making “wrong” political and economic decision?

7

3. Why is it when an American or a Briton puts money abroad it is called

“Foreign Investment and when an African does the same it is called

“Capital flight”?

4. Why is it that when an American company puts 30% of its equity

abroad it is called “Strategic Diversification” and when a Nigerian

businessman puts only 4% abroad it is called” Lack of Confidence.

Such arguments make the definition of Capital flight complex. This is

basically true because capital flight has had inhibiting consequences on

the economies concerned despite reflows that some countries have

experienced. Whether or not a country impose capital controls, the

immediate consequences of capital flight is to reduce foreign exchange

reserves which may, in turn, require increase external borrowing to

finance development expenditures. When both the foreign exchange

reserves and external borrowing capacity have been exhausted, the

country will be forced to initiate balance of payments adjustment through

either devaluation or equivalent expenditure switching policy, or by

8

expenditure reduction. Devaluation will result in the reduction of

domestic savings required for financing domestic investment and hence

reducing future growth potential. The reduction in expenditure or demand

also reduces output both in the current and in future periods.

In countries with capital controls, capital flight is associated with a

rising parallel market premium as the demand for foreign exchange

increases due to the need to finance capital flight. The premium will also

result in the drain of some foreign resources from official reserves into

the parallel market. In extreme case, the diversion of the reserves into the

parallel market may exhaust the country’s foreign reserves and thus

forcing both the government and the private sector to increase their

foreign borrowing. Capital flight also has some income distributional

consequences especially if the country follows the “Origin” principle of

taxation, since there may be little foreign investment which can be taxed.

On the other hand, even when a country follow the “residence” principle

of taxation, it would not be easy to tax flight capital, since such capital is

9

normally not reported to the tax authorities. However, strong conclusions

on the consequences of capital flight is strictly an empirical matter which

is beyond the present work. The damaging effects of capital flight may

make rational lenders hesitate to increase credits to the debtor countries.

On the other hand, the behaviour of individual agents to diversify their

portfolio by keeping some of their wealth in foreign assets is postulated

as rational by economic theory and accepted as normal in industrial and

some developing countries.

1.4. PURPOSE OF THE STUDY

From the perspective of the different angles from which capital flight

can be viewed, it is important to study it for any economy. The economic

argument against capital flight from developing countries are not only

convincing but are often too strong to be ignored. Firstly, the outflow of

capital can cause a shortage of liquidity in the economy and thereby create a

shortfall in the amount of funds that are needed for the importation of

equipment which are needed for development.

10

In addition, the shortage of liquidity in the economy can lead to the

exertion of upward pressure on interest rates. Furthermore, given the fact

that capital outflow is a diversion of domestic savings away form domestic

real investment, the pace of growth and development is retarded from what it

would have been otherwise. It can also cause a depreciation of the domestic

currency if the authorities are operating a floating exchange rate system. If

attempts are being made to defend a particular exchange rate, a loss of

reserves will ensue.

Secondly, the income that is generated abroad and the wealth that are

held abroad are outside the purview of domestic authorities and therefore

cannot be taxed. Thus, potential government revenue is reduced and hence

the debt-servicing capacity of government’s debt is affected. The

aforementioned consequences of capital flight call for prompt attention.

This, is the purpose for which the study is to be carried out.

1.4.1 OBJECTIVE OF THE STUDY

11

The broad objective of the study is to examine the effect of capital

flight on Nigerian economy. This broad objective will lead us to the specific

objectives which are:

(i) To estimate the magnitude and determine the causes of capital

flight from Nigeria.

(ii) To briefly examine the political and macro-development in

Nigeria.

(iii) To discuss the policy implication of what to do in order to stem or

recapture the capital flight.

(iv) To identify factors influencing port folio choice of private wealth

holders in Nigeria.

1.4.2 JUSTIFICATION FOR THE STUDY

At the inception of the current civilian government in Nigeria in 1999,

a campaign for external debt relief from Nigeria’s foreign creditors and a bid

to attract foreign investment were launched as cardinal goals in the pursuit

of economic growth and better living conditions for Nigeria. The policy

12

direction was informed bys the belief that he country’s debt burden and

inadequate inflow of investment capital were strong hindrances to the

growth of the economy. When that government assumed office in 1999 the

ratio of Nigeria’s external debt to GDP was as high as 84% and the domestic

debt/GDP ratio was 25%. On the investment flow side, the net flow of

foreign private capital declined by more than 92% in 1999.

Basically, a large volume of capital flight is considered as evidence of

excessive taxation and economic mismanagement in the home country. It

casts doubts about debt relief as an appropriate response to the debt service

problem (Eggerstedt et al, 1995) and sends wrong signals to investors. A

recent study by Boyce and Ndikumana (2001) reports that as much as US$

3.5 billion flew out of Nigeria in 1996. In the light of the external debt

burden of the country, the recently approved debt relief by the Paris club and

the urge to reverse capital flight in the process of economic growth, this

study is a starting point in providing new and more recent insights into the

13

issue of capital flight from Nigeria, and possible policy measures or

strategies to reverse the trend.

In the particular case of Nigeria, capital flight has been a recurrent

phenomenon and was estimated to be taking place even before the adoption

of the structural adjustment programme in 1986. could it perhaps be that

capital flight has continued unabated even under democracy?.

In view of the adverse implications of capital flight, providing insight

into possible strategies to effect capital flight reversal is crucial at this time.

1.5 STATEMENT OF HYPOTHESIS

Based on data to be gathered in relation to the concept of capital flight

and in order to facilitate this research work, an hypothesis will be formulated

and tested for reliability or otherwise purposes. The hypothesis to be tested

include:

H0: Capital flight has no significant effect on Nigerian economy.

H1: Capital flight has significant effect on Nigerian economy.

Where: H0 is a Null hypothesis

14

H1 is an Alternative hypothesis.

1.6 SCOPE AND LIMITATION OF THE STUDY

Capital flight and its effect on Gross Capital Formation (GCF) and

Gross Domestic Product (GDP) are being examined which are major

economic indices of growth in the economy. The time horizon cover by the

study is 38 years (1970-2007). The period cover is justified based on

observation that enormous capital outflow from Nigeria to foreign nations

occurred during this period majorly by political office holders.

This study is constrained by a number of factors. The major ones are:

i. Financial constraint as this could not allow us to access and exploit

some potential sources of data.

ii. Time constraint also limit our ability because class-work also

deserves prompt and full attention.

iii. Data collection problem because the only recognized empirical

studies on capital flight conducted for Nigeria is by Ajayi (1992)

as cited in Onwioduokit (2001).

15

1.7 OUTLINE OF THE STUDY

The study will be divided into five (5) separate but highly related

chapters.

Chapter one is the general introduction of the study, it focuses

attention on the historical background of the study. It gives the objective of

the study, statement of problem, statement of hypothesis, significance of the

study, scope and limitation of the study which covers the period of 38 years.

Chapter two deals with the theoretical framework and review of past

studies on capital flight. Also, it examines briefly the political; and macro-

economic developments in Nigeria and how they influence capital flight.

Definition of terms and magnitudes are also discussed there in and also a

review of Nigerian’s experience.

Chapter three deals with the methodology framework to be used in

this study and this consists of re-statement of hypothesis, model

specification, definition of variables, estimation of techniques types &

sources of data used in the study.

16

Chapter four will be exclusively reserved for the statistical inference.

In other words, giving the economic interpretation to the empirical results of

descriptive estimation.

Chapter five which is the last chapter summarizes, concludes and give

detailed recommendations on capital flight for policy-makers and others who

are concerned.

1.8 DEFINITION OF TERMS

In the context of this study, some terms will be employed to analyse

and are defined as follows:

(i) Brain Drain: It refers to the movement of educated elites from one

county to another for development purpose due to better offer such

as incentives:

(ii) Capital flight: The term capital flight as used in this study connotes

illegal movement of capital or funds from one country to another

usually from developing countries to developed countries. This

17

connotation implies that there may be “normal” or “legal” and

“abnormal” or “illegal” flows.

(iii) Capital outflow: It is used as a proxy for capital flight which

implies movement of investible resources out of developing

country such as Nigeria to a developed country like Britain.

(iv) Inflation: it refers to a persistent increase in price of goods &

services in an economy over a period of time. It is an economic

situation in which there are plenty money chasing fewer goods.

(v) Money laundering: It refers to an act of converting financial

proceeds realized from illegal dealings such as necrotic drugs into

legal investment.

18

CHAPTER TWO

2.0 THEORETICAL FRAMEWORK AND LITERATURE

REVIEW

2.1 Introduction

Most studies on capital flight have been done for Latin American,

Cuddington (1986) and Conesa (1987). However, capital flight has been

argued to stem from many factors, classified into political and economic

factors, Ajayi (1992). He argued that the political aspect is often ignored in

most analysis on capital flight and said this is predicated on corruption ( a

problem which is hardly limited to LDCs) and access to foreign funds by

political leaders.

Beginning in the mid-1980’s, the phenomenon of capital flight from

developing countries received considerable attention in the literature. A

number of country-specific case studies and cross-country studies have

examined the magnitude of capital flight, its causes, and its effects (Ajayi

19

1997). Until recently, however, sub-sahara Africa has received less attention

than other developing regions. Yet capital outflows from African economies

deserve serious attention for several reasons away from domestic investment

and other productive activities. In recent decades, African economies have

achieved significantly low investment levels than other developing countries

( International Finance Corporation, 1998;Ndikumana, 2000). These low

levels of domestic investment are attributable, in part, to the apparent

scarcity of domestic savings, weak and shallow financial systems, and high

country risk due to unstable macroeconomic and political conditions. Capital

flight is both a cause and a symptom of this weak investment performance.

Secondly, capital flight is likely to have pronounced regressive effects

on the distribution of wealth. The individuals who engage in capital flight

generally are members of the sub-continent’s economic and political elites,

who take advantage of their privileged positions to acquire and channel

funds abroad. Both the acquisition and the transfer of funds often involve

legally questionable practices, including the falsification of trade documents

20

(trade misinvoicing or faking), the embezzlement of export revenues and

kickbacks on public and private sector contracts (Ndikumana and Boyce,

1998). The negative effect of the resulting shortages of revenue and foreign

exchange fall disproportionately on the shoulders of the less wealthy

members of the society. The regressive impact of capital flight is

compounded when financial imbalances results in devaluation, the wealthy

who hold external assets are insulated from its effects, while the poor enjoy

no such cushion.

A third reason for greater attention to African capital flight is that

most developing countries remain in the grip of a severe external debt crisis.

Debt service today absorbs a sum equivalent to more than 6% of developing

country’s GDP. In so far as the proceeds of external borrowing are used not

to the benefit of the African public, but rather to finance the accumulation of

private external assets by the ruling elites, the moral and legal legitimacy of

these debt-service obligations is open to challenge.

21

This section of the study shall deal with several issues on capital

flight such issues will cover those on prior studies, issue of measurement,

causes and effects, political and macro-economic developments in Nigeria, a

detailed analyses of trade-faking, that is, the under-invoicing/over-invoicing

of exports and imports, definitions of the concept and others that can

increase the flight of capital from Nigerian economy.

2.2 THEORETICAL FRAME WORK

Over recent years, the deteriorating impact of capital flight on

economic growth and development has received increasing attention from

researchers, economist, analysts and policy makers, especially in the third

world.

Sutherland (1996), based on the new open macro economic models by

obstfeld and Rogoff (1996) studied the implications of financial openness on

macro economic fluctuations. Buch et al (2003) modified the above model in

three respects and this modified version is used as the theoretical framework

in the study of Nair (2006) on India economy. In the study, he made 32

22

observations, the period is 1973 to 2005 while he selected GDP and GNP as

the macro-economic violatility and the degree of capital account openness is

proxied by capital outflow liberation among others.

He checked out the time series properties of the variables using

Augmented Dickey Fuller (ADF) tests. In the study, he used Akaike

information criteria to select optimum number of lags and concluded that all

the variables are integrated of order one except the world bank estimates of

capital flight. So, he carried out multivariate tests and suggest a robust long

run relationship between capital account openness and the volatility of all

macro economic aggregates. He proceeds to multivariate error correction

modelling (ECM) to capture the dynamic (shortrun) casual relationship

between variables. He found out that the t-ratios are significant and the ECM

are acceptable. The model adequacy tests were also satisfied.

