Impact of illicit financial flows related to extractive commodity trade on Africa’s productive capacity: The moderating role of governance

Abstract This study adopted both dynamic and static panel methods to assess the role of governance in moderating the effects of disaggregated illicit financial flows (IFFs) on productive capacity in Africa. The study spans 38 African countries between 2010 and 2021. The analysis employs dynamic system GMM to ensure robust model specification, address omitted variable bias, and prevent instrument proliferation. To reinforce the reliability of the results, Driscoll-Kraay standard errors with fixed effects are used as a robustness check. The findings reveal a dual impact of IFFs on productive capacity. On the one hand, illicit financial inflows are associated with an increase in productive capacity, and under good governance, illicit financial inflows remain beneficial for the region's productive capacity by potentially fueling investment and economic activity. On the other hand, illicit financial outflows are associated with a decline in productive capacity. These illicit outflows are consistently detrimental, even in the presence of quality governance. This study recommends fighting and regulating illicit flows that currently bypass official systems and improving governance mechanisms. These measures are essential to promote transparency, strengthen accountability, and ensure economic equity for a more just and effective system. Additional insights and their policy implications are discussed within the framework of the Sustainable Development Goals (SDGs) and Africa’s Agenda 2063, to support efforts aimed at enhancing the region’s productive capacity.