New Analysis of Capital Flight from Saudi Arabia: The Relation with Long-Term Economic Performance

Abstract

This research provides new estimates of illicit capital flight from Saudi Arabia using the Residual methodology and accounts for the social opportunity cost of those unregulated funds in terms of forgone economic growth by utilizing the Incremental Capital-Output Ratio (ICOR) approach. The empirical findings reveal that over the period 1971-2015, capital flight from Saudi Arabia reached over 212 billion of 2010 USD, causing an annual average of 3.57 percent of wasted potential additional economic growth for the same period. When considering the median instead, an incremental 1.72 percent would have been added annually to the aggregate output growth in Saudi Arabia had capital flight not taken place with the observed pattern during the analysis period. The research concludes with important suggestions for extending this work and crucial remarks for policymakers to tackle unregulated cross-border capital flows and minimize the related consequences. Critical policy measures include coordination with trading partners and key investment destination for Saudi capital flows, as well as strengthening of the regulatory framework for cross-border financial transactions based on best international practices.