Already, reviews of HIPC are highlighting a rapid deterioration of external debt indicators in a growing number of post-completion point countries [Sun (2004), World Bank (2006)].<sup>36</sup> In this regard, the established causality between capital flight and external debt may strengthen ongoing efforts to increase domestic resource mobilization and savings in support of investment and growth, and enhance the long-run sustainability of HIPC threshold indicators.

# **V. Conclusion** :

In the face of long-run and persistent co-movements of capital flight and external debt, which both increased dramatically in Sub-Saharan Africa, this paper investigates the covariation and nature of the association between the two series, using nonparametric methods and Granger causality error correction models. The dramatic increase of these two series had significant implications for investments and growth in the region. In particular, they have been accompanied by sustained periods of economic downturns characterized by decumulation of capital stock and balance of payment crisis. Ultimately, they propelled numerous countries into a debt crisis in the 1990s, with many of them seeking eligibility to the HIPC initiative when their external debt became unsustainable.

The focus on a causal relationship between these two series undertaken by this study could shed some light on the causes and origins of capital flight and avert another cycle of external indebtedness in countries which reached the completion point under the HIPC initiative. Indeed, the study spans a period of more than three decades and covers a relatively large sample of countries, including HIPC and non-HIPC countries. It is based on the most recent data on capital flight, and hence allows extension of the analysis to the HIPC completion point era, when a number of severely indebted countries acceded to debt relief.

This framework also assesses the nature and the existence of a possible long-run relationship between the two series. This assessment is undertaken by first applying the Spearman Rank Correlation test to the data. The application of this test to the bivariate time series reveals the existence of a direct positive association between capital flight and external debt. The nonparametric rank correlation test rejects the null hypothesis that the distributions underlying the movements of the two series are independent and identically distributed, in favor of the alternative direct positive association. Under this alternative, the underlined co-movement of the two series is consistent with inference from revolving door models, especially to the extent that debt-driven or fueled capital fight or alternatively flight-driven or fueled external indebtedness require that the two series have a common trend.

At the same time, revolving door models implicitly assumed the existence of causality and possibly dual causality. This assumption is tested using Granger causality error correction models as the Phillips-Perron Unit Root test reveals the presence of a co-integrating relationship in the distributions of external debt and capital flight in the majority of countries. While the null hypothesis of non-causal relationship is rejected, the error correction Granger causality test overwhelmingly 36 A review by the World Bank Independent Evaluation Group conducted in 2006, found that the key indicators of external debt sustainability have deteriorated significantly and quite rapidly in a sizable number of post-HIPC Completion Point countries. In some of these countries, these ratios once again come to exceed HIPC thresholds. This evaluation concluded that debt reduction alone is not a sufficient instrument to affect the multiple drivers of debt sustainability, and call for investment booms in support of export diversification, sound fiscal management, terms of new financing and improved public debt management. However, the success of these measures will be mitigated if fiscal and public debt management initiatives do not emphasize policies to prevent and reverse capital flight.

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