Does capital flight undermine growth: a case study of Pakistan

Abstract

Purpose This study aims to estimate the magnitude of capital flight from Pakistan. Furthermore, it analyzes the impact of capital flight on the economic growth of Pakistan in the short and long run. Design/methodology/approach This study uses the World Bank’s residual method to estimate the magnitude of capital flight from Pakistan during 1976–2018. This study used the autoregressive distributed lag (ARDL) approach to estimate the effect of capital flight on the economic growth of Pakistan. Findings ARDL results revealed a negative and statistically significant relationship between different measures of capital flight and economic growth in the long run. However, this relationship is not statistically significant in the short run. After correction for external borrowing and trade misinvoicing, this study finds that the total capital flight from Pakistan during the study period amounted to US$333bn (in 2010 dollars). With accrued interest earnings, the stock of capital amounted to US$124,768bn, significantly higher than the accumulated stock of long-term debt, which amounted to US$1,231bn during the study period indicating that Pakistan faces a severe challenge of capital flight. Originality/value This study calculates the magnitude of capital flight from Pakistan for the first time. Furthermore, this study also calculates the magnitude of capital flight for military and democratic regimes. This study suggests many policy proposals to deal with the challenge of capital flight.