Welfare implications of external debt and capital flight in Sub-Saharan Africa (Evidence using panel data modelling)

Abstract The countries in Sub-Saharan Africa (SSA) have experienced a positive growth rate of over five per cent per year, on average, since their transition from the Heavily Indebted Poor Countries Initiative in 1996 and the Multilateral Debt Relief Initiative in 2006. Despite this growth, poverty and inequality are still very high. Employing the Driscoll – Kraay standard panel estimation method and dataset from 1990 to 2015, this paper sets out to examine the implications of external debt and capital flight on the general welfare of the people. The estimation results reveal that both external debt and capital flight have a welfare inhibiting effect, suggesting that increases in external borrowing or capital flight may lead to a reduction in the welfare of the people in the sub-region. The study, therefore, recommends to policymakers and government in the sub-region the need to tackle the revolving nature of external borrowing and capital flight and take steps to halt all channels through which deservingly acquired capital leaves the sub-region.