Adeniyi and Obasa (2004) in their study, set out to empirically

investigate the impact of interest rates and other macro economic factors on

performance in Nigeria using co-integration and error correction mechanism

23

(ECM) technique with annual time series covering the period between 1970

and 2002. They stated their analysis by examining stochastic characteristics

of each time series by testing their stationarity using Augmented Dickey

Fuller (ADF) test. After that, they proceeded to estimate the error correction

mechanism (ECM) model. From their study, many interested conclusions

were drawn. First, they found that interest rate spread and government

deficit financing have negative impact on the growth of manufacturing sub-

sector in Nigeria. Secondly, their study reveals that liberalization of the

Nigerian economy has promoted manufacturing growth under the period of

study. The findings were further reinforced by the presence of a long run

equilibrium relationship as evidenced by the co-integration and stability in

their model.

In addition, the results of the tests in Nair (2006) study tally with

results for the growth equation showed that not only does past debt

accumulation deter growth but so do current flows.

24

Alberto and Guido (1987) have shown that capital flight will result

when future governments are expected to follow income re-distribution

policies that are not desirable for holders of domestic wealth. Capital flight

is thus, more a consequence than a cause of unequal income distribution.

Obasa and Adeniyi (2004) also argued that a way of avoiding spurious

regression results stationarity of variables and co-integration among them

should be tested prior to estimation of error correction model and Granger

causality regressions. This claimed that the co-integration for stationary

variables would be meaningless because variables have to be integrated

individually in order to be co-integrated. While the study of Nair (2006) for

India was concluded through the error correction term which showed debt to

have negative implications on growth potential of the economy. Using both

the Gross Domestic Product (GDP) and Gross National Product (GNP) as

important determinants of growth.

Onwiodukit (2007) also employed co-integration analysis for the

determinants of capital flight from Nigeria. In this model, he identified

25

important variables explaining capital flight to include domestic inflation,

parallel market premium comparative growth rate of the economy. His

results showed that these variables determined capital flight in Nigeria as the

expected signs hold in the model. The unit root tests also confirmed the

variables stationarity at their various levels. Thus, the author confirmed

based on his empirical findings that capital flight could deter growth if not

given prompt attention by the policy-makers.

2.3 REVIEW OF EMPIRICAL STUDIES

By its very nature, it is difficult to measure capital flight. The

difficulties involved, not withstanding, a number of capital flight estimates

have been made over the last several years. The preponderant of these

studies cover a number of countries including mostly Argentina, Brazil,

Chile, Korea, Mexico, Peru, the Phillipines and Venezuela. A recent study

by Rojasuarez (1991) covers Argentina, Bolivia, Chile, Columbia, Ecuador,

Gabon, Jamaica, Mexico, Nigeria, Peru, the Philippines, Venezuela and

Yugoslavia. These various studies differ from one another in terms of the

26

methodological approaches of measurement, country coverage and lifespan.

The most significant of these studies which have made impact on capital

flight estimates include the studies by Dooley (1986, 1988), Dooley et al.,

(1986), Worldbank (1985), Morgan Guaranty Trust Company (1987), Cline

(1986), Cuddingtom (1986), Cumby and Levich (1987), Lessard and

Williamson (1987), Khan and Ul Haque (1987) and Verna – Schneider

(1991).

In the Cuddington (1986) approach, capital flight is defined as a short

term speculative outflows which according to him is the typical meaning of

capital flight. It is defined as short term external assets by the non-bank

private sector plus the errors and omissions in the balance of payments. This

approach is concentrated on what is popularly referred to as “hot money

flows” method because of the fact that funds are expected to respond quickly

to changes in expected returns or to changes in risk. Variations in economic

conditions are likely to affect the magnitude of such flows. These in essence

are funds “on the wings” that are expected to return very quickly to the

27

country of origin when economic conditions are favourable, that is, when

appropriate macro economic policy stance is adopted.

Khan and UI Haque (1987) calculated capital flight for eighty highly-

indebted developing countries for the period 1974-1982. Capital flight is

defined in two ways. First, it is defined simply as gross private short term

capital flows plus net errors and omissions in the country’s balance of

payment accounts. This is the same as the Cuddington estimate. The second

method tries to take account for normal capital flows. Capital flight is

defined as that part of the increase in external claims that yields no recorded

investment income, this in essence is the Dooley (1986) approach.

Cuddington (1986) also estimated the economic determinants of

residents capital outflow of four countries (Argentina, Mexico, Uruguay and

Venezuela). His empirical findings differed from country to country. In

mexico, capital flight was highly related with over-valuation of the exchange

rate, while in Venezuela, there were over-valuation and foreign interest

rates. In Argentina and Uruguay it lagged effective exchange rate and error

28

of the model were related to capital flight. Conesa (1977) had similar results

except that it had 16 annual observation while Cuddington (1986) had 91.

Conesa (1987) had growth as an additional explanatory factor and did not

attempt to estimate over-valuation of the real or effective exchange rates but

used level of government borrowing in his study of seven developing

countries (Argentina, Mexico, Brazil, Chile, Peru, Venezuela and

Philippines). Dooley (1988) discovered that capital flight is significantly

related to domestic inflation, financial repression and a measure of country

risk premium.

Chang and Cumby (1991), in their sample of 36 African countries

discovered that with the exception of Nigeria, the absolute levels of capital

flight from the individual African countries were smaller than Latin

American countries. But in relation to external debt and Gross Domestic

product (GDP) many African countries experienced higher capital flight

than their Latin American counterparts. Hermes and Lensuk (1992),

estimated capital flight from six-sub-Saharan African countries (Congo,

29

Zaire, Cote d ivore, Nigeria, Sudan, Tanzania and Uganda) from 1976 to

1989, using their estimates, capital flight may seem small compared to Latin

American countries but the burden as a percentage of GDP is higher by 61%

of sub-Saharan compared to 22% for Latin American. Also, by their

calculation, Murinde et al., (1996) discovered that Nigeria experienced the

biggest capital flight over the period $21billion representing 60% of the

combined total of the six countries in the sample. Their econometric analysis

of the determinant of capital flight indicated that the most explanatory

variable is public external borrowing. The results implied that capital flight

and external debt are closely dependent.

In this study of three countries (Cote d’ivore, Nigeria and Morocco,),

Ojo (1992) opined that Nigeria had the largest capital flight of $35billion

and emphasized the importance of domestic economic environment

including policy related variables as government budget deficit and changes

in external debt. AJayi (1992) discovered in his study that cumulative capital

flight in the period of 1980 to 1991 averaged 40% of external debt to run 18

30

countries sampled. The ratio was as high as 94% for Nigeria, 74% for Kenya

and 60% for Sudan. He also discovered that countries that exhibited the

greatest capital flight often are the most highly indebted and referred to them

as “twin problems”.

Ajayi (1992) estimated capital flight from Nigeria in 1972 to 1989,

drawing attention to the role of “trade faking” (misinvoicing) in the

country’s oil sector and to the link between capital flight, corruption and

governance failure. He concluded that most of the capital flight from Nigeria

is recorded in the BOP and debt statistics and that is not only explained by

economic factor but also political factor or uncertainty. Owiodukit (2001) in

his study stated that the major determinants of capital flight from Nigeria are

domestic, inflation, availability of foreign exchange reserve, comparative

growth rate of the economy and parallel market premium. Using empirical

evidence of the magnitude of capital flight from debtor countries in the

1980s, Gaydeezka and Oks of the IMF and the World Bank respectively

looks for satisfactory explanations of this phenomenon. The study argues

31

that the nature of capital flight pre-1982 can be explained by poor domestic

policies resulting in adverse economic incentives for domestic investors and

facilitated by large inflows from foreign creditors. The authors then search

for an explanation for the resurgence in capital flight since 1986, and argue

that debtor governments not only lost external credit worthiness (in 1982-

1983) but have now also lost domestic credit worthiness. As confidence in

governments has been eroded , the perceived risk of domestic assets rises

and residents have sought to diversify through investing abroad. While this

continues still at the core of the problem of capital flight, the authors also

looked at several other explanations of the problem for example continuing

policy distortions, debt overhang and uncertainty over debt negotiations.

According to the authors, large capital flows out of developing

countries have ample evidence of high capital mobility between LDC’s and

the outside world and of private capitals stronger responsiveness to changes

in both domestic and foreign economic incentives. They also hold the view

that because LDC governments largely ignored capital mobility and allowed

32

policy distortions to persist, capital flight continued until external credit was

denied and some corrective measures were undertaken. They concluded that

the price LDCs paid for capital flight was already high. They argued further

that massive foreign lending played instrumental role in facilitating private

capital outflows and that the deeper roots of capital flight is traceable to their

economic dis-incentives created by domestic policy distortions. They

observe that the decline in outflows from the early 1980s through 1986 can

be ascribed in part to the correction of some distortions such as the reduction

in exchange rate.

The study by Ajayi(1995) provided link between capital flight and

external debt in Nigeria. He concluded that most of the capital flight from

Nigeria is recorded in the balance of payment and debt statistics and that

capital flow is explained by not only economic factor but also political

instability.

Econometrics study on Africa seem to suggest that capital flight

results mainly from macro economic mismanagement, especially domestic

33

inflation. Ng’eno (1994) for example, found capital to be positively

correlated to domestic inflation and lagged capital flight. Olopoenia (1995)

study for Uganda showed unsatisfactory results. In fact the R2 was less than

0.30. The explanatory power in Olopoenia (1995) raises concern on the

difficulty of estimating capital flight in African countries which arises

mainly from poor quality of the data.

The poor results of empirical studies on capital flight from Africa may

not be unconnected to the use of estimated statistics of capital flight as a

dependent varaiable. Attempts to empirically determine the factors that

affect an estimated statistics on capital flight is suspect and is bound to

produce spurious results, as none of the methods of estimation discussed can

capture the very nature and character of the developing countries, including

Nigeria. The relative under developed nature of statistical gathering as well

as the very nature of the applied concept of capital flight makes the adoption

of any model developed for the industrial economies for the purpose of

measuring capital flight in the developing country like Nigeria, irrelevant.

34

In the light of the above, and given our earlier discussion on the

consequences of capital flight on the economy, which cannot be separated

from the impact of genuine capital movement, we shall adopt for this study

the capital outflow as the dependent variable. In an alternative model, we

shall adopt the error and omission statistics, as proxy for the dependent

variable. The use of the two alternative variables is more relevant to a

developing economies like Nigeria since illegality of the so-called “capital

flight” cannot be modeled.Ng’eno(1994)

As noted earlier, the only known empiricalsties on capital flight in

Nigeria is Ajayi(1992). However, the author did not test for unit roots in the

regression models before running the econometrics model with the variables

in levels. In order to avoid spurious regression, the author should have first

established the levels of the variables. In addition Ajayi (1992)empirical

work was based on estimated capital flight figure as the dependent variable.

The problem of attempting to determine the determinants of an estimated

dependent variable is very obvious as the result of the regression can best be

35

interpreted with caution. To adequately take care of the short comings of

Ajayi(1992), we intend to test for statistical properties of the variables used

in the equation as well as used firmed figure of capital outflow as a proxy for

capital flight the reason for this has been adumbrated earlier.

2.4 SHORTCOMINGS OF PAST ESTIMATES

It is observed that past studies on capital flight have taken into

account the effect of exchange rate fluctuations of the dollar value in

deriving residual measures of capital flight. Depending on whether these

currencies appreciate or depreciate against the dollar, this can introduce a

downward or upward bias in relevant countries where a substantial portion

of the debt is dominated in other currencies as in the francophone countries

of sub-Saharan African where much debt is dominated as frame. Secondly,

past studies of capital flight from sub-Saharan Africa except Chang and

Cumby (1991) and Ajayi (1992) cover a small number of countries. As a

result, they do not offer a basis for expansive cross-country analysis of the

magnitude, causes and consequence of capital flight. Those that cover a

36

large sample only refer to a fairly short time period which limits the ability

to examine the trends in capital flight over long time frame. For time series

analysis, it would be useful to have estimated capital flight for a good

number of years.

