PROJECT TOPIC- EFFECT OF CAPITAL FLIGHT ON ECONOMIC GROWTH IN NIGERIA
- Background of the study
Nigerian economy compared to other Sub-Saharan Africa countries at the time following structural adjustment was featured by macroeconomic instability, (Salisu, 2005). Many African countries including Nigeria experienced a prolong political instability which cause many nations to record a poor turnover, this highlight the wrong incentive structures and institutions that will not coordinate markets efficiently in terms of demand and supply, relative to active government participation, thus keeping the markets at the sideline.
Despite the factors that may cause a country to undergo macroeconomic instability, which may appear in so many forms, such as increase budget deficits which raise current account and features that occur in Nigerian macro economy as at the periods. Thus, factors explaining the economic situations were discovered on the determinants of capital flight (Taiwo, 2010). Many studies revealing the issue of debt problems in the beginning of nineteen-eighties focused on the movement of individual capital in line with the effects of government policies and political crisis.
The situation was commonly known as ‘capital flight’ hence the phenomenon get complicated and form national issue in the 1980s. Its’ result affect the economic system and was seen to be a uniquely economic indicator or parameter to the investment atmosphere in a nation as well as an economic variable for individual investors. The phenomenon has structured the confidence of residents of unknown economic crisis relative to 1980s, where good numbers of nations were unable to service their external debt and were considered as countries undergoing the effects of capital flight.
It was viewed that countries experiencing capital flight are likely to face weak or poor economy, due to debt and low economic performance in all sectors. It appear as a vital economic indicator which measures a country’s ability in handling financial issues relative to debt repayment internationally and likewise a corrective sign to financial institutions worldwide in future financial deals to those countries already captured by the effects of Capital flight.
The concept ‘Capital flight’ is explained as unconstitutional transfer of cash, asset or finance from one economy to another (Bamel, 2009). the study of capital flight has imposed great challenges among scholars. The concept characterized by ‘normal’ and ‘abnormal’ flow of funds, the constitutional exchange of capital implies normal capital flow or control. The concept “capital flight” has no conclusive definition, but is used according to economic situations of a nation.
In most cases, the usage of the terminology “ capital shift” implies that when capital shift out of the developing countries, which is simply referred to as capital outflow; the situation generates investment opportunities, an environment for investors in developed nations as developing countries expressed it as escaping the portfolio risk experienced domestically (Robinston, 2011).
Different researchers attempt to distinguish legal outflow of capital (normal capital) from illegal flows (capital flight). In order to actualize the objective of this research work, the concept “capital flight” is defined as a net abnormal/ unauthorized movement or outflow of funds from a particular country or nation of interest. It is obvious that capital export is the legal or authorized/ constitutional means of conveying of funds in full accordance by the law of a nation, which does not in any form affect the economy from the international horizon, it implies that there is optimal allocation of funds as the later impoverish an economy, hampers prospective investment opportunities as well as endanger further development of the economy (Kosarev, 2010).
Findings from most studies revealed that constant balance of payment deficit and poor growth in so many developing nations including Nigeria, in spite of long term capital investment and private transfer are associated with capital flight (Ajayi, 2010). Thus, the government microeconomic policies such as public sector deficits financial limitation and repression, exchange rate misalignment also other vital reasons are attributes of capital flight.
The basic economic worries about capital flight in an economy, is that it step down the standard of living such that it leads to a net loss in the total real resources available to an economy for investment and growth. That is, capital flight is seen as a diversion of domestic savings away from financing domestic real investment and in favor of foreign financial investment (Tchasso,2011).
Hence, the development pace and growth of the economy is reduced from what it otherwise would have been. The best option involves a reduction in the savings to finance domestic investment of a magnitude essentially equal to the size of the capital flight; future increase will in consequence be reduced. The worst case involves a reduction not just in future growth possibilities but also in the current level of output by some multiple of the size of capital flights.
Subsequently, government tax revenue escapes thus denying nations of resources that can stand as shock absorber of government fiscal liabilities and other restricting expenses attached on socio-political well-being of the citizen base on programmes which include security and infrastructural facilities designed for stabilizing the economy for investment purposes. Thus, the propelling force inducing tax incidence as a result of the concept ‘capital flight’ by wealthy citizens facilitates income differences and aggravates social crisis (Taiwo,2010).
The phenomenon ‘capital flight’ can appear in different nature, such as; documenting a huge amount of money that does not exist as foreign debts, under-estimating the exports invoice document and escalating imports invoice document, e-transfer of funds through individual banking services, collection of agency charges as contracts or business commissions outside a country, unauthorized movement of currency.
In addition, it may also take the form of foreign investments that are unconstitutionally established which exist in the form of smuggling activities of harmful drugs(cocaine, marijuana, alcoholic substances and likewise other fake synthetic drugs) subsequently the issue in line with the control of exchange rate and tax activities (Salisu, 2005).
PROJECT TOPIC- EFFECT OF CAPITAL FLIGHT ON ECONOMIC GROWTH IN NIGERIA
1.2 Statement of the problem
The abnormal capital flow indicates opportunity foregone of a country investment in producing technical equipment, infrastructural facilities, and other viable productive capacities. It causes loss of governments’ revenue such as tax which hampers the fiscal planning and pending expenses on infrastructural development. Similarly, the weight of un-paid tax as a result of capital flight factored by the wealthy class which is an avenue not revealed to other sub-groups, that is the middle and low categories, which accelerate income differences and as well as arose socio-political issues (Tchasso,2011; Taiwo, 2010).
Shortfalls of investment capital and income from tax are related to capital flight which has cause the structural modeling of oversea borrowing which impose nations to sort for additional funds outside its economy, thus escalating the debt problems. The phenomenon is an ill-wind that has carry away the vital financial resources of Nigerian economy which can be used for structuring tax revenues, investment arena, restructuring pensions, capital formation, and other infrastructures (Tchasso,2011).
