Determinants of capital flight in kenya (1987 - 2007)

Abstract

This study is an econometric investigation of the relationship between capital flight and various hypothesized determinants. The determinants considered are domestic inflation rate, interest rate, GDP growth rate, total external debt, corporate taxes, exchange rate, corruption, and political uncertainty. The prime objective was to test the nature of the relationship between capital flight and its determinants. Annual data over 1987 - 2007 period for Kenya is employed in testing for the effects of the identified factors on capital flight. An error correction model is adopted. The findings of the study indicate that overvaluation of the exchange rates, increasing external debt, accelerating GDP growth rates, and high corporate tax rates are important determinants of capital flight in Kenya. These factors must therefore be taken into consideration when designing policies to prevent and even reverse the outflows of capital from Kenya. The combinations of good governance and its features, the establishment of fiscal discipline, tax adjustments, etc., are recommended.