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Capital Flight and the Financial System

Working papers

Written by Isabella Massa

Working papers

​Capital flight has become an increasing source of concern for policy makers in developing countries, including African economies, since it represents a severe constraint for growth and development. This paper analyses how the domestic and global financial system may facilitate capital flight from Africa. We argue that on the domestic side, the existence of financial sectors characterized by a high presence of foreign banks as well as underdeveloped financial markets; the presence of weak banking regulatory and supervisory frameworks; and the take-off of mobile banking are some of the factors that may be conducive to capital flight. On the other hand, the global financial system may operate as facilitator of capital flight through banking secrecy, business in secrecy jurisdictions, and financial innovation (e.g., new payment methods, financial derivatives, hedge funds, private equity funds). Bank secrecy laws and financial activities in secrecy jurisdictions also represent an important obstacle for capital flight repatriation to Africa. In the paper, policy responses adopted at both the international and national level to prevent and combat capital flight and promote asset recovery are investigated. The analysis sheds light on the fact that the effectiveness of such policy measures is far from satisfactory. This is due to a number of factors, which include but are not limited to: (i) the lack of political will at both the African and global level; (ii) weaknesses of the initiatives promoted at the international level such as lack of legal enforcement mechanisms, scarce credibility, and limited involvement of African countries; (iii) the existence in Africa of regulatory loopholes, weak governance, and low levels of expertise and knowledge; (iv) the lack of collaboration between local and foreign authorities; (v) differences in the legal systems of African economies and foreign countries; and (vi) the lack of a universally recognized institutional body for global governance.
Isabella Massa