Thirdly, many past estimates, ignored analysis on falsification of trade

transaction. Exception is given to Chang and Cumby (1991) and Ajayi

(1992, 1997), Ndikumana and Boyce (1998). Instead they take trade

statistics unlike capital account statistics in official balance of payments

table at the fact value. In practice, the official BOP data on exports and

imports are of ten of poor quality due to trade misinvoicing i.e. exporter may

understate the value of the export revenue with the intention of retaining

abroad the difference between their actual export value and declared export

value. On the import side, there are incentives for both over-invoicing and

under-invoicing. Over invoicing allows importers to obtain extra foreign

exchange, which can be transferred abroad from the Central Bank on

favourable term, while under invoicing and outright smuggling allows

37

importers to evade custom duties and restriction. Thus, this weakness

suggest that caution should be taken in the interpretation of the regression

results due to problems inherent in determining the determinants of the

estimated capital flight.

2.5 FOREIGN LENDING AND CAPITAL OUTFLOWS

The estimations of Gajdeezka and Oks shows a very strong correlation

between capital outflows and foreign lending. However, they believe that

this high correlation does not necessarily reveal conclusive causality

linkages in either direction. They argued that the nature of the relationship

between net lending and capital flight has changed over time. They also

discussed the relationship between net lending and capital flight in the

context of risk assymetrics and scarce investment opportunities in

developing countries.

Their estimates revealed a close relationship between foreign lending

and capital flight. During the 1980-1987 period, the total value of capital

outflow from highly indebted countries (HICs) was $84billion and which

38

corresponded to roughly 40% of the total net long term resource inflows to

these countries in the group of high capital flight countries (Argentina,

Brazil, Colombia, Mexico, Nigeria, Peru, Philippines and Venezuela), for

each dollar in net lending, approximately 60% was expatriated as capital

outflows. They argued that this is an important observation given that

foreign lending was a major source of exchange reserves financing and that

these reserves were a source of foreign exchange for capital flight. They

added that the correlation between foreign lending and capital our flows can

be explained in several ways. Prior to 1982, the most straight forward

explanation is that governments borrowed to replenish foreign exchange

reserves and thus enabled capital outflows. External lending and capital

showed when voluntary lending to developing debtor countries stopped in

1982.

However, they observe that the linkage between capital flight and

borrowing changed after the outbreak of payments difficulties in 1982, in

particular the large foreign debt meant that foreign creditors faced much

39

higher levels of risk than before. They explained that the disbursement of

additional loans were made condition in the implementation of policies

which by themselves required less external finding. Therefore, the resulting

contraction in lending by 1986 was accompanied by the conspicuous

reduction in capital flight. On this note, Gagdeezka and Oks suggested that

the decline in capital outflows until 1986 was achieved by better economic

policies negotiated in conjunction with lower borrowing requirements and

the imposition of capital controls.

2.6 DOMESTIC POLICY DISTORTIONS, DEBT

ACCUMULATION AND CAPITAL OUTFLOWS

Domestic policy distortions were an integral part of the growth and

stabilization policies pursued by most Latin American countries. Policy

distortions led to a loss of government’s credit-worthiness, exchange rate

over valuation and financial instability, which in turn generated incentives

for capital flight. These factors are examined below.

40

2.6.1 LOSS OF CREDIT-WORTHINESS

During the 1970s, governments of large Latin American countries for

example pursued expansive fiscal and monetary policies associated with

relatively fast rates of growth and received massive financial support from

foreign commercial banks. Foreing lending help avert the short-term

inflationary consequence of large domestic deficits but as foreign debt

accumulated, both the foreign and domestic credit worthiness of these

governments were impaired. As the internal perception of government’s

solvency deteriorated, thus raising inflationary risks and devaluation

expectations, even extremely high interest rates could not prevent capital

flight. The reason was that the risk involved in holding domestic debt grew

faster than their nominal interest rate and when corrected for risk factors

(including unexpected devaluation risk) foreign asset remained a better

choice capital flows in and out of a country arbitraged differentials between

these risk-adjusting domestic and foreign rates of return.

41

2.6.2 EXCHANGE RATE OVER-VALUATION

Exchange rate policy was often aimed at fighting inflation rather than

at preventing future balance of payments difficulties. For example in

Argentina, Chile and Uruguay, a pre-announced path of decreasing exchange

rate devaluations was deliberately enforced to contain inflation. These

policies, which were conducted without controls on capital movements were

facilitated by favourable terms of trade, initially low real foreign interest

rates and massive foreign lending. These anti-inflation policies led to

exchange rate over valuation and fed capital outflows as speculators brought

foreign assets when the real exchange rate became unsustainably

overvalued. In this way, central banks financial capital flight, thus re-

chanelling abroad a substantial portion of foreign lending to governments,

with controls on capital movements unlike in the open capital account

situation described above, currency over valuation is reflected in a premium,

the black market offers above the official exchange rate. This tends to raise

the unofficial surplus, an alternative source of capital flight, because the

42

black market premium creates an economic incentives for smuggling, export

under-invoicing, import-overvoicing and unofficial trade transactions related

to tourism. Capital flight through smuggling and under-voicing of exports is

also induced by export taxes or in the case of drugs by legal restrictions. On

the other hand, import tarriffs induce import under-invoicing (as importers

seek to avoid trade taxes) that tends to reverse capital flight.

2.6.3 FINANCIAL INSTABILITY

Although financial instability was partly a consequence of fiscal

deficits and exchange rate policies, in many countries it was also a by-

product of financial repression, that is interest rate fixed below inflation

rates, high legal reserve requirements of banks the other institution rigidities

imposed on financial systems. Financial repression encouraged capital flight

both by lowering returns on domestic investments and feeding overall

financial instability for example through its potential impact on financial

disintermediation when inflation rises.

43

In countries with more liberal financial systems for example with

market determined interest rates, large fiscal deficits and exchange rate over-

valuation resulted in high real domestic interest rates thus creating a

different type of financial instability as firms and governments became

highly indebted domestically. Domestic firms that took advantage of

relatively cheap foreign credit experienced financial instability after

corrective devaluations were implemented. Financial instability also

activates what can be regarded as a secondary source of capital flight – the

stock of assets held by residents abroad. Financial instability induced foreign

asset holder to reinvest abroad the returns on their assets such as interest,

dividends and capital gains. While policy distortions tends to have an

immediate effect on capital flight, reversing them may only have positive

results in the longrun. In the short-run, trade and fiscal reforms may promote

rather than reverse capital flight as they pose a threat to heavily protected

sectors, privileged tax loopholes and tax evasion. However, a substantial

44

reduction of fiscal imbalance could accelerate the beneficial effects of

removing other policy distortions.

Table 2.1: Capital flight estimates for highly indebted countries

(US&billions).

1980-1987 1983-1987 1986-1988

Total outflows -83.7 -30.9 -14.1

Hot money -77.9 -27.9 -13.5

Residual method -46.2 -21.6 -8.0

Banking Assets (Deposits) NA NA 5.64

Long term resource inflow 209.8 83.0 33.9

Memorandum item:

Total outflow/revenues -39.9% -37.2% -42.7

Notes: Negative sign denotes outflow

1. Total outflows: - Long term and short-term assets of the official,

deposit money banks and other sectors plus errors and omissions.

45

2. Hot money: Short term capital of other sectors and errors and

omissions.

3. Residual methods: Sum of current account, change in reserves,

foreign direct investment and net lending

4. Banking assets: Exchange rate adjusted changes in balance sheet

report deposits of the non-bank private sector.

5. long term resource inflow: sum of official transfers, net foreign direct

investment and net lending.

Sources: IMF balance of payments statistics, World Bank’s Debtor reporting

system, Bank for international settlements and estimates.

Table 2.2: Capital outflows from HICs (US $ billions)

1988-7 1986-8

A B C C

Argentina -1.7 0.6 1.1 2.1

Bolivia 0.6 0.6 1.5 0.3

Brazil -0.4 -5.5 2.3 -2.2

46

Chile 0.5 0.2 0.7 0.8

Columbia -1.8 -2.8 -3.8 -1.5

Cote d’Ivory -0.5 0.2 -1.3 -0.1

Coasta Rica 0.10 0.5 -0.1 0.2

Jamaica 0.0 -0.3 0.3 0.4

Ecuador -0.3 0.6 -1.0 -0.4

Mexico -10.7 -6.8 -17.9 -10.4

Morocco -0.4 -0.4 0.3 -0.9

Nigeria -5.1 -7.9 6.8 2.7

Peru -1.1 -0.9 0.3 1.6

Philippines -0.4 0.7 -2.3 1.2

Uruguary -0.1 -0.3 -0.1 -0.1

Venezuela -6.4 -5.7 -5.5 0.9

Uruguary 0.3 0.3 -2.2 -0.4

Total -30.9 -27.9 -21.6 -8.0

47

Notes: Negative sign denotes outflow

A = Total outflow

B = Hot money

C = Residual method

Source: See table 1

2.7 INTERNATIONAL TRADE FAKING AND CAPITAL FLIGHT

The term “trade faking” is used to describe the over-invoicing /under

invoicing in international trade i.e. of exports and imports. The analyses here

will be in three steps. In the first step an analysis is undertaken of the extent

of trade faking in Nigeria’s trade using UN trade data system. The focus of

attention here is Nigeria’s trade with Industrial Market Economies. In the

second step, we analyze using the SITC classification of the extent of trade

faking that exists in the fuel section of Nigeria’s export trade. Oil is nigeria’s

most important export. The last step deals with the industrial countries. The

48

data from industrial countries which is adjudged reliable is subsequently

used to arrive at the adjusted capital flight estimates.

It is necessary not only to discuss the rationale behind trade faking,

but also analyze the reasons for the existence of discrepancy in recorded data

on exports and imports. Most of the studies on trade faking started in the

early 1960s and 1970s of note are the studies by Bhagwate (1974, 1967),

Bhagwati, Krueger and Wibulswaschi (1974), Simkin (1970), Richter

(1970), Yeats (1978), Nayak (1977). Recent studies since the 1980s include

that of McDonald (1985), Dewulf (1981) and Yeats (1981, 1990).

It is true that the imports of one country is the export of another

country. Thus, it is expected that the ratio of the values of imports of a

country (say country A) that originate from another country (say country B)

over the values of exports from country B to country A which is called the

valuation ratio should be unity. There are a variety of reasons, however, why

trade statistics (i.e. exports and imports) may not match. One of the reasons

49

is the under-invoicing or over-invoicing of trade transaction as a means of

effecting capital flight.

The differential in the export-import statistics may however, not be

due to illicit or illegal activities connected with under invoicing or over

invoicing of trade statistics. There are a number of other factors that may be

responsible for the data discrepancy. These include shipping costs,

diversions en-route to final destinations, re-export of goods, differential lags

in reporting, potential discrepancies arising from the conversion from one

currency to another and then to a common currency usually the US dollar

and variations in exchange rate (De Wulf, 1981; and Yeats, 1990). Perhaps

one of the basic causes of trade data discrepancy in sub-Saharan African

countries is due to the routing process for trade transactions. This problem

occurs when goods are routed through several countries bordering the

exporter and/or importer country before the final destination is reached.

Thus, in these cases “the country of origin may inaccurately list a routing

country as the importer or the country of final destination may report the

50

routing country as the exporter. A range of discrepancies may thus appear

between the three (or more) parties for the transactions” (Yeats, 1990, p.

137).

Countries that maintain overvalued currencies and restrict access to

foreign countries are often the setting for invoice alterations. One of the

basic reasons for trade faking in developing countries is the fact that

exchange controls are common place. Consequently, foreign currencies can

be brought or sold at a premium in the black market for foreign exchange.

