The role of foreign aid in the nexus between capital flight and unemployment in sub-Saharan Africa

Abstract

PurposeThis study assesses the relevance of foreign aid to the incidence of capital flight and unemployment in 20 countries in sub-Saharan Africa.Design/methodology/approachThe study is for the period 1996–2018, and the empirical evidence is based on interactive quantile regressions in order to assess the nexuses throughout the conditional distribution of the unemployment outcome variable.FindingsFrom the findings, capital flight has a positive unconditional incidence on unemployment, while foreign aid dampens the underlying positive unconditional nexus. Moreover, in order for the positive incidence of capital flight to be completely dampened, foreign aid thresholds of 2.230 and 3.964 (% of GDP) are needed at the 10th and 25th quantiles, respectively, of the conditional distribution of unemployment. It follows that the relevance of foreign aid in crowding out the unfavourable incidence of capital flight on unemployment is significantly apparent only in the lowest quantiles or countries with below-median levels of unemployment. The policy implications are discussed.Originality/valueThe study complements the extant literature by assessing the importance of development assistance in how capital flight affects unemployment in sub-Saharan Africa.