Illicit financial flows in Africa: linkages with terrorist activity and public investment

This study aims to analyse the effect of illicit financial flows on public investment in Africa. It also examines the indirect effect of illicit financial flows through their effect on terrorist activities. The empirical strategy relies on fixed effects regressions as well as on three-stage least squares (3SLS) regressions using panel data from 38 African countries from 2002 to 2019. The estimation results show that illicit financial flows have a significant and negative effect on public investment, whereas illicit financial flows, especially illicit financial inflows, have a positive and significant effect on terrorism activity. However, we find no evidence that terrorist activity has a significant effect on public investment. These findings are qualitatively robust with respect to alternative estimation strategies. The main policy implication of these findings is that, to increase public investment and reduce terrorist financing, African governments should pool and intensify their efforts to combat illicit financial flows.