INSTITUTIONAL QUALITY, CAPITAL FLIGHT AND CAPITAL FLOWS

Abstract

This paper examines the determinants of capital flight using panel data for 53 developing and 21 developed countries from 1984-2004. Our empirical results show, first, that institutional quality is a key determinant of capital flight for developing countries. Second, capital control is not an effective tool to mitigate flight of capital. Capital flees less to the extent that a country is financially more open and more developed. Third, capital flight increases with the standard of living up to a certain level of income, but thereafter decreases as income rises. Finally, upgrading institutional quality not only encourages private capital inflows but also discourages capital flight.