capital flight

Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength. This leads to a disappearance of wealth and is usually accompanied by a sharp drop in the exchange rate of the affected country (depreciation in a variable exchange rate regime, or a forced devaluation in a fixed exchange rate regime).

This fall is particularly damaging when the capital belongs to the people of the affected country, because not only are the citizens now burdened by the loss of faith in the economy and devaluation of their currency, but probably also their assets have lost much of their nominal value. This leads to dramatic decreases in the purchasing power of the country's assets and makes it increasingly expensive to import goods.

Discussion

Legality

Capital flight may be legal or illegal. Legal capital flight is recorded on the books of the entity or individual making the transfer, and earnings from interest, dividends, and realized capital gains normally return to the country of origin. Illegal capital flight, also known as illicit financial flows, is intended to disappear from any record in the country of origin and earnings on the stock of illegal capital flight outside of a country generally do not return to the country of origin.

Capital flight within a country

Capital flight is also sometimes used to refer to the removal of wealth and assets from a city or region within a country. Post-apartheid South African cities are probably the most visible example of this phenomenon. Johannesburg in particular has been abandoned by business moving to northern suburbs. The flight of capital from central cities to the suburbs that ring them was also common throughout the second half of the twentieth century in the United States.

Recent examples

In 1995, the International Monetary Fund (IMF) estimated that capital flight amounted to roughly half of the outstanding foreign debt of the most heavily indebted countries of the world.

Capital flight was seen in some Asian and Latin American markets in the 1990s. The Argentine economic crisis of 2001 was in part the result of massive capital flight, induced by fears that Argentina would default on its external debt (the situation was made worse by the fact that Argentina has an artificially low fixed exchange rate and was dependent on large levels of reserve currency). This was also seen in Venezuela in the early 1980s with one year's total export income leaving through illegal capital flight.

In the last quarter of 20th century capital flight was observed from countries that offer low or negative real interest rate (like Russia and Argentina) to countries that offer higher real interest rate (like China).

A 2006 article in The Washington Post gave several examples of private capital leaving France in response to the country's wealth tax. The article also stated, "Eric Pinchet, author of a French tax guide, estimates the wealth tax earns the government about $2.6 billion a year but has cost the country more than $125 billion in capital flight since 1998." ^[1]

A 2008 paper published by Global Financial Integrity estimated capital flight, also called illicit financial flows to be "out of developing countries are some $850 billion to $1 trillion a year."^[2]

See also

• Sudden stop (economics)
• Human capital flight (brain drain)
• Tax exporting
• Capital strike
• illicit financial flows

References

1. ^ Moore, Molly; "Old Money, New Money Flee France and Its Wealth Tax"; Washington Post Foreign Service; July 16, 2006; Page A12
2. ^ Illicit Financial Flows From Developing Countries: 2002-2006, Dev Kar and Devon Cartwright-Smith, 2008

External links

• Capital flight after revolution Anarchist view of capital flight
• "Capital Flight" from the Concise Encyclopedia of Economics
• European Network on Debt and Development reports, news and links on capital flight.
• Eurodad: Capital Flight, tax justice and financial regulation
• Global Financial Integrity: Studies and works to curtail capital flight from developing countries.