BASELINE RELATIONSHIP BETWEEN ILLICIT FINANCIAL FLOWS AND ECONOMIC GROWTH IN SELECTED OIC COUNTRIES
DOI:
https://doi.org/10.24191/joa.v14i2.12415Keywords:
Illicit financial flows, Economic growth, OIC countries, Panel data, Pooled OLS, Capital flightAbstract
The issue of illicit financial flows (IFFs) has become a major concern for developing economies due to their negative impact on domestic resource mobilisation and on the growth of developing economies. In spite of the growing interest in the global agenda on capital leakages, empirical research of macroeconomic implications of capital leakages for Organisation of Islamic Cooperation (OIC) countries is limited. Therefore, this study examines the baseline relationship of economic growth and IFFs for the selected OIC economies for 2010–2023. The analysis utilizes panel data from the World Bank's World Development Indicators, and is based on pooled ordinary least-squares (POLS) estimation, allowing for the analysis of the relationship between illicit financial flows and economic growth, whilst taking account of important macroeconomic factors such as trade openness, investment, government expenditure, population growth, tertiary education, and institutional quality. The empirical findings show that illegal financial flows and economic growth are negatively related and statistically significant, meaning that the countries with high amounts of capital leakages tend to have weak economic performance. The findings are consistent across alternative model specifications that include country and time effects, indicating that the negative growth effects of illicit financial flows hold even when accounting for global shocks and country specific factors. The results support theoretical arguments that capital leakages lower domestic savings, lower the strength of the fiscal sector, and reduce productive investments required for continued economic growth. Furthermore, it was observed that investment and trade openness has positive impacts on economic growth, and government expenditure and population are negatively associated with economic performance. The study concludes that overall illicit financial flows are a significant constraint on economic growth in the OIC countries and that the financial governance and transparency should be improved to promote sustainable economic development
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