As a result of the premium on foreign exchange, the tendency exists to

under-invoice exports and over-invoice imports. That of course is not the

only reason, the existence of high import duties can also provide the

incentives among importers to under-invoice imports in contrast to the usual

case of over-invoicing of imports when a premium exists on foreign

exchange in the black market. If there is a subsidy on imports it will likely

cause over-invoicing of imports. A tariff on exports will lead to under-

51

invoicing while over-invoicing of exports exists when a subsidy exists on

exports.

Under-invoicing of imports can systematically arise in the following

two cases. The first case is one where the imported commodity carries a

tariff duty. The second situation is one in which the importation of the

commodity is strictly controlled. In the case of the tariff duty, it pays the

importer to understate the value of his imports when the amount of savings

he will make in tariff duties exceeds the extra price that he must pay to

procure foreign exchange in the black market. Thus, the importer benefits by

under-invoicing if: -

T – Bp > 0

Where, T = tariff rate and BP = black market exchange rate at premium

(Bhagwati,1964).

In the case of quantitative importer restrictions, under-invoicing is

profitable if two conditions are met. The first is that under-invoicing enables

a larger quantity to be imported under license and secondly the premium on

52

the imported commodity in the domestic market is greater than the foreign

exchange premium.

Over the last several years, there has been a thriving black market in

foreign exchange in Nigeria. In addition, the tariff policy has consistently

varied allowing at one time the importation of certain commodities at either

zero or positive rate to a situation of total ban at another time. Also during

the 1979-1984 civilian administration, the issuing of import licenses to

business men was in vogue. The existence of these situations inevitably

provided the fertile ground for the over-invoicing and /or under-invoicing of

exports and imports.

One of the mechanisms for preventing customs abuse is pre-shipment

inspection (PSI). PSI verifies the quantity, quality and price of imports

before shipment from the exporting country. As a complement to its foreign

exchange control, Nigeria implemented a PSI program in January 1979. This

was carried out by Societe General de Surveillance (SGS). On October 1,

1984, the previous contract with SGS was ended and three other companies

53

were hired. These were Intertek (goods from North and South America);

Bureau veritas (for goods from continental Europe and Africa) and Cotecna

(for goods from the United Kingdom, Asia and South Pacific). Quite a large

array of products apart from the imposition of value limitations are however

are, exempted from the PSI program. Thus, the program has not been

successful in eliminating trade faking.

2.8 POLITICAL AND MACRO ECONOMIC DEVELOPMENTS IN

NIGERIA

A study of capital flight is incomplete without a preliminary

examination of the structure of the Nigerian economy and its political

history. Ordinarily Nigeria was an agrarian society, with agriculture

accounting for at least 65% of the GDP. The contribution of the sector,

gradually declined due to the emergence of crude petroleum in 1970 when

Nigeria became a member of OPEC. Thereafter, oil became the mainstay of

the economy (Onwiodukit, 2001).

54

The oil boom of the early 1970s had a pervasive effect on the growth

and development of the economy. It suddenly became the dominant sector of

the economy accounting for more than 90% of exports and main source of

revenue. However, the oil revenue witnessed growth overtime and the

growth was absorbed mainly by public sector spending particularly on

transportation, social services, education etc. but considering their long run

financial implications and efficiency with which the projects where price

increases secured the resource needed to accommodate the supply in non-

traded goods but they depressed the non-oil traded goods sectors.

Nigeria borrowed significantly during this period to procure foreign

goods. In 1978, economic problems start to manifest but a second oil-boom

in 1979 brought about confidence that oil proceeds could be a sound basis

for planning and sustaining public sector consumption and investment. The

second oil-boom coincides with the civilian government (second republic).

The increase in oil revenue gave the government impetus to increase public

expenditure and real income declined. Then, the government was forced to

55

run deficit budget and finance this by borrowing. Also, the value of

exchange rate began to appreciate and this placed export at a disadvantage

position. The distorted exchange rate prevented the government from

allocating resources efficiently to purchase import.

Based on this, government established several measures and stringent

trade control in the economy, stabilization heat of 1982. Besides, public

investment was cut noticeably and petroleum products’ prices and tarrifs

were raised. In spite of these stringent measures, the economy reached a

crises point in 1983/84 when oil earning declined drastically. To fill the

domestic savings gap in order to execute development projects, government

continue to borrow heavily and the external debt was mounting, this put

unnecessary pressure on BOP position.

Nigeria’s indebtedness impeded her access to foreign capital and short

term trade arrears amounts to the point at which foreign banks held back on

confirming letters of credit. Due to her unwillingness to devalue naira,

donors refuse to roll over short term debt or fresh capital. This persisted until

56

the military seized power in 1983 (Adedipe, 04). The military government

strengthened the strict measure of 1982, then imposed wage freeze on public

sector employees, enforced the redundancy of a vast number of civil

servants and introduced users fee in education and health sectors. Yet, there

measures made little impact on budget deficit. As the deficit in budget was

manifested by capacity under utilization widespread closure of plants.

Decline in imports and exports was accompanied by a significant rise in

domestic price levels, inflation rate escalated, domestic savings and

investment fell drastically, private investment also fell coupled with the

reluctancy of the donors to release fresh debt, it became difficult to

accumulate capital (GCF) which is a major ingredient in developmental

process.

Meanwhile, government could not reach an agreement with the

Bretton Woods institution on several issues including devaluation of the

naira and import liberalization. Thus, a significant difference emerged

between Nigeria government and its creditors. Later, the Babangida

57

administration emerged in 1998 without proper accommodation of the multi-

lateral lending institutions, the prospect for more credit was bleak. This led

to the adoption of SAP. This programme brought some far-reaching reforms

on the Nigerian economy, such as devaluation of exchange rate,

liberalization of interests rates, imports and exports, commercialization and

privatization of several public enterprises and so on. Suddenly, there were

reverse in the old trend as GDP starts to witness growth, but inflation rates

worsens. Interest rates reforms did not yield the desired result due to

frequent policy changing. In the era of high inflation rate, the real rate of

interest became negative. From 1985,the interest rate, direct foreign

investment and foreign exchange had been liberalized of AFEM. The 1997

monetary and banking policies adopted in the fed budget as well as entire

financial system restructuring as well as the fiscal surplus achieved in the

last two years (1999) appear to seemingly approximate the precondition for

preventing capital flight. Thus, the need to sustain and improve the

seemingly enabling environment in order to consolidate growth reduce

58

external debt through restructuring programmes in agreeable to the Bretton

wood institutions that could illicit favourable disposition by our donor

nations in ensuring debt reduction for Nigeria cannot be overemphasized.

\

2.9 DEFINITIONS AND MEASUREMENT ISSUES

There are various definitions of capital flight. The use of the term

“capital flight” arouses strong emotions in some quarters. Some analysts

view capital flight as a symptom of a sick society while others view capital

flight as the cause of heavily indebted countries in ability to recover from

their present debt problems. Capital flight is regarded by others as a

“pejorative description of natural, economically rational response to the

portfolio choices that have confronted wealthy residents of some debtor

countries in recent years” Clessard and Williamson, 1987 p. 202). The

controversy surrounding the term is due partly to the lack of a precise and

universally accepted definition for it in economic theory and partly

becauseof the way the term is used between developed and developing

59

countries. It is usual amongst some economists to refer to capital outflow

from developed countries as foreign investments while the same activity

when undertaken by the residents of the developing countries is referred to

as capital flight. One of the distinctions that is often made, however, is that

exchange rate control regimes existing in many developing countries.

One of the reasons for this dichotomy is the belief that the investors

from developed countries are responding to better opportunities abroad. The

investors from the developing countries on the other hand are said to be

escaping the high risks which they perceive at home. This interpretation

makes it very obvious why a lot of economist are “ill-at-ease” with the

definition of capital flight. In general, it is believed that the investors from

all countries whether developed or developing will base their investments

decisions on the relative returns and risks of such investments at home and

abroad.

There are possibly a number of valid reasons why capital flows from

developing countries should be labeled as “capital flight”. The first is the

60

general presumption in economics that capital should flow towards capital-

scarce countries. There is scarcity of capital in developing countries. Any

flows in the opposite direction, that is, from developing to developed

countries as mentioned in the introduction are not only unusual but

abnormal. The second reason is related to a policy issue. What is important

is the extent to which those assets held abroad could be utilized at home to

reduce the level of external indebtedness and relieve the inherent liquidity

problems brought about by debt service obligations (Pastor 1990). In

distinguishing between capital flight and normal capital flows, two broad

approaches are taken in the literature. The first is an identification of specific

episodes (or countries) that are characterized by abnormally adverse

economic conditions for investment and consider all estimates of the

acquisition of external claims that are not reported to the domestic

authorities (Chang and Cumby, 1987); (Dodey, 1998). On the other hand,

capital flight can be considered as those capital outflows which are in excess

61

of “normal flows”. One problem with this definition lies in what constitutes

“normal” capital outflows in this content (Anthony and Hallett, 1990).

These various difficulties essentially lie at the heart of the varying

definitions and computation methodologies in which have been employed to

quantify the capital flight phenomenon (Anthony and Hallett, 1990). Thus,

the possibility of multiple definitional terms is one of the quandaries in this

area in a sense and yet perhaps one of the strong points. One cannot but

therefore agree with Chang and Gumby (1991) that there exists more than

one viable definition of capital flight and the appropriate choice will depend

on the policy question most pertinent capital flight and the so called

“normal” capital flows. Since illegal transactions are not reported, it is

therefore not only difficult, but almost impossible to measure it as a

component of capital flight. “capital flight is capital that flees” (IngoWalter,

1987; Kindleberger; 1987). Alternatively, capital flows in response to

economic or political crisis are capital flight (Husted and Melvin, 1990).

62

Normal capital flows on the other hand, refer to flows that correspond to

ordinary portfolio diversification of domestic residents.

According to Cuddington (1986), capital flight refers to short terms

private capital outflows. It involves “hot money” that responds to political or

financial crisis, heavier taxes, a prospective tightening of capital or a major

devaluation of domestic currency arising from high misalignment of the

currency. In the Morgan Guaranty Trust Company (1986 p. 13), an

expansive definition is adopted. Capital flight is “the reported and

unreported acquisition of foreign assets by the non-bank private sector and

elements of the public sector”.

In order to clarify our thoughts on capital flows presented in table 1 is

a taxonomy of factors explaining international capital flows. This table is

adopted from Lessard and Williamson (1987). The upper left quadrant of the

table identifies various factors based on differences in economic returns

across countries. In the upper right quadrant are those additional factors that

deal with the two-way flows “normal” portfolio diversification. Most of the

63

theoretical and empirical studies of capital flight place emphasis on the

lower left and right quadrants. The factors emphasized are those that create a

“wedge between economic and financial returns” regardless of whether they

operate a cross the board or asymmetrically among residents or non-

residents (Lessard and Williamson, 1987 p. 217).

Table 1: Taxonomy of Factors Explaining International Capital Flows

One-way flows Two-way flows

Economic risk and

returns

-Natural resources endowments

-Terms of Trade

-Technologies changes

-Demographic shifts

- General economic management

-Differences in absolute

riskness of economics

-Low correlation of risky

outcome across country

-Differences in investor

risk preferences

Financial risk and

returns, relative to

economic

-Taxes (deviation from world

levels)

-Differences in tones and

their incidence between

resident and non-residents

64

-inflation

-default on government

obligations

-Devaluation

-Financial repression

-Taxes on financial

intermediation

-Political instability, potential

confiscation

-Differences in nature and

incidence of country risk

-Asymmetric application

of guarantees

-Different interest ceiling

for residents and non-

residents

-different access to foreign

exchange denomination

claims

Adapted from: Lessard and Willams on (1987) p.216

From the above table and analysis therein, normal capital outflows are

the ones that take place in order to maximize economic returns and

opportunities between countries. Normal portfolio diversification takes place

65

on the basis of differentials in economic returns. Capital flight on the other

hand as seen from this analysis is that “subset of capital outflows that are

propelled by source country policies” (Lessard and Willamson (1987,

p.217).

2.9.1 THE MECHANISMS OF CAPITAL FLIGHT

The conduits for capital flight are not only many but varied, Ajayi

(1992). A very suitable description of some of the conduits and various

forms as they take place is described best by Glyll and Koenig (1984 pp.

