Effect of Capital Flight on Real GDP Growth in the East African Countries (2000-2022)

Abstract

Countries in the East African region have had high capital flight both in its absolute value and relative to the GDP. The extent to which this increased volume of capital flight in the region has impacted economic growth is not well established. This study, therefore, sought to determine the effect of capital flight on real GDP growth in the EAC countries over the period 2000-2022. The study used fixed fixed-effect estimation method to examine the determinants of study variables. The Levin-Lin-Chu (LLC) panel unit root test was applied to examine the order of integration, where all variables were found to be stationary at the level. The Hausman test preferred fixed effects over random effects. The results showed that the capital flight, external debt, terms of trade, and investment had a significant (at 5% level) effect on real GDP growth with coefficients of -0.37, -0.18, 0.29, and 0.56. Capital flight and external debt had a negative influence, while terms of trade and investment had a positive effect. It is therefore recommended that the East African countries should, on the one hand, enhance policies that would reduce capital flight and external debt, and, on the other hand, improve the countries’ terms of trade and investment levels so as to realize real GDP growth. Future studies should consider causality tests to establish the causal direction of the relationship between economic growth and capital flight.