Reducing Capital Flight in Africa: Does Regional Financial Integration Matter?

Abstract

Capital flight continues to be an issue of paramount importance for developing economies, as it deprives them of the funds required for economic takeoff. Hence, this paper aims to analyze the effect of regional financial integration (RFI) on capital flight in Africa. Based on a sample of 23 countries, we specify and estimate an asset demand model of capital flight using a portfolio choice analysis by the system-generalized method of moments for the period 1996-2015. We find two important results. First, the RFI reduces capital flight. This result becomes even more interesting when the quality of governance is considered. Second, structural breaks in the RFI-capital flight relationship explain why the RFI has had a mixed effect on the capital flight over the study period. We recommend that the attractiveness of regional financial services be enhanced concurrently with the standardization of banking and financial regulation in Africa.