109). It comes in first bottom suitcases or in electronic funds transfers from

private banking services that caters to high net worth individuals”. Thus,

there are a number of channels through which capital flight can take place in

Nigeria and these are briefly discussed as follows.

Firstly, it can take place through precious metals and collectibles

including works of arts, local currency is converted into gold, silver or other

precious metals, stones, jewelry and similar assets that cannot only be

moved abroad but also retain their value. The sales of value of these items

66

are usually high in foreign currency. Secondly, transfer of money in form of

capital flight can take place through cash or monetary instruments. These are

usually in the form of either foreign or domestic currency. In the early 1970s

studies about Nigeria currency were being carried out of the country and

being exchanged in big centers like London and New York, Ajayi (1992).

Another method of transferring money abroad is through black market

itself. This is a thriving source of transferring funds abroad. Through this

method, the amount of money transferred is difficult to estimate. Fourth

method is through the bank’s transfer from a local affiliate of foreign owned

banks to a designated recipient abroad. This amount of money can be

exchanged at the market rate where no constraints or restrictions are in

place. Transfer can still possible in the face of exchange controls but

possibly at a less favourable rate. The fifth vehicle through which money can

be transferred abroad from domestic country is false invoicing of trade

undertaken. Substantial amount of money can arise from the systematic

faking of imports and exports. For capital flight to occur in this case

67

exporters will engage in underinvoicing while importers overinvoicing, in

the process foreign exchange gain is derived by both and this is outside the

control of the foreign exchange authorities.

2.9.2 CAUSES OF CAPITAL FLIGHT

The causes of capital flight are many. These various causes can be

grouped under relative risks, exchange rate misalignment, financial sector

constraints and/or repressions, fiscal deficits and external incentives (Khan,

1989) and disbursement of new loans to LDCs (Cuddingtom, 1987). These

are no doubt economic causes of capital flight. There are, however, other

non-economic causes which though important are often ignored. These

include the corruption of political leaders and extraordinary access to

government funds. Some of these factors are now discussed.

2.9.2.1 RISKS

68

In decision making process, the wealth holder looks at the various

risks confronting him. There are certain inherent characteristics of

developing countries which make risks attached to investments larger than

those of developed countries. An increase in risk in a rational expectation

setting would tend to increase the outflow of private capital from the

domestic economy into foreign countries where investment are less risky.

Thus, domestic investors will prefer to transfer funds and hold foreign

assets.

2.9.2.2 EXCHANGE RATE MISALIGNMENT

The importance of this variable has amply been demonstrated in

several empirical analysis including the studies by Dornbusch (1985),

Cuddington (1986), Lessard and Williamson (1987) and pastor (1989, 1990).

The real exchange rate plays a significant role in the direction and

magnitude of capital flight from highly-indebted developing countries.

Under normal circumstances, if a currency appreciation is expected,

domestic wealth owners would shift out of domestic assets into foreign

69

assets. In general, it is difficult to measure precisely exchange rate

expectations. It is safe, however, to assume that if a currency is overvalued,

economic agents would expect the currency to be devalued in the future.

Holding firm to this expectation would cause residents to avoid the potential

capital loss by converting into foreign claims.

2.9.2.3 FINANCIAL SECTOR CONSTRAINTS

This can also lead to capital flight. It is well known that narrowness of

the capital and money market is a feature of developing economies.

Financial markets in these countries provide only a limited variety of

financial instrument in which wealth can be held. There is also in many

developing countries the lack of full or credible deposit insurance on assets

that are held in the domestic banking sector. This deficiency is, however,

being increasingly remedied by many developing countries.

Additionally, there are extensive controls on interest rates and on

other aspects of financial market behaviour in developing countries.

Government policies in the financial sector have resulted in normal interest

70

rates that are far below the rates on comparable foreign financial

instruments. In most cases, the real rates of return on domestic financial

assets are negative.

2.9.3 EFFECTS OF CAPITAL FLIGHT

As observed from various studies in capital flight, it deserves serious

attention for many reasons. Oloyede (2002 pp163) classified the effects into

both short term and long term.

i) The short term effects: A sudden increase in the outflow of capital

can have destabilizing effects on domestic reserve position.

ii) Long term effects:

a. A reduction in available resource to financial domestic

investment, leading to a decline in the rate of capital formation

and adversely affecting the countries growth rate.

b. Reduction in government ability to tax all the income of its

residents

71

c. Increase in the need to borrow from abroad thereby increasing

the foreign debt burden.

Other effects of capital flight are: It might have pronounced regressive

effects on the distribution of wealth. The individuals who engage in capital

flight generally are members of the sub-continents economic and political

elites who take advantage of their privileged position to acquire and

siphoned funds abroad. Both the acquisition and transfer of funds often

involves legally questionable practices including the falsification of trade

documents (Trade misinvoicing).

Also capital flight causes a diversion of scare resources away from

domestic investment and other productive activities. In recent decades,

African economies have achieved significantly low investment levels than

other developed countries (international financial corp, 1998; Ndikuma,

2000). These low level of domestic investments are attributable in part to the

apparent scarcity of domestic saving, weak and shallow financial systems

and high country risks due to the unstable macro-economic ad political

72

conditions. Thus, capital flight is both the cause and symptom of this weak

investment performance.

Furthermore, the outflow of capital can cause a shortage of liquidity in

the economy and thereby create a short fall in the amount of funds that are

needed for the importation of equipment which are needed for development.

Accorind to Lessard and Williamson (1987 pp52) capital flight leads to a net

loss in the total resources which are available to an economy for the purpose

of investments and growth. Therefore, the pace of growth and development

in the economy is retarded from what it would have otherwise been.

2.10 CAPITAL FLIGHT: THE NIGERIAN EXPERIENCE. HOW

NIGERIA LOSES N960bn ANNUALLY TO CAPITAL FLIGHT

IN THE OIL SECTOR

Nigeria’s economy loses about N960bn ($8billion) annually to non-

implementation of local content by oil companies operating in the country,

thus leading to lost opportunities for able-bodied Nigerians.

73

Oil experts at the just concluded local content workshop in Abuja

disclosed that with an estimate annual spending of about N1.2trillion

($10billion) going into the Nigerian oil and gas industry annually, only

about 20percent or N240billion ($2billion) of that amount is domiciled in

Nigeria. About $8billion of this amount goes out of the economy in things

that could ordinarily be done locally. And with proven oil reserved of about

35billion barrels and 187trilliion standard cubic feet of gas (Sc fg) Nigeria is

termed in some quarters as “a gas province with a drop of oil”. It is

therefore, no surprise that Nigeria has the biggest investment in natural

liquefied Gas (NLG) in the world. But, that has made little impact on the

country’s Gross Domestic Product (GDP). This is because most of the

engineering, technical, supplies, insurance, shipping and other skilled aspect

of the business is either done abroad or carried out in-country by expatriates

and their firms.

Apart from creating thousands of jobs through direct and indirect

engagements of Nigerians, if Nigeria acquires the capacity to carry out these

74

jobs, a value chain in economic activities would lead to more properity. It is

with this in mind that the federal government initiated the Nigerian content

initiative. The target of government is to meet 45percent of the local content

of the production of oil and gas by 2006 and 70percent by 2010 by which

time, apart from employment, the same proportion of investment an sundry

economic activities will be domesticated.

To show its resolve, the presidency, six years ago directed the

Nigerian national petroleum corporation (NNPC) to put in place a

comprehensive and workable Nigerian content realization strategy in the

industry. The NNPC created a Nigerian content division (NCD), but its

effectiveness is still a matter of controversy in the industry.

Insurance an shipping companies are at a loss that almost all the

insurance businesses and oil liftings are carried out by foreign firms with

little or no inputs from Nigerians. Also, the national assembly is on the last

stage of passing the Nigerian content bill, if the utterances of some members

of the assembly is anything to go by. The bill, when passed will lead to the

75

establishment of the Nigerian content development agency to be run by the

Nigerian content management board that will oversee the running and affairs

of the Nigerian content “policy”. But, that is for the future. Meanwhile, as

the NNPC and other related arms of government are busy applauding

themselves and ascribing high scores over their contribution to the

realization of the Nigerian content dream, some indigenous experts have

ridiculed their claims. For example, the petroleum technology association of

Nigeria (PETAN), an association of Nigerian indigenous technical oil field

service companies in the upstream and downstream sectors of the oil

industry, has come short of laughing off such claims. Contrary to claims by

government that Nigeria has now attained 45percent Nigerian content,

PETAN, said even by 2010, Nigeria would not attain 30percent of local

content if things stand the way they are today.

PETAN which employs about 20,000 Nigerians also said the crisis in

the Niger Delta would persist unless government mandates oil firms to

broaden indigenous participation in oil jobs, establish decent educational

76

facilities, build infrastructure and improve on the wellbeing of host

communities. Chairman of PETAN, Mr. Shawley Coker, said multinational

oil companies were trying to stiffen the conditions for getting oil contracts

and employments opportunities to the extent that the present local content in

the industry is just about 15percent and not the figure flaunted by

government officials. On contracts, he said since the issue of Nigerian

content came to therefore, multinational oil firms had come up with

frustrating terms before engaging Nigerian servicing companies.

77

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 INTRODUCTION

The primary objective of this research work as stated in chapter one of

this study, is to investigate the effect of capital flight on Nigeria economic

development using an error correction mechanism (ECM) technique. In

order to effectively realize the objective of the study, relevant factors or

variable will be used to measure the time series characteristics of the

variables in the model where Gross Domestic Product (GDP) denote the

dependent variable while index capital flight (ICF), Gross capital formation

(GCF), External reserves (ER) denotes independent variables.

The significance of methodology in any research study cannot be

under-estimated because it guides the data collection process. According to

Oloyede (2002 pp.2) research is a step-by-step procedure for obtaining

reliable findings about existing problems through organize and systematic

78

collection, analysis and interpretation of data with the aim of making

significant contribution to already known body of knowledge.

In a nutshell, this section deals with the specific model to be used in

arriving at the index of capital flight, the estimation technique to be

employed in the analysis, the restatement of hypothesis to be tested and the

data sources and collection procedure. The estimation techniques encompass

the unit root test, co-integrating test and the error correction model.

3.2 RESTATEMENT OF HYPOTHESIS

This research work shall involve the formulation of hypothesis to be

tested hereafter. We shall make use of the null hypothesis and alternative

hypothesis. The aim of this study is to measure the effect of capital flight on

Nigeria’s economic development. This study would attempt to do this by

testing the following hypothesis.

H0: Capital flight has no significant effect on gross domestic product.

H1: Capital flight has significant effect on gross domestic product.

3.3 ECONOMIC “APROIRI” CRITERIA

79

These are determined by the principles of economic theory and refer

to the sign and size of the parameters of economic relationship. In this study,

index of capital flight is expected to have a negative sign because an

increase in the capital flight will reduce gross domestic product that is,

dGDP 0

dICF

while gross capital formation is expected to be positive because an increase

in the GCF will have a positive effect on gross domestic product.

dGDP >0

dGCF

Also, external reserve is expected to be positive because an increase in

the external reserve will have a positive effect on gross domestic product.

dGDP >O

80

dER

3.4 MODEL SPECIFICATION

GDP = F (ICF, GCF, ER,U)…………………..(i)

Where,

GDP = Gross Domestic Production

ICF = Index of capital flight

GCF = Gross capital formation

ER = External reserves

U = Error term

F = Functional relationship among variables specified in the model.

Specifying the model in explicit by log-linearizing it becomes

Log(GDP)=X0+X1LOG(ICF)+X2LOG(GCF)+X3LOG(ER)+U….(ii)

WHERE,

LOG= Natural Logarithm

X0= Intercept of the relationship in the model

X1= Coefficient of the Index of Capital Flight

81

X2= Coefficient of Gross Capital Formation

X3= Coefficient of External Reserves.

Specifying the model in a time series form:

Log(GDP)=X0+X1LOG(ICF)+X2LOG(GCF)+X3LOG(ER)+U…….

