Capital Flight and Economic Growth on Selected West African Countries

Abstract

Inconsistent economic growth and annual capital flight losses of approximately $10 billion pose severe structural challenges for West African nations, leading to higher inflation, exchange rate volatility, and rising unemployment. This phenomenon depletes scarce resources needed to bridge infrastructure gaps and support domestic production, often fueled by weak political institutions and illicit financial transfers. Hence, this study examined the impact of capital flight on economic growth in five selected West African countries: Benin, Burkina Faso, Côte d’Ivoire, Ghana, and Nigeria, from 2000 to 2025. Specifically, this study evaluated the impacts of four key capital flight pathways: current account balance, outward foreign direct investment, external debt, and net portfolio investment. Rooted in Endogenous Growth Theory, this study adopted a panel data design using secondary data from the World Bank Development Indicators. The analytical framework included Pesaran Cross-Sectional Dependence tests, Levin-Lin-Chu unit root tests, and Pedroni cointegration tests to ensure data stability and avoid spurious regressions. The primary analysis used the Panel Dynamic Ordinary Least Squares (DOLS) estimator to provide robust, unbiased estimates of long-term relationships. Results revealed that the current account balance and net portfolio investment have positive and statistically significant impacts on economic growth: a 1 percent increase in the current account balance leads to a 0.82 percent increase in growth, while a 1 percent increase in net portfolio investment results in an approximately 0.86 percent rise in economic growth. Conversely, outward foreign direct investment hurts growth, consistent with a priori expectations: a 1 percent increase leads to a 0.72 percent decrease in economic growth. External debt showed a positive but statistically insignificant influence on economic growth. By implication, a one percentage change in external debt will lead to a 0.59 percent increase in economic growth in the long run. Overall, the model explained 83.2% of the variation in economic growth across the sampled countries. Based on these findings, this study recommended that Finance Ministries in the selected countries support export-oriented industries to maintain healthy current account surpluses. Central Banks of the five countries should implement stringent monitoring of capital outflows and consider strategic capital controls to regulate outward FDI. Furthermore, relevant agencies must develop a wider variety of financial instruments and ensure exchange rate stability to attract and retain portfolio investments. Finally, Debt Management Offices must ensure that external borrowing is strictly channeled into the real sector and infrastructure to trigger production rather than financing capital flight.