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June 1998 Insights Issue #26Capital flight and the East Asian crisis: what are the implications for Africa?The East Asian crisis spotlights the dangers of triggering a private capital outflow. While this malaise is new to East Asia, it is by no means new to Africa. Over the past two decades more private capital relative to wealth has flown from Africa than from any other continent. Our analysis combined data on capital flight with data on capital privately held within 43 countries, 22 in Africa. It reveals that by 1990 some 39 percent of African-owned private wealth was held outside the continent. The comparable figure for East Asia was only six percent. By 1990 Africa was fully integrated into the global capital market by reason of this massive cash exodus. In attempting to explain the proportion of Africa's private wealth that is held abroad, we find that three variables are important determinants of capital flight:
The extent of African capital flight is fully accounted for by these three factors in combination. What, then, does this tell us about African policy towards global private capital flows? First, it tells us that Africa and East Asia have radically different problems. Africa is chronically capital-scarce: per worker it has only one seventh the capital of East Asia. Africa desperately needs more capital in the continent. Secondly, unlike East Asia, Africa has a huge opportunity to attract back its own wealth. If Africa could get its own wealth back into the continent its private capital stock would increase by about 65 percent. By contrast, East Asia is surely going to experience private pressure for a gradual diversification of its wealth outside the region. Hence, East Asian governments face the policy problem of how to retain their wealth within the region, whereas African governments face the problem of how to attract capital back into the region. Finally, our analysis suggests two ways in which African governments can begin the task of attracting this capital back into the continent. One is predominantly to do with macroeconomic, the other with microeconomic policy and they are (on the one hand) avoidance of exchange rate overvaluation and trade restrictions and (on the other) creation of a more investment-friendly environment. What this dual policy shift means in practice will probably differ from country to country. Governments will need to:
East Asian governments will naturally have to ask themselves whether it is wise to permit unrestricted capital movements. Yet this is a much less important issue for African governments. The massive capital flight Africa has already experienced demonstrates that in most situations controls have been ineffective. There are isolated examples on the record (for example, Zambia in 1991) of premature relaxation of the capital account in Africa. Even so, for most countries the policy question is no longer how to keep capital in, it is how to get it back. Paul Collier T: +1 (202) 458 8208 Email: pcollier@worldbank.org Anke Hoeffler Email: anke.hoeffler@balliol.ox.ac.uk Cathy Pattillo Email: cpattillo@imf. org |
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