Financial Liberalization and Capital Flight: Evidence from the African Continent

During the past decades, many countries experienced considerable capital flight. Residents moved their wealth abroad, using different ways to accumulate foreign assets. Since the 1990s, several of these countries reformed their domestic financial markets in an attempt to improve the functioning of their domestic financial systems and to increase the efficiency of resource allocation—that is, to enhance financial development. In this paper, we examine the relationship between financial liberalization and capital flight, with special emphasis on
countries on the African continent, and carry out an empirical analysis using data for a sample of 18 countries from this region for the period 1973–2005. We find that whereas reforms related to opening up domestic banking markets for new domestic and foreign entrants and bank privatization programs seem to reduce capital flight, policies focusing on liberalizing the capital account increase capital flight.