CAPITAL FLIGHT AND INVESTMENT IN NIGERIA IN THE ERA OF FINANCIAL GLOBALISATION (1970 â€" 2007)

By

ADETILOYE Kehinde Adekunle CUGP040051

Presented To

Department of Banking and Finance

Abstract
 
As being  experienced in many developing countries,  Nigeria has been  experiencing
confirmed capital flight which has been a  problem believed  to have  adversely  affected
domestic investment. The existence of this problem is further accentuated by the financial
globalisation process which has enabled capital to flow more freely than before between
countries of the world. This study examined  the  relationship between  capital flight in
Nigeria and investment during the period of financial globalisation with data from 1970 to
2007. The main variables used were exchange rates, investment, Kaopen, financial savings,
external reserves and interest rate differential among others. Ordinary Least Square (OLS)
technique is used in determining the significant variables in investment  and financial
globalisation, while Vector Error Correction Mechanism (VECM) was adopted to determine
the long-term relationship between investment and capital flight.  The study finds that the
rate of exchange is significant in investment and financial globalisation but not significant
in World Bank’s and Dooley’s estimates of capital flight. The different estimates of capital
flight do  not significantly  impact negatively against  investment though it has a long-term
negative impact on external reserves of the country. The Dooley’s definition of capital flight
is  found to more significant in the Nigeria case than the World Bank’s as its impact is
negative on the investment, though not significant. This signifies the role of errors and
omissions in distorting  the estimates of capital flight in Nigeria.   The other determinant of
capital flight  is the  interest rate differential in the co-integrating equation. Unusually, the
Kaopen measure is significant in the Nigeria’s financial globalisation scenario, which calls
for careful foreign exchange rate management to determine the rate of the exchange.  The
study recommends a cleaner  floating of  the domestic currency to reduce capital  flight, the
improvement of the business environment and an increase in the autonomous investment by
both public and private sectors in the economy to induce other domestic investments, which
will facilitate inflow of capital.

TABLE OF CONTENTS

Title and Cover Page - - - - - - - -       
Certification - - - - - - - - - i
Authorization - - - - - - - - - - ii
Dedication - - - - - - - iii
Acknowledgment - - - - - - - - - iv
Table of Contents - - - - - - - - - vii
List of Tables - - - - - - - - xii
List of Figures - - - - - - - xiii
Abstract - - - - - - - - - - - xiv

CHAPTER ONE: INTRODUCTION
11  Background to The Study - - - - - - - 1
12  Statement of the Problem - - - - - - - - 5
13  Objectives of the Study - - - - - - - - 7
14  Research Questions - - - - - - - - 8
15  Statements of Hypotheses - - - - - - - 9
16  Significance of the Study - - - - - - - 9
17  Scope  of the Study - - - - - - - - 11
18  Outline of the Study - - - - - - - - 11

CHAPTER TWO: REVIEW OF LITERATURE  
20 Introduction - - - - - - - - - 13
21 CAPITAL FLIGHT - - - - - - - - 14
211 Conceptual and Definitional Issues in Capita - - - - - 14
22 CAUSES AND ROUTES OF CAPITAL FLIGHT - - - - - 18
23 Capital Flight and Capital Flows - - - - - - , - 21
231 Public and Private Wealth or capital - - - - - - 22
232 Capital Flight and Wealth of a Country - - - - - - 23
233 Capital Accumulation or Formation - - - - - - 24
23 4 Portfolio Theory in Capital Flight - - - - - - - 26
235 Risk and Uncertainty in Capital Flight - - - - - - 27
24 LEGAL AND ILLEGAL CAPITAL FLIGHT - - - - - 28
25 RISKS AND CORRUPTION - - - - - - - 31
251 Macroeconomic Risks - - - - - - - - 31
252 Political Risks - - - - - - - - - 32
252 Corruption and capital flight - - - - - - - 33
253 IMF on Governance Issues and Corruption - - - - - 35
254 Corruption Control and Freedom of Information (FOI) Law - - - - 36
255 Private Banking Services for Flight Capital - - - - - 37
26 INVESTMENT - - - - - - - - 38
261 Definitions of Investment - - - - - - - 38
262 Domestic Investment - - - - - - - - 39
263 Review of Empirical studies - - - - - - - - 45
264 Sources and Determinants of Domestic Investments - - - - 47
265 Measurements and Models - - - - - - - 51
266 Foreign Private Investment - - - - - - - 52
267 International Capital flows - - - - - - - 56
268 Foreign Direct Investment Inflow - - - - - - 57
27  CAPITAL FLIGHT,  OPEN MACROECONOMICS AND BALANCE OF
PAYMENT - - - - - - - - - 60
271 Openness of Current Account - - - - - - - 60
272 Openness of Capital account - - - - - - - 62
273 Errors and Omissions - - - - - - - - 64
274 The Abuse of the Errors and Omission - - - - - - 65
274 Requirements of Capital Account Liberalisation - - - - - 66
28 CAPITAL FLIGHT AND FINANCIAL GLOBALISATION - - - - 70
281 Definitions - - - - - - - - - 70
282 Financial Globalisation and Integration - - - - - - 71
283 Financial Globalisation Capital Flows and Volatility - - - - 78
284 Financial Globalisation and Capital Account Liberalisation - - - 79
285 Financial Globalisation and Financial Development - - - - 80
286 Empirical Studies on Nigeria Globalisation - - - - - 81
287 Models and Measurements of Financial Globalisation - - - - 82
288 Nigeria’s Efforts at Globalisation and ECOWAS - - - - - 85
29 CAPITAL FLIGHT IN OTHER DEVELOPING COUNTRIES - - - 87
291 China - - - - - - - - - 87
292 Russia - - - - - - - - - 88
293Thailand - - - - - - - - - 88
294 India - - - - - - - - - - 89
210 CAPITAL FLIGHT AND RELATED ISSUES - - - - - 89
2101 External Debt - - - - - - - - 89
2102 Aid - - - - - - - - - 89
2103 Brain Drain (Human Capital flight) - - - - - - 90

