The effect of financial liberalization on capital flight in African economies

In this paper we assess the effects of financial liberalization on capital flight in African economies. A portfolio model, in which capital flight is one of the assets, is estimated on a sample of nine African countries for 1970-91. The estimation results suggest that financial liberalization induces a reduction in capital flight. After augmenting the model with submodels for the banking sector, the government sector and the external sector, we conduct simulation experiments involving an interest rate deregulation, a decrease in reserve requirements and a change in exchange rate policy. The simulation results show that capital flight is reduced by all the three financial liberalization measures. The effects, however, are very small. Considering both the estimation and simulation results, we conclude that financial liberalization policies are useful in attempts to reduce capital flight in African economies, but per se the policies may not be the panacea. (C) 1998 Elsevier Science Ltd. All rights reserved.