Capital flight and its effect on private investment: empirical evidence from Ethiopia

Abstract

This study examines the impact of capital flight on private investment in Ethiopia over the period 1970–2020, estimating the magnitude of capital flight at $80 billion, or approximately $1.5 billion annually. Using the ARDL bounds testing approach, we find that capital flight significantly hinders domestic investment financing in both the short and long run. In addition, government spending, foreign exchange reserves, and bank credit to the private sector complement private investment in the long run but constrain it in the short run. Our analysis also identifies a strong negative effect of foreign aid on private investment. The findings highlight the importance of robust institutions, transparency, and the rule of law to mitigate capital flight and foster private investment in Ethiopia. This study contributes unique insights into the Ethiopian context, offering policy implications for addressing capital flight and promoting economic growth.