(iii)

The specification of the model in a general ECM (Error Correction

Mechanism) gives thus:

DLog(GDP)=X0+nEi=0X1LOG(ICF)t-1+ nEi =0X2LOG(GCF)t-1+ nEi

=0X3LOG(ER)t-1+ nEi =0ECM t-1 + E t ………………………….(iv)

Where :

t-1=Meaning the variables were lagged by one period

nE i=0ECM t-1= Error Correction Term

E t= White Noise Residual.

Once Co-integration is established along side its extent and form, the next

step is to develop an over-parametized autoregressive distribute (ADL)

82

model (ECM1)and a Parsimonious Error Correction Model (ECM2) that

incorporates long-run equilibrium relationship and the short-run dynamics

3.5 ESTIMATION TECHIQUE

The recently developed co-integration analysis and the Error

correction mechanism (ECM) techniques shall be used for estimation of the

parameters of the model specified earlier on. The co-integrating analytical

technique will be used to analyze in this study. This involves the use of unit

root test, co-integration test and error correction model. As stated earlier, the

test of hypothesis for each parameter will be conducted using the standard

error test. The Johansen co-integration test will also be employed in testing

for co-integration among the variables while Augment Dickey Fuller test

(ADF) is used for determining the stationary in the variable series.

3.5.1 CO-INTEGRATION ANALYSIS

83

The concept of co-integration relates to the existence of a long-run

equilibrium relation to which an economic system converges overtime and

equilibrium relationship among the set of non-stationary variable influencing

it implies that their stochastic trends must be linked. It is necessary to assess

whether the services in a time series data are stationary or not. The reason is

that regression of a non-stationary series on another non-stationary series

leads to what is known as spurious regression.

Thus, implicit in the co-integration theory is that, there exists a linear

combination of these non-stationary variable that is stationary. If two series

are non-stationary but their linear combination is, the two series are said to

be co-integrated series that are co-integrated move together in the long run at

same rate. In other words, they obey an equilibrium relationship in the long

run (Davidson and Macknnon, 1993). In this study, we will test for the

stationarity of the variable through the Augment Dickey Fuller (ADF) unit

root test.

3.5.2 UNIT ROOT TEST

84

This is the first step in co-integration analysis and it is the standard

approach to investigate the stationarity of a time series. This test is relevant

because of the statistical test of the parameter resulting from spurious

regression, sequel to regression of a non-stationary series on another non-

stationary series may be biased and inconsistent (Engle and Yoo, 1987).

3.5.3 CO-INTEGRATION TEST AND ERROR CORRECTION

MODEL

Having established stationary of the variables then we proceed to

investigate whether or not there is such a relationship labeled “co-integration

among the variable”. This is sequeal to the fact that, although economic

variables may not be stationary individually, a mechanism could still exist

that prevents some of the variables from diverging significantly from one

another.

The number of co-integration equation which is know as “co-

integration rank” can be decided through the Johanson tests. The hypothesis

of the (H0) is that there is no-integrating vector or there is one co-integration

85

vector. This implies that the variables in the model have no equilibrium

condition that keeps them in proportion to one another in the long run. To

this hypothesis, compare the likelihood ratio in each of the row of the upper

table of the output of the Johnanson co-integration test to their

corresponding critical values. If the likelihood ratio is greater than the

critical value, then reject the null hypothesis and accept the alternative

hypothesis of the existence of co-integration and vice-versa.

The issues of error correction model (ECM) series when the various

statistical tests performed supports the existence of co-integrating

relationship between the dependent variable and any (or a combination) of

its explanatory variables. The first error correction model (ECM1) known as

the “over paramelized” ECM involves lagging of variable in the regression

equation.

However, “parsimonious” error correction model (ECM) is simply to

introduce dynamism into the model. The selection of this final vector

error correction model (ECM0 should be based on economic as well

86

as statistic criteria of evaluation put differently, only the variables that

are statistically significant are reported in ECM2.

3.6 NATURE AND SOURCES OF DATA

For the purpose of this study, the data used is entirely secondary as

obtained from the Central Bank of Nigeria (CBN), Federal Office of

Statistics (FOS) and other sources of already processed data that are relevant

to the study.

87

CHAPTER FOUR

4.0 ESTIMATION AND ANALYSIS OF DATA AND

INTEPRETATION OF RESULTS

4.1 INTRODUCTION

This chapter deals with presentation of data gathered for the purpose

of this study, presentation and analysis of the co-integration result

4.2 DATA PRESENTATION

YEAR GDP ICF GCF ER

1970 5205.1 121.6 38941.775 104.6

1971 6570.7 319.6 4750.15 132.3

1972 7208.3 248.3 203064.72 191.6

1973 10990.7 192.6 27244.85 241

1974 18298.3 48.3 7922.25 3112.5

1975 20957 475.4 50198 3380.1

1976 26656.3 46.3 81078 3057.6

1977 31520.3 197.6 9420.6 2521

88

1978 34540.1 331.8 9386.3 1249.1

1979 41947.7 289.9 9094.5 3043.2

1980 46632.3 467 10841.2 5445.6

1981 47619.7 137.8 12215 2424.8

1982 49069.3 1624.9 10922 1026.5

1983 53107.4 556.7 3135 781.7

1984 59622.5 534.8 5417 1143.8

1985 67908.6 329.7 65578 1641.1

1986 69147 2499.6 7386 3587.4

1987 105222.9 680 10663.1 4643.3

1988 139085.3 1345.6 12383.7 3272.7

1989 216797.5 439.4 18414.2 13457.1

1990 267550 464.3 3062.6 34963.1

1991 312139.8 1808 35423.9 44249.6

1992 532613.8 8269.2 58640.3 13992.5

89

1993 683869.8 32994.4 80078.1 67245.6

1994 889863.2 3907.2 85021.4 30445.9

1995 1933211.6 48677 111476.3 40333.2

1996 2702719.1 2731 172105.7 174309.9

1997 2801972.6 5731 205553.2 262198.5

1998 2708430.9 24078.9 192984.4 226702.4

1999 3194023.6 1779.1 175785.8 546873.1

2000 4537640 3347 268894.5 1090148

2001 4685912.2 3377 371897.9 1181652

2002 5403006.8 8206 438114.9 1013514

2003 6947819.9 13056.1 429230 1065093

2004 11411066.9 19908.7 433672.45 2478620

2005 14610881.5 25881.3 431451.23 3835433

2006 18564594.73 41470.8 433117.145 5617317

2007 19675476.23 43676.1 432284.1875 5726375

90

SOURCE: The sources of this data is secondary from the publications of:

1. Central Bank of Nigeria (CBN) Statistical Bulletin.

2. Federal Office of Statistics (FOS) Annual Reports .

Annual time series data for the period between 1970 and 2006 were used for

this study. We start the empirical analysis by examining the characterization

so as to know whether a trend is present or not. A trend variable is necessary

in the Augmented Dickey-Fuller unit root test if trends are present in the

series.

4.3 UNIT ROOT TEST

The unit root test is carried out to know if the data of the variables are

stationarity with respect to time. The unit root or stationary test for each

variable in the model is carried our using hypothesis. The hypothesis are:

H0: Xt ………………..1(1)

H1: Xt ………………. 1(0)

Decision Rule

91

If the Augmented Dickey-Fuller test statistics is greater than the

Mackinnon critical value (in absolute value), the null hypothesis (H0) that Xt

does not contain a unit root is rejected and the alternative hypothesis (H1) is

accepted and meaning that Xt is stationary is accepted and vice-versa.

In the literature, most time series are non-stationary at level and using

non-stationary variables in the model might lead to a spurious regression

result(Granger and Newbold,1977). The first or second differenced terms of

most variables will usually be stationary (Remand tham, 1992). All the

variables are tested at levels, first and second differences for stationary using

the Argumented Dickey-Fuller (ADF) tests. All the variables are stationary

at their respective second differences.

The table(s) below (the unit root table) shows the result of the

stationarity test for all variables used. The stationary level is considered after

comparing the ADF value against the Mackinon Critical Value at 5% level.

The result of the ADF unit root test, which can be found in the

appendix and are summarized in table 4.2, 4.3 and 4.4 below.

92

TABLE 4.2

RESULT OF STATIONARITY TEST AT LEVEL

Variables ADF test

statistic value

Mackinnon

critical value

@5%

No of time

difference

Remark

GDP 3.96596 -2.948404 1(0) Non-stationary

ICF -1.036021 -2.948404 1(0) Non-stationary

GCF 0.290599 -2.948404 1(0) Non-stationary

ER 3.260222 -2.948404 1(0) Non-stationary

ECM -4.535505 -2.948404 1(0) Stationary

Sources: Extracted from computer output (See appendix)

From the table above, the absolute values of Mackinnon critical

values at 5% are greater than that of the ADF test statistic values in all the

variables. This means that the null hypothesis of the presence of a unit root

at one percent is accepted.

93

Since there is non-stationarity of the variables at level

difference of the time series variables, there is need to carry out the test at

first difference to see if there will be stationary of the variables.

The first difference is reported as following table 4.3

RESULT OF STATIONARITY TEST AT FIRST DIFFERENCE

Variables ADF test

statistic value

Mackinnon

critical value

@1%

No of time

difference

Remark

GDP 0.290523 -2.951125 1(1) Non-stationary

ICF -6.638374 -2.951125 1(1) Stationary

GCF -5.781224 -2.951125 1(1) Stationary

ER 0.003477 -2.951125 1(1) Non-stationary

Source: Extracted from the computer output (See appendix)

The unit root test analysis above shows that the dependent variable

(GDP) and External Reserves (ER) are non-stationary while some of the

independent variable (GCF and ICF), are stationary at first difference. The

94

result shows that ADF test statistics of GDP and ER are less than that of its

MacKinnon critical value, but, this is not so for GCF and ICF as a result,

there is the need to carry out further test of second difference for GDP and

ER. This is shown below:

TABLE 4.4

RESULT OF STATIONARITY TEST AT SECOND DIFFERENCE

Variables ADF test

statistic value

Mackinnon

critical value

@1%

No of time

difference

Remark

GDP -4.413200 -2.954021 1(2) Stationary

ER -4.119319 -2.954021 1(2) Stationary

ICF -12.61177 -2.954021 1(2) Stationary

GCF -8.970314 -2.954021 1(2) Stationary

Source: Extracted from computer output (See appendix)

The table above shows that the variables (GDP and ER) are stationary

at their second difference. That is, ADF test statistic values of the variables

95

are greater or higher than the Mackinnon critical values which means, the

variable are stationary after the second difference.

Table 4.5

SUMMARY OF THE ORDER OF STATIONARITY

VARIABLE ORDER OF

STATIONARITY

ICF 1(1)

GCF 1(1)

GDP 1(2)

ER 1(2)

Table 4.6 below shows the result of the ADF test equation on each of

the variables with their different level of stationarity and lagged period. Also

shown is their corresponding co-efficient of multiple determination (R2). The

variables in each of the multiple are regressed together expressing one as

96

dependent variable (i.e GDP) and others as independent variables. The test

of significance was also conducted for each of the equation.

TABLE 4.6

THE ADF TEST EQUATION

Variables Co-efficient Standard

Error

t-statistic Probability

value

R2

D(GDP(-

1),2)

D(GDP(-

1),3)

C

-1.285777

0.048750

149264.9

0.291348

0.196205

124738.5

-

4.413200

0.248467

1.196622

0.0001

0.8055

0.2408

0.6084

D(ICF(-1)

D(ICF(-

1),2)

-2.168550

0.311439

2038.064

0.326651

0.179253

1874.363

-

6.638744

1.737422

0.0000

0.0922

0.2853

0.8336

97

C 1.087337

D(GCF(-1)

D(GCF(-

1),2)

C

-1.355292

0.131879

11101.17

0.234430

0.146772

8679.261

-

5.781224

0.898528

1.279045

0.0000

0.3758

0.2104

0.6933

D(ER(-1)

D(ER(-

1),2)

C

-1.055294

0.109384

56456.42

0.256182

0.187389

5097.46

-

4.119319

0.583723

1.107609

0.0003

0.5638

0.2768

0.4680

Source: extracted from computer output (See appendix)

4.4 CO-INTEGRATION TEST

Given, the above multi variables case, the test for co-integration was

performed using Johansen maximum likelihood estimation approach. Under

98

this approach, trace test statistics was used on testing whether a long run

relationship exist among the variables. If this test establishes that at least one

co-integrating vector exist among the variables under investigation, then a

long term equilibrium relationship exists between them.

