Research pick: SSA economies cleared for takeoff with grounded governance - "Capital flight, tax revenue and economic growth in Sub-Saharan Africa: the role of good governance"

Research in the International Journal of Economic Policy in Emerging Economies has examined the relationship between capital flight, tax revenue, economic growth, and good governance indicators in sub-Saharan Africa (SSA) from 1996 to 2018. The study found that capital flight hampers economic growth in the region, while an increase in tax revenue has a positive impact. The counterpart is that increase in tax revenue acts as a catalyst for economic growth in SSA, the team found. However, the effects of capital flight and tax revenue on economic growth depend on the presence of good governance indicators.

Capital flight occurs when individuals, businesses, or investors transfer funds and assets out of their home country. It can negatively affect economic growth in that country or in this case a whole region. It is usually driven by concerns on the part of the investors regarding economic or political instability, unfavourable business conditions, legislation and regulations, or simply a lack of confidence in the local economy.

James Atta Peprah of the University of Cape Coast, Ghana and Harold Ngalawa and Evelyn Derera of the University of KwaZulu-Natal, South Africa demonstrate that the positive impact of tax revenue is influenced by good governance indicators and this can mitigate the negative effects of capital flight on economic growth. The work underscores the importance of implementing policies that promote good governance and thus growth in Sub-Saharan Africa, SSA.

The team explains that factors such as the rule of law, government stability, and effective control of corruption are crucial in good governance. There is a pressing need to strengthen democratic processes, promote economic freedom, and encourage private initiatives to attract investment and drive economic growth and development.

The researchers point out that given the limited availability of external financing sources, governments in SSA need to prioritize the enhancement of tax revenue mobilization and the promotion of domestic capital investment. This will require improvement in internal organizational structures, more training opportunities, and the fostering of stronger relationships with local governments. With the political will, SSA can create an environment conducive to economic development to support long-term economic prosperity in the region.

Peprah, J.A., Ngalawa, H. and Derera, E. (2023) ‘Capital flight, tax revenue and economic growth in Sub-Saharan Africa: the role of good governance’, Int. J. Economic Policy in Emerging Economies, Vol. 17, No. 3, pp.444–464.