Full Project – CAPITAL FLIGHT AND INVESTMENT IN NIGERIA IN THE ERA OF FINANCIAL GLOBALISATION (1970 – 2007)
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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.
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Full Project – CAPITAL FLIGHT AND INVESTMENT IN NIGERIA IN THE ERA OF FINANCIAL GLOBALISATION (1970 – 2007)