Capital Flight from the Franc Zone: Exploring the Impact on Economic Growth

This paper examines the effect of capital flight on economic growth in the Franc Zone (FZ). For the period 1970 to 2010, real capital flight from these countries is found to be positive and massive with a magnitude of roughly US$86.8 billion or US$80.1 billion, representing 122.1% or 112.6% of GDP, and 5.3 times or 4.9 times domestic investment. At the same time, the FZ countries experienced low and very volatile investment and growth rates. The econometric analysis shows that capital flight significantly reduces economic growth in the FZ. Capital flight thus poses a huge threat to high and sustainable economic growth in the FZ. The results also reveal that domestic investment, credit to the private sector, the quality of institutions, and domestic savings play an important role in explaining the influence of capital flight on economic growth in the FZ, and are therefore important channels that affect the growth effect of capital flight in this zone. The key implication of these results is that capital flight repatriation helps to raise significantly the volume of investment in the FZ, credit to the private sector, the quality of institutions, and domestic savings, implying that this can help FZ countries sustainablyincrease their economic growth.