THE NEXUS BETWEEN PERCEIVED CORRUPTION, MACROECONOMIC INDICATORS, AND CAPITAL FLIGHTS IN ASEAN-4 COUNTRIES

Abstract

Capital flight refers to the outflow of financial assets from a country due to various factors, including economic instability, political uncertainty, and perceived corruption. Understanding the determinants of capital flight is crucial for policymakers because it has significant implications for a country's economic stability and growth. This study investigates the impact of the Corruption Perception Index (CPI) and macroeconomic indicators, such as the inflation rate, exchange rate, and gross domestic product (GDP), on capital flights within four South East ASEAN countries or ASEAN-4: Indonesia, Malaysia, Philippines, and Thailand over 2010-2020. The current study hypothesises that countries with higher levels of perceived corruption, higher inflation rates, depreciating exchange rates, and lower GDP growth are more likely to experience higher levels of capital flight. The current study employs a static panel data regression analysis using the Feasible Generalised Least Square (FGLS) model for more robust estimates. The analysis found a negative relationship between CPI scores and capital flight. Higher CPI scores indicate lower corruption, enhanced investor confidence, and reduced uncertainty. Conversely, a higher inflation rate positively influences capital flight, reflecting the erosion of purchasing power and reduced investor confidence. Additionally, the analysis also finds that a depreciating exchange rate may discourage capital flight because it reduces the value of foreign assets held by domestic investors. Finally, higher GDP levels discourage capital flight, indicating a more robust domestic economy and better investment opportunities. Policy implications are derived from the empirical findings, suggesting that addressing corruption is crucial for achieving sustainable economic growth and curtailing capital flight.