Hot Money, Hot Spots? Is Capital Flight an Indicator of Political Instability?

Abstract

Insider trading, or the leveraging of material, non-public information for private gain, frequently is illegal in nations with a stable rule of law. During periods preceding a collapse of government control, however, it is possible that political and economic elites will engage in behavior that is similar to that of insider traders, and will transfer private funds in increased volumes out of their country of origin. This paper reviews capital flight as a proxy for the historic transfer of private funds preceding the onset of political instability in Sub-Saharan Africa. It concludes that capital flight is indeed positively and significantly correlated with the onset of state failure.