TABLE 4.7

RESULTS OF JOHANSEN CO-INTERGRATION TEST ON THE SPECIFIED

MODEL

Hypothesized

no of (ECs)

Elgen value Trace

Statistics or

Likelihood

ratio

5% critical

value

1% critical

value

Non ** 0.648396 64.18367 47.21 54.46

At most 1* 0.427287 27.59991 29.68 35.65

At most 2 0.199836 8.091966 15.41 20.04

At most 3 0.008226 0.289098 3.76 6.65

The co-integration equation is specified below

99

dGDPt= -49.45dICFt -9.639840dGCFt -4.111052dERt

*(**) denotes rejection of hypothesis at 5% significance level. Trace

(LR) test indicates one co-integrating equation at both 5% and 1%

significance level.

The result in table 4.7 shows the existence of co integration or long

run relationship among the growth of GDP, index of capital flight (ICF) ,

Gross capital formation and external reserve (ER). The condition for co-

integration among the variables is that the critical value at 5% must be less

than the likelihood ratio considering the table, the critical value at 5% is less

than the likelihood ratio at none hypothesized (i.e. the first column). Hence,

the hypothesis of non-co integration has been rejected at 5% significance

level.

4.5 ERROR CORRECTION MEHANISM

Having established the long run relationship among the variables

through the use of Johansen co-integration test, the next step is to switch to

the short run model with the error correction the unit root test was also

100

conducted on the error correction mechanism model with its ADF test

statistics at -4.535505 and 5% critical value at -2.948404 at level difference

with R2 of 0.68. This shows that the error correction model is stationary at

level difference.

An over parameterized error correction model is estimated by setting

the lag length long enough in order to ensure that the dynamics of the model

have not been constrained by a too short lag length.

Table 4.8 below presents us the over-parameterized error correction of

the model.

TABLE 4.8

OVER PARAMETERIZED MODEL

Variables Co-efficient Standard Error t-statistic Probability

d(GDP(-1),2) -0.119014 0.109943 -1.082501 0.2890

d(ICF,2) -7.646534 2.278173 -3.356432 0.0024

d(ICF(-1),2) 1.471856 2.195169 0.670498 0.5085

101

d(GCF,2) 2.175970 0.663471 3.279676 0.0030

d(GCF(-1),2) 0.423608 0.496417 0.853330 0.4013

d(ER,2) 2.548199 0.154793 16.46202 0.0000

d(ER(-1),2) -0.100643 0.322268 -0.312294 0.7573

ECM (-1) -.614563 0.126542 -4.856572 0.0000

R2 = 0.93

Adjusted R2 = 0.91

Durbin Watson statistic = 2.086

The table above shows the over parameterized error correction of

capital flight and Nigeria’s economic development. The result shows that the

error correction mechanism model is in conformity with the a priori

expectation. Also the R2 is 0.93 or 93% with Durbin-Watson statistic of

2.086.

However, for the sake of simplicity there is need to simplify the

model into a more interpretable and certainly more parsimonious model. The

standard error is employed as a guide to this reduction exercise. All in the

102

standard error values of the parameters of model is an indication of model

parsimony. The result of the parsimonious model is reported in the table

below:

TABLE 4.9

PARSIMONIOUS MODEL

Variables Co-efficient Standard error t-statistic Probability

d(ICF,2) -7.313022 1.574439 -4.644843 0.0001

d(GCF,2) 1.649559 0.475139 3.471736 0.0015

d(ER,2) 2.522510 0.150093 16.80637 0.0000

ECM (-1) -0.681589 0.095303 -7.151796 0.0000

R2 = 0.8996 =0.90

Adjusted R2 = 0.8899

Durbin Watson statistic = 1.877

F – statistics = 106.43056 (See appendix)

103

The result of the parsimonious error correction model is drawn from

the over-parameterized model and if considered and explained only those

variables certified significant from the over parameterized model.

4.6 INTERPRETATION OF RESULTS

From the parsimonious model result above, it can be seen that the co-

efficient of external reserve and Gross capital formation as well as their

lagged values are positive in conformation with the a priori expectation. This

means that there is a positive relationship between the gross domestic

product, external reserves and gross capital formation. Thus, with the co-

efficient of external reserve and gross capital formation at 2.5225 and 1.6496

respectively. This implies that a unit increase in both external reserves and

gross capital formation will increase gross domestic product by 2.5225 and

1.6496.

The co-efficient of index of capital flight is negative in conformation

with the apriori expectation. This means that there is a negative relationship

between the index of capital flight and GDP. The co-efficient of the index of

104

capital flight -49.45176, a unit rise in index of capital flight will lead to a fall

in gross domestic product by 49.45176 .

Furthermore, the error correction model (ECM) otherwise known as

the speed of adjustment is significant with the appropriate sign i.e negative

sign in conformity with the a priori expectation. This implies that the present

value of gross domestic product (GDP) adjust rapidly to changes in external

reserves, gross capital formation and index of capital flight. The large value

of the error correction variable given as 68% indicates a feed back of that

value from the previous period disequilibrium of the present level of gross

domestic product in the determination of the causuality between the past

level of GDP and the present and past levels of external reserve, gross

capital formation and index of capital flight.

The co-efficient determination (R2) shows the percentage of total

variation in the dependent variable explained by the independent variables.

The coefficient of determination (R2) from the model stands at 0.8996 i.e

90%. This means that over 90% of the variation in the present state of gross

105

domestic product is being explained by the variation in past values of GDP

and the present and past values of external reserve, gross capital formation

and index of capital flight, while about 10% of the variation in the present

value of gross domestic product is being explained by the stochastic error

term or a counted for by the disturbance variable. Thus, the depth and

magnitude of the percentage of gross domestic product (GDP).

The standard error test is carried out for the significance of the

parameters. The standard error test measures the statistical reliability or

significance of the co-efficient estimates. It is carried out by comparing

standard error value of a parameter and the co-efficient of the parameter

divided by 2.

Test for ICF

Co-efficient = 7.313022 and standard error = 1.574439

SE > coefficient

< 2

1.57443 < 7.313022

106

2

1.57443 < 03.656511

Since the standard error is less than that the coefficient then the ICF is

statistically significant.

Test for GCF

SE > coefficient

< 2

0.475139 < 1.649559

2

0.475139 < 0.8247795

Since the standard error is less than that the coefficient then the GCF

is statistically significant.

Test for ER

SE > coefficient

< 2

0.150093 < 2.522510

107

2

0.150093 < 1.261255

Since the standard error is less than that the coefficient then the ER is

statistically significant.

Test for ECM

SE > coefficient

< 2

0.095303 < 0.681589

2

0.095303 < 0.3407945

The ECM is significant

From the above standard error test, it can be seen that all the variables

in the model are statistically significant. The statistical significance of the

independent variable means that the null hypothesis is rejected while the

alternative hypothesis is accepted, implying that there is a relationship

108

between the dependent and independent variables. This means that index of

capital flight, gross capital formation and external reserve are statistically

reliable and significant in explaining variations in the gross domestic

product. This is how the variables influence or affect the gross domestic

product.

The F-test shows the overall or aggregate significance of the model.

The aim is to find out whether all the explanatory variables put together do

actually have any significant influence on the dependent variable. It is

carried out by comparing the F-cal culated (F*) and F-tabulated (Ft)

F* = R 2 /K-1

(1-R2)/(N-K)

Where N = simple size

K = No of parameters

F* = 763.0678

This follows an F-distribution value with K-1 and N-K degree of

freedom at 95 percent confidence level.

109

Therefore, with V1 = K-1 (i.e 4-1 =3)

V2 = N-K (i.e 37-4 =33)

FT 0.05= 7.44

763.0678 >7.44

Since the F-calculated is greater than the F-tabulated we reject the null

hypothesis and accept the alternative hypothesis. This shows the overall

significance of the model. That is, the result shows that all the explanatory

variables that is external reserve, gross capital formation and index of capital

flight are significant in influencing or explaining variations in the growth

rate of the gross domestic product.

The Durbin-Watson test is to be carried out to test for serial correction

of resideuals in the model.

Hypothesis is set up as:

H0:d* = 0 (No autocorrelation)

H1:d* = 0 (there is autocorrelation)

110

111

0 dL dU 2 4-dU 4-dL 4 1-08 1.66 2.34 2.92

+ve autocorrelation

-ve autocorrelationInconclusive region

Acceptance region

Inconclusive region

No autocorrelation

Or

dL dU 2 4-dU 4-dL Time1.31 1.66 2.34 2.69

Note: CR = Critical value

dL = Durbin Watson @ lower case

du= Durbin Watson @ upper case

To test for autocorrelation at 5% significant level,

D.w state = 2.094861

From the graph, since d* (i.e 1.877584) falls between du <d* <4-du,

then H0 is accepted and H1 is rejected. Therefore, there is no auto correlation

in the model.

4.7 SUMMARY OF FINDINGS

The analysis shows that there exists positive relationship between the

gross domestic product, external reserve and gross capital formation. The

co-efficient of index of capital flight is negative and this conforms with the

aprior expectation.

Thus with the co-efficient of external reserve and gross capital

formation at 2.522510 and 1.649559 respectively, this implies that a unit

112

increase in both external reserve and gross capital formation will increase

gross domestic product by 2.522510 and 1.649559.

In order to determine the goodness of the model, the co-efficient of

determination (R2) is considered. The R2 is 0.899593 i.e 90%. This means

that over 90% of the variation in the present state of gross domestic product

is being explained by the variation in past values of gross domestic product

and the present and past value of external reserve, gross capital formation

and index of capital flight, while about 10% of the variation in the present

value of GDP is being explained by the stochastic error term or accounted

for by the disturbance variable.

The empirical investigation shows that external reserve, gross capital

formation and index of capital flight and their lagged values are statistically

significant and reliable in explaining variations in the gross domestic

product.

113

4.8 IMPLICATIONS OF FINDINGS

This study does not pretend to consider exhaustively all the potential

factors determining economic growth and development with regards to

capital flight.

However, the models developed and the estimation techniques

employed in this study are intended to reveal how capital flight has been

able to affect the gross domestic product (GDP) and gross capital formation

(GCF) since capital flight is detrimental to development of any economy as

also revealed by the empirical results of this study which is consistent with

the findings of Ajayi (1992) and Onwiodukit (2007). Though Ajayi (1992)

did not employ co-integrating analytical technique to estimate his data, the a

prior expectation still holds. Thus, this study has contributed to the existing

body of knowledge by employing short run dynamics of ECM which bridge

the gap between the short run disequilibrium and the long-run equilibrium in

estimating the observed time series data.

114

Furthermore, anymore increase in the laxity of supervision of the

central bank of Nigeria (CBN) and national drug law enforcement agency

(NDLEA) will further worsen Nigeria’s growth rate with regards to the

moving out of funds from the domestic economy.

On the whole, the research revealed that the current level of index of

capital flight (ICE) does not only explain or account for the current level of

GDP and GCF but also the previous level of index of capital flight 9ICE)

should be reckoned with in order to account adequately for the current level

of GDP and GCF. They have been identified as two most important measure

of growth, both the GDP and GCF should therefore steadily increase with a

corresponding mass reduction in the level of capital flight that fled to

achieve sustainable development in Nigeria.

115

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARY

This study addressed the issues relating to capital flight and the major

objective being to determine its effect on the Nigerian economic

development for the period 1970-2006. the economic growth indicators used

in this study are the grows domestic product (GDP) and gross capital

formation (GCF) while the important variables explaining capital flight from

Nigeria include mounting external debt, external reserves, inflation,

depleting foreign exchange reserves, comparative growth rate of the

economy among others.

