Capital Flight Accounting and Welfare Implications in the MENA Region

Abstract

This research brings together the first estimates of capital flight in the MENA countries from 1970 to 2002. In addition, it explains the nature, volume, determinants and growth impact of capital flight in the resource-based and the resource-poor economies of the MENA region on the basis of their respective structural and institutional characteristics. Our findings suggest that cap-ital flight follows a systematic pattern depending on whether a MENA country is resource-based. The resource-based economies are found to be net creditors to the world economy and have ex-perienced more than 273 billion of 1995 USD in capital flight (average of 9.42 percent of GDP). In these economies, capital flight is assisted by natural resource exporting rents, the outward ori-entation of most economies and the monarchial character of most of their political systems. In assessing the welfare impact, capital flight is shown to negatively and significantly affect eco-nomic growth in the resource-based economies. In contrast, the nonresource economies are shown to have experienced a net inflow of an unrecorded foreign exchange of $215 billion in 1995 USD (average of 9.38 percent of GDP). These inflows are mainly reflected in smuggling of imported goods to avoid trade taxes and regulations and are assisted by the inward-looking strategies, one-