Economic Consequences of Capital Flight in Nigeria: Evidence from an Economic Linkages Framework (Published)
Capital flight remains a pervasive constraint on economic development in Nigeria, yet the dominant literature has concentrated on its determinants and magnitude rather than its internal structural consequences. This paper examines the developmental consequences of capital flight through an Economic Linkages Framework, an original conceptual architecture that synthesises Hirschman’s (1958) backward and forward linkage theory, Keynesian multiplier analysis, and endogenous growth theory to explain how capital flight disrupts the processes through which domestic investment generates compounding economic value.The framework distinguishes two structural pathways. When capital is retained domestically, it initiates multiplier cascades through business expansion, supply chain deepening, employment generation, and fiscal strengthening, constituting positive economic linkages. When capital exits the economy, these pathways are severed, producing weakened aggregate demand, reduced productivity spillovers, labour market deterioration, and tax base erosion, constituting negative economic linkages and structural fragmentation. To operationalise these arguments, the paper introduces the Domestic Capital Circulation Curve (DCCC), a non-linear growth model grounded in Barro and Sala-i-Martin’s (1995) endogenous growth framework and Ramsey-Cass-Koopmans capital accumulation theory. A quadratic empirical specification is estimated using Nigerian time-series data (1991–2017) via OLS with heteroscedasticity-consistent standard errors. The model is explicitly framed as an empirical illustration of the theoretical framework rather than a fully identified causal test.The results suggest that labour market conditions may be an important transmission channel: a one percentage point increase in the unemployment rate is associated with a 2.48 percentage point reduction in GDP growth (p < 0.001), validating the labour market linkage mechanism. Capital flight coefficients are not individually significant but exhibit sign patterns consistent with the non-linear damage hypothesis. The model explains 57.4% of variance in GDP growth (R² = 0.574). The paper contributes to development economics by reframing capital flight as a problem of linkage disruption rather than simple financial outflow, providing a theoretically grounded and policy-relevant framework for Nigeria and comparable resource-dependent economies.
Keywords: Capital Flight, Domestic Investment, Endogenous Growth, Hirschman linkages, Nigeria, development economics, economic linkages, non-linear modelling