Terms of trade and market premium under Capital flight have produced great level of differences and its consequences have resulted to high external debt, high mortality rate, unemployment and inflationary prices. The danger imposed in the development of developing countries are numerous and deadly on the residents. This situation will cause fall in investment due to reduction in growth potentials of the economy.
The implication lead to a drastic fall in the economic growth which can cause a holistic fall in employment or work status, as well as chances for poverty within the economy, lack of self-esteern and confidence, inability of most countries to service the external debt and may stimulate mortality rate. This situation will flush away the tax base of a nation because capital movement into another nation is no longer part of their resource, hence escalating poor standard of living as well as necessitating economic instability and political unrests.
In addition, illegal capital transactions outside the country does not appear in the national accounts of any other country, rather will settle down in somebody’s pocket and such fund from the circulation cannot produce any additional money in either country. The major keys to pay-off current account deficits are; portfolio investment, Foreign Direct Investment and, remittances of funds from migrants, all these variables are external resource flows, but the volatility of these capital flows are very high, which can disrupt current account sustainability and exchange rates, this was experienced in Asia in the late 1990s.
The situation is obvious that the amount of capital paid has a low portfolio risk compared with the various nature of fund out flows which can appear or surface as the basic source of external finance for the sub-Sahara African regions and likewise reduce current account deficits and step-down capital flight. Subsequently, the retrieval of capital flight goes down to assist external resource gap confronting most African countries (Tchasso, 2011).
The issues of capital flight in Nigeria have manifested in such a way that the country is heavily-indebted and have form a base of importance. Lack of comprehensive study on the concept capital flight base on its’ causes, measurement, and effects as well as the consequences particularly in Nigeria, the magnitude of the country’s external debt and the likelihood of the implications to impose threat that will affect the nation’s true liability, which make this research work on unconstitutional movement of fund very important (Angoua, 2011).
The illegal transactions or business, which is aimed at avoiding the official documentations of the deal, thus makes it difficult to have a measure of the overall amount of capital flight in a given country. Though, scholars and researchers have come up with divergent techniques or ways to calculate capital flight, for the moment; there exist about five main measures of capital flight, but may have significant variations in terms of methodology applied or adopted as well as vary significantly in its’ estimates (Tchasso,2011).
Taking a closer look at the weight of capital flight, the concept itself is a difficult assignment. Many researchers and studies have centered their work on measurement of capital flight but yet do not analyze its consequences. This research work would obviously be considered as a vital action to fill the gap that were lacking in decades of research work, and to enhance economies of scale which is situated to address the formulated programs to fight against the illegalities of fund transfers in Nigeria.
- Objectives of the study
The principal objective of this study is to ascertain the implication of capital flight on economic growth in Nigeria. To achieve this laudable objective, we sort:
- To ascertain the short run relationship between capital flight and economic growth in Nigeria;
- To determine the long run relationship between capital flight and economic growth in Nigeria;
- To examine the causal relationship between capital flight and economic growth in Nigeria.
- Research Questions
To achieve the objectives of these study the following research questions were formulated:
- What is the short run relationship between capital flight and economic growth in Nigeria?
- What is the long run relationship between capital flight and economic growth in Nigeria?
- What is the causal relationship between capital flight and economic growth in Nigeria?
- Research hypotheses
To achieve the objectives of this study three objective were formulated and tested.
H01: There is no short run relationship between capital flight and economic growth in Nigeria;
HA1: There is short run relationship between capital flight and economic growth in Nigeria.
H02: There is no long run relationship between capital flight and economic growth in Nigeria;
HA2: There is long run relationship between capital flight and economic growth in Nigeria;
H03: There is no causal relationship between capital flight and economic growth in Nigeria.
HA3: There is causal relationship between capital flight and economic growth in Nigeria.
- Significance of the study
The primary objective of this research work is to evaluate the effect of capital flight on economic growth in Nigeria. The result of the analysis will be of immense benefits to the policy makers (legislators) of the federal government as a guide in formulating policies to regulate the financial system and create a conducive environment that would attract adequate capital to the national economy.
The study would also strengthen the financial regulatory authorities (Central Bank of Nigeria and Nigeria Stock Exchange) streamlining their actions towards curbing the illicit fund transfers within and outside the nation, restructuring and instituting a sound financial system. This study would reposition the confidence of investors (individuals or organizations) in line with the vibrant nature of the regulatory bodies. The financial institutions (Banks), on its operation will be guided appropriately in all financial transactions among its potential customers.
The bank-customer relationship will be enhanced through the constitutional rules and regulations of the government, educating and directing in areas of investment. The study is a contribution to the body of knowledge to scholars/ researchers in their academic pursuit of knowledge in the sense that this will open up an avenue for future research. In addition, the study will create an awareness of the need for controlling and checking the activities of foreign companies as well as the indigenous ones in order to verify their financial transactions abroad. It will also provide knowledge on the major sources of capital which bring with it up to date. The research is done in partial fulfillment of the requirement for the award of masters (M.Sc) degree in Banking and Finance.
- Scope of the study
The study focused on an empirical assessment of the implications of unconstitutional fund movement on the economy of Nigeria. It covered a twenty five years period ranging from 1986 to 2010.
1.8 Limitations of the study
The study may face the following constrains, they includes: Lack of research infrastructures; the data collection and treatment bearing in mind that the information to be used to accomplish this study came from different sources (Journals, Websites, textbooks, CBN bulletins, World Bank etc.); and access to the software used in running the data for the study. These limitations may have probably affected the final judgments of this work by some readers or researchers.