1. 1 Background to the Study

Назва1. 1 Background to the Study
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The literature is replete with the various estimates and definitions of capital flight. Though all point to the same direction that capital is lost to the economy suffering from capital flight, the peculiar definition that best fits the Nigerian type of flight can be fully understood as a result of this study. The study brings to light the many estimates or definitions most relevant to Nigeria. This will avail policymakers the opportunity to direct efforts at how to eliminate the challenge in the most effective way possible

Nigeria is presently overwhelmed with the infrastructural deficit that has impeded the development of the country and its transformation into an industrial economy. In addition, the economy has constantly lost resources to capital flights over the years. The study will help bring policy makers back to the issues that need to be addressed in order to attract further capital inflows in FDI and retain resident capital domestically and thereby reduce capital flight out of Nigeria.

It is arguable if capital flight has increased the depletion of external reserves which seem to the hallmark of emerging economies among which Nigeria has been classed of recent. The external reserves of the country steadily increased through accumulation and good performance of the commodity sector of the economy especially petroleum from 2004. The ostensible reason for the maintenance of high level of reserve was for liquidity and as measure to attract FDI. In spite of seeming progress of this classification by Goldman Sachs (2003), capital flight has continued unabated especially without the attraction of corresponding quantum of foreign investment and capital into the economy. In spite of the view of some studies that that capital flight should not result from high level of reserves as it should increase the confidence level of the foreign direct investor, the reverse has been the case. Nigerian external reserve has been high at over $60 billion as at 2007 but has steadily reduced to about $33 billion by December 2010 without corresponding increase of FDI inflows.

Different definitions exist for capital flight by different studies using different estimates. The three commonest definitions are those of the World Bank (essentially from Cuddington), Dooley and Morgan Trust Banking Company which all came out in 1986. Though the different estimates point to the fact that capital flight estimates are country-specific, it nevertheless require that attention be paid to a specific definition that may allow the country to deal with the problem using the particular and the most significant estimates. The most significant determinants can then be used to unravel the main issues that need to be focused on in the search for the solution to the problem of capital flight in Nigeria. Noteworthy also is the fact that the literature has also began to make a distinction between illegal and legal capital fight.

1.7 Scope of the Study

This study is centred on Nigeria and there is no comparison with the estimates of capital flight and its incidence with those of the Latin American (LATAM) countries, and a number of emerging economies of the world among those of South East Asia. Capital flows occur from countries to countries throughout the world and can become a concern when the flow becomes heavy and is enough to disrupt the financial system. When the quantum of capital flows is continuous, it becomes capital flight as capital flees either to safety or to secrecy. As a result, of this, nearly all countries are involved in the capital flows management attempting to avoid heavy flows that degenerate into capital flight. Cursory references may be made. However, this is done to investigate if the case of Nigeria is significantly different. Data from 1970 – 2007 are to be used in the study. The period covers both pre-globalisation and globalisation years. Also attempt is made to find the long run relationship for these periods in the analysis.

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