Do Geopolitical Risk Factors and Economic Policy Uncertainties Stimulate Capital Outflows? An Updated Evidence.

Abstract

Most developing countries are making frantic efforts to curtail illicit outflows of investible funds. Unfortunately, these efforts seem not to have produced the expected results. Meanwhile, existing empirical investigations have failed to explain emphatically, the channels through which this economic sabotage is being perpetuated. In this context, this study scrutinizes whether geopolitical risk factors (GPR) and economic policy uncertainty (EPU) stimulate the outflows of illicit capital from South Africa over 1985 – 2018 while controlling for the influence of national income, trade openness, foreign direct investments (FDI) and population. Preliminary investigations confirmed co-integration among the series. Furthermore, it is established that capital flight is a systemic problem considering its significant short-run autoregressive effect. Further evidence from the ARDL model indicates that GPR and EPU exert significant positive impacts on capital flight only within the short-run, whereas FDI produces a positive and significant influence on capital outflows at all times. The influence of FDI on illicit capital outflow is also consistent when the Kernel Regularised Least Squares (KRLS) model was applied, such that its positive and significant influence was also observed both on the average and across all quantiles of the distributions of capital migrations. Therefore, to curtail capital flight, policymakers must keep an eye on the inflows and outflows of FDI. Meanwhile, GPR and EPU are not long-term predictors of capital migrations from South Africa. The findings of this investigation could be equally beneficial to other countries battling with capital flight.