As indicated in the introductory part of this study, the phenomenon of

capital flight from developing countries received considerable attention in

economic literature beginning from the mid-1980s. A number of country

specific case studies and cross country studies have examined the magnitude

116

of capital flight, its course and its effects. On this note the outflows of

capitals from Nigerian economy deserves serious attention for several

reasons. First, capital flight constitutes a diversion of scarce resources away

from the domestic investment and other productive activities. Secondly, it is

likely to have pronounced regressive effect on the distribution of wealth.

The third reason for the greater attention to the Nigerian capital flight like

most sub-Saharan African countries is that is remains is the grip of severe

external debt crises, which has the potential to dampen economic growth.

In achieving the objective of this study, the co-integrating analytical

technique is used to determine the effect of capital flight on the time series

of GDP and GCF in Nigeria. The specific model used to estimate capital

flight is the Residual Approach, the World Bank Version (1985) and Erber

(1986) version. The simple regression and error correction model (ECM)

results revealed that capital flight has significant negative effect on the

Nigerian Economic development as the co-efficient of GDP and GCF in the

ordinary least square (OLS) vis-à-vis the co-efficient of the same variables

117

in the dynamic model was found to be negative which is consistent with our

expected result.

This situation in Nigeria context could be attributed to unstable macro

economic environment which forces investors to respond positively to

external incentives, debt overhang and its burden of interest payment also

influences the outflows of domestic resources as this makes the government

of domestic economic to lose credit worthiness both internally and

externally. In addition, political instability is also attributed to the negative

impact of capital flight on the Nigerian economic growth and development.]

The result is therefore consistent and accords with our a priori

expectation that capital flight is detrimental to the economic development of

any nation.

5.2 CONCLUSION

A number of conclusions can be drawn from this study. The first is

that there is no generally accepted definition of capital flight, hence the use

of several concepts in this study. Secondly, a significant proportion of

118

capital flight can be estimated from recorded data in the BOPS and debt

statistics. The implication is that, the reliability of the measure is dependent

on the accuracy of the items in the BOP statistics and debt data. Significant

amount of capital flight in relation to external debt took place over the years

covered by this study. Trade faking has been discovered as an important

vehicle of effecting capital flight. Thirdly, domestic macro economic policy

distortion is the culprit in the capital flight episode. Of significances in the

area of policy errors are lack of opportunities for profitable investments

within the domestic economy. The attractive incentives offered by the

foreign sector cannot be left out. Lastly, the present level of the economy

cannot only be explained or judged by the current level of capital flight but

also the previous level of capital that fled the economy as evident by our

findings in this study.

On this note, policy-makers and the relevant authorities should pay

more attention than ever to the issue of capital flight in order to stem its

counter productive effects on economic growth. To conclude following

119

Ajayi (1992), capital flight constitutes a diversion of domestic savings away

from the domestic investment and it retards the pace of growth and

development in the economy from what it would have otherwise been.

However, this study may not have exhausted all the ramifications of the

concept of capital flight in relation to economic growth and development but

it constitutes a fair representation of thinking in the literature. Therefore, this

study forms a basis for further research.

5.3 RECOMMENDATIONS

Nigeria has been identified as a sleeping giant with a lot of potentials

to develop based on her natural endowment but the massive fled of capital in

terms of human and material resources has retarded the pace of its growth

and development. Meanwhile economic growth is known to provide

opportunities for profitable investments. If investment opportunities are

enhanced profitability will be ensured in the domestic money would be less

difficult.

120

From our analysis the policy issues that can be drawn are very clear.

There is the need for the maintenance of sound domestic macro economic

policy. The various aspects are hereby discussed. There is a lot to be said on

imposition of controls on the movement of capital to foreign countries by

appropriate authorities, Oks and Gajdeczka, (2004). In addition it is

necessary to ensure that the exchange rate is not appreciated by high

domestic inflation. We also recommend that fiscal discipline should be

given priority so that deficit as a proportion of the gross domestic product is

kept in check because this is crucial to the maintenance of macro economic

stability. Appropriate interest rate policy is also germane as there is the need

to ensure a positive real interest rate. The rates should be high enough to

attract funds but not too high to stifle investment initiatives. In addition, an

integrated and unified tariff structure would be useful, as it will reduce the

rewards for trade faking.

The issue of the existence of and how to deal with corruption is

certainly more difficult to prescribe. It is part of the general problem of

121

capital flight, one can only say that there is a need or change of attitude on

the part of those who public office and have access to foreign funds directly

or through the contracts, which they awarded. This attitudinal changes

involves a serious commitment to honest government. Therefore, we

recommend that they place their public duties ahead of their personal gain,

by so doing the economy will experience a boost as enough funds will be

available to execute development project such as power generation and

opening of new vibrant sectors.

Of paramount importance is the provision of enabling environment for

business to thrive. It is more important to make the domestic economy more

attractive for the investors by creating a wider menu of domestic financial

assets on which domestic capital can be invested at a rate not lower to rate

on comparable foreign financial instruments.

If the policy package discussed are pursued rightly and with

consistency it should be possible and there is every reason to hope for the

122

repatriation of capital flight or at worse eradication of further flight of

capital.

123

REFERENCES

Adedipo (2004): “Capital flight in low income sub-saharan Africa; The

Effect of Political Climate and Macro-economic Policies”.

Scandinavian jounal of Development

Alternatives(December)59-68

Ajayi .S. Ibi (1992): “An economic analysis of capital flight from Nigeria”,

World Bank PRP Paper No. 993.

Ajayi S. Ibi (1995): “Capital flight and external debt in Nigeria”, Research

Paper No.35, Nairobi.

Ajayi S. Ibi(1997): “An analysis of External Debt and Capital in the severely

Indebted Low Income Countries in Sub-saharan Africa”. IMF,

Working Paper WP/97/68.

Amadi S.N. (2000), “Impact of Macro economic environment and foreign

direct investment” International Journal of Business and Common

Market Studies. Vol 1, No 1, 2000.

124

Anthony and Hallet(1992): “How Successfully Do We Measure Capital

Flight? The Empical Evidence from Five Developing Countries”

Journal of Development Studies, 28(3), 538-556.

Bakare O.M. (2006), “Taxation avoidance, capital flight and poverty in

Nigeria” http//www.jstor.org

Bhagwati Jagdish N. (1964): “On the Under-invoicing of imports ,Bulletin of

the Oxford University Institute of Statistics (November)

Boote,Anthony and Kamau(1999): Debt Relief for Low Income Countries;

The HIPC Initiative. Washington,D.C. International Monetary Fund.

Boyce, James K.(1993): “The Revolving Door External Debt and Capital

Flight;A Philippine Case Study”:World Development, 20(3),pp 335-

349

Chang and Cumby(1999):Capital Flight in Sub-Saharan Countries. Africa’s

External Finance in the 1990’s. The World Bank Washington D.C

162-187.

125

Chiami, R.C Fullenkamp and Jahjah(2003): ”Are Immigrant Remittance

Flows a Source of Capital for Development”.IMF working paper

wp/03/189.

Claesseus, Stijn and David Naude(1993): “Recent Estimates of Capital Flight

World”. Bank Working Paper pp 1,186.

Collier, Hoeffler and Pattilo(2001): ”Flight Capital as a Portfolio choice”,

World Bank Economic Review, 15(1) pp55-80.

Conesa,E.R.(1987): “The Causes of Capita Flight in Latin America” Inter-

American Development Bank. Washington D.C

Cuddington J.T. (1986): Capital flight: Estimates issues and explanations.

Princeton studies on international finance No. 58 Princeton.

Doley,M.P.(1986): “Country-Specify Risk Premium, Capital Flight and Net

Investment Income Payments in Selected Developing Countries”.

Mimeo Washington D.C. International Monetary Fund.

Dornbusch R. (1985): “External Debt, Budget Deficit and Disequilibrium

Exchange Rates” in G.N Smith and J.T Cuddington (eds),

126

International Debt and the Developing Countries Washington D.C

World Bank.

Duwendag.D.(1989): Capital Flight from Developing Countries Development

Co-operation 3

Eatson J. (1987):”Public Debt guarantees and private Capital Flight” World

Bank Economic Review Vol 1(3).

Engle R.F. and Granger W. (1987), “Co-integration and error correction:

representatives, estimates and festing, Econometrics, Vol 55.

Eribe.S.(1985):”The Flight of Capital from developing countries” Inter-

economics (November/December)pp 268-275.

Financial Times (1999): “Nigeria seeks to Help in Tracing Billions Taken by

Former Military Leaders”, 23 July ,pp 5.

Financial Times (2000): “Abacha’s Loot”, Lead Editorial, 28 January.

Gordon and Levine (1989): “The problem of capital flight ; A Cautionary

Note” World Economy Vol 12 June

127

Gulati,Sunil K.(1987): “A note of Trade Misinvoicing in Lessard, Donald R

and John Williamson (eds). Capital Flight and Third World Debt,

Washington D.C Institute for International Econmics,(68-78)

Hermes and Lensink(1992):”The Magnitude and Determinants of Capital

Flight”. The Case for Six Sub-saharan African Countries, De

Economist 140(4) pp 515-530

Hermes, Lensink and Murinde (2002): ”Flight Capital and its Reversal for

Development Financing” WIDER, Discussion Paper 2000/99

Hermes and Lensink (2000): Capital Flight and the Uncertainty of

Government Policies .University of Groningen, Unpublished

Manuscript

International Finance Corporation (1998): “Trends in Private Investment in

Developing Countries, statistics for 1970-96 Discussion paper 34.

Ize.A and G.Oritz. (1987): “Fiscal rigidities, Public debt and Capital Flight”

IMF Staff Papers Vol34(2) June.

128

Khan M.S. and Nadeem H. (1985), “Foreign borrowing and capital fligh: A

formal analysis” Staff Papers, IMF, Vol 32.

Khan M and N Hague (1987):” Capital Flight From Developing Countries”

Finance and Development Vol24(1)

Kindle Berger C.P(1987): “Capital Flight- A historical perspective”In Lessard

and Williamson (eds) Capital Flight and Third World Debt

Washington D.C. Institute for International Economics.

Lessard and Williamson (1987), “Capital flight and third world debt”, Journal

of International business studies, Vol. 19. No. 3

Martin Giman(1981):Financing of foreign Direct Investment. London,

Frances Printer (publishers) Ltd, First Edition Pp 22-35

Mc Donald L. (2005): “Effect of Capital flight”, www.yahoosearch.com

Morgan Guaranty Trust Company(1986): “LDC capital flight” World

Financing Markets (March)Pp 13-15.

Nair (2006): Debt Relief for Low income Countries; Washington D.C

International Monetary Fund.

129

N’geno N.K(1994): “Capital Flight in Kenya” Paper Presented at the AERC

Workshop in Nairobi(may/june).

Obasa and Adebiyi (2004) “Institutional framework, interest rate policy

fracturing sub-sector”, yahoosearch.com

Ogunleye E.O. Simeon – Oke O.O. (2004) “The impact of Publics Sector

growth on Socio economic welfare in Nigeria”. The Nigerian Journal

of the Socio Sciences Vol. 3. No 1. 2005

Ojo Oladeji O.(1992): “An Empirical Investigation of Capital Flight in

Selected African Countries, Abidjan African Development Bank

Economic Research Papers No 17

Olopoenia R.A(1995): “Capital Flight from Uganda,1971-1994. Estimates

causes and consequences” Paper Presnted at the AERC workshop in

Nairobi Kenya (May/June)

Oloyede Bayo (2002): Principles of International Finance. Lagos ,forthright

publishers Pp 160 to 164.

130

Oloyede Bayo (2002): Research Methods in finance. Lagos, forthright

publishers

Onwioduokit E.A(2007): “Capital Flight from Nigeria; An Empirical Re-

examination”. West African Monetary Institute Accra, Ghana.(2007)

Pastor Manuel(1990): “Capital Flight from Latin America” World

Development 18(1) Pp 1-18

Ricardo O’Brien and Ingrid Inversen (1990): International economic and

financial market. 3, New York, Oxford University Press pp2-116.

World Bank(1985): Case Study; Mexico in D.Lessard and J.Williamson.

“Capital Flight And the Third World Debt”. Institute of International

Economics, Washington D.C.

131