Capital Flight and Poverty Reduction in Africa

This paper investigates the impact of capital flight on poverty reduction through the investment and growth channel. It uses two approaches. First, the Incremental Capital-Output Ratio (ICOR) approach is used to estimate additional income that would have been generated if all capital flight had been invested domestically. The second approach uses capital stock to derive the potential effect of capital flight on income per capita and on poverty. The effect on poverty reduction is computed by taking into account country-specific and time-varying income-growth elasticity of poverty. The ICOR method suggests that the average annual rate of poverty reduction over the period 2000-2010 could have been 1.9 percentage points higher. The capital stock method generates an additional 2.5 percentage points per year above the current rate of poverty reduction. The evidence in this paper confirms that capital flight has significantly undermined African countries