CHAPTER THREE:  THEORECTICAL FRAMEWORK  AND  RESEARCH
METHODOLOGY
30 Introduction - - - - - - - - - - 91
31 Theoretical framework and Linkages - - - - - - 91
32 APPROACHES TO MEASUREMENT OF CAPITAL FLIGHT - - - 92  
33 Balance of Payment approach - - - - - - - 92
322 The Bank Deposit approach - - - - - - - 92
33 MODELS SPECIFICATION - - - - - - - 94
331 Techniques of estimation of Capital flight Variables - - - - 95
341 CAPITAL FLIGHT MEASUREMENT - - - - - - 98
342 Dooley Measure and Estimates - - - - - - - 99
35 Domestic Investment Function - - - - - - - 100
351 Variables of Investment - - - - - - - - 102
36 FINANCIAL GLOBALISATION - - - - - - - 104
361 Kaopen Measurement - - - - - - - 106
362 Variables of Financial Globalisation - - - - - - 107
37 SOURCES OF DATA - - - - - - - - 108
371 Limitation of the Study - - - - - - - - 110

CHAPTER FOUR: ESTIMATION RESULTS, HYPOTHESES TESTING AND FINDINGS
40 Introduction - - - - - - - - - 111
41 Unit Roots Tests - - - - - - - - - 111
42 Capital Flight - - - - - - - - 114
421 Capital flight and Domestic Investment - - - - - 115
423 Equality Tests - - - - - - - - 116
423 Regression Estimates - - - - - - - - 120
424 Co-integration Test - - - - - - - - 125
425 Vector Error Correction - - - - - - - - 127
426 Paired Samples Tests - - - - - - - 128
427 Granger Causality Results - - - - - - - 129
43 DOMESTIC INVESTMENT - - - - - - - 131
44 FINANCIAL GLOBALISATION - - - - - - 134
45 DISCUSSIONS OF EMPIRICAL FINDINGS - - - - - 140
46 FURTHER FINDINGS - - - - - - - 144

CHAPTER  FIVE: SUMMARY  OF FINDINGS,  RECOMMENDATIONS AND
CONCLUSIONS
51 Summary - - - - - - - - - 146
52 Conclusion - - - - - - - - - 148
531 Recommendations: Capital Flight - - - - - - 149
532 Investment - - - - - - - - - 151
533 Financial Globalisation - - - - - - - - 153
541 Contributions to Knowledge - - - - - - - 155
542 Areas for Future Research - - - - - - - 157
References - - - - - - - - - 158
Definition of terms - - - - - - - - 174

Capital Flight Variables - - - - - - - - 178
 
LIST OF TABLES  
21 Private Wealth and Its Composition by Region - - - - - 23
22 Estimated Cross Border Flows of Dirty Money - - - - - 30
23 Nigerian Corruption Perception Index - - - - - - - 34
24 Balance of Payment Crisis and Capital Flight - - - - - 62
2 5 Nigeria General Globalisation Index - - - - - - 70
26 Drivers of Financial Globalisation - - - - - - 83
27 Pre and Post Consolidations Assets Holdings of Selected Nigerian Banks - - 84
411 Unit Root Tests (ADF) - - - - - - - 112
412 Hadri Group Unit Root test - - - - - - - 113
433 Breuch-Godfrey Serial Correlation LM Test - - - - - 114
421 Test of Equality between a series of Variables - - - - - 117
422 Capital Flight Regression Estimates - - - - - - 118
423 Johansen Multivariate Co-integration Result - - - - - 123
424 Vector Error Correction Estimates for Capital Flight - - - - 125
425 Paired Samples Differences Results - - - - - - 126
426 Granger Causality Test result - - - - - - - 127
431 OLS Regression Results for Investment - - - - - 129
431 Regression Results for Financial Globalisation - - - - - 133

TABLE OF FIGURES
21 Financial globalisation growth and development - - - - - 77
41 Pre Globalisation Investment Ratio and Capital Flight Ratio to GDP - - 115
42 Post Globalisation Investment Ratio and Capital Flight Ratio to GDP - - 116
43 Capital Flight (World Bank) and (Dooley) Measures - - - - 119
44 Divergence between Naira Real rate and Dollar Real savings rate - - - 120
45 Capital Flight and Investment Ratio to GDP - - - - - 121
46 Capital flight (World Bank) and Domestic Investment - - - - 122
47 Capital Flight (Dooley) and Domestic Investment - - - - 122
48 External Financial Asset and Liabilities - - - - - - 135
49 Nigeria Financial Globalisation - - - - - - - 135