Journal Article

Africa's Exodus: Capital Flight and the Brain Drain as Portfolio Decisions

Paul Collier, Anke Hoeffler and Catherine Pattillo

in Journal of African Economies

Volume 13, issue suppl_2, pages ii15-ii54
Published in print December 2004 | ISSN: 0963-8024
Published online December 2004 | e-ISSN: 1464-3723 | DOI: https://dx.doi.org/10.1093/jae/ejh042
Africa's Exodus: Capital Flight and the Brain Drain as Portfolio Decisions

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  • Development Studies
  • Economic Development
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We build a data set on financial and human capital flight for 48 countries for the period 1970–98 and analyse capital flight as a portfolio choice. Financial capital flight is measured as the stock of capital flight relative to domestically held private net wealth and human capital flight as the proportion of a country's educated population that is living outside the country. Our results suggest that the same economic factors influence human and financial portfolio decisions, namely the relative returns and the relative risks in the competing locations. We focus on the estimated model's implications for Africa, finding that the severe financial capital flight that Africa experienced until the late 1980s has started to be reversed. The factors that have accounted for this repatriation are probably the reduction in the parallel market premium and African indebtedness, the reduction in the incidence of civil war (a phenomenon true only of our sample countries, rather than a general African phenomenon) and the decline in real US interest rates. In contrast, we find that human capital flight is rapidly increasing, as the emigration of the educated is subject to much more powerful momentum effects than financial capital flight. Finally, we find that for both types of capital flight policy changes only affect outcomes with long lags, suggesting that Africa's human capital exodus will be an increasingly important problem.

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Subjects: Development Studies ; Economic Development ; African Studies

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