Capital flight and external debt: Revisiting the revolving door hypothesis for Zimbabwe (1980-2010).

Abstract

The relationship between capital flight and external debt has been described as two faces of the same coin and it has attracted a lot of attention from policy makers and academics. Due to the observed incidence of high capital flight and external debt in Zimbabwe, this study examined the relationship between capital flight and external debt in Zimbabwe. The main objective of the study is to establish the direction of causality between capital flight and external debt for the period 1980-2010 in the spirit of the revolving door hypothesis. The hypothesis of the study is that high levels external debt drive capital flight. The study employs the Granger causality test in order to investigate this relationship. The pair wise Granger causality test revealed the existence of a uni-directional relationship running from external debt to capital flight. This result indicates that for Zimbabwe, external debt has had an influence on capital flight, whilst capital flight has no influence on external debt. The results obtained herein further shows that, if external debt remains unchecked, it will continue to lead to massive capital flight. There is need for the authorities to formulate and implement a holistic debt management strategy in order to deal decisively with high external indebtedness which is causing massive capital flight.