Capital flight often affects a particular sector of society. Many of the poorest members cannot afford to withdraw their capital. In the last quarter of the 20th century, there was a flight of capital from countries with low or negative real interest rates (such as Russia and Argentina) to countries with higher real interest rates (such as the People`s Republic of China). A 2008 article published by Global Financial Integrity estimated that capital flight, also known as illicit financial flows from developing countries, « is about $850 billion to $1 trillion a year. » [7] It is important to mention that capital flight can refer to the withdrawal of domestic and foreign capital. The phenomenon can be short-lived or last for decades. The definition of capital flight refers to an economic phenomenon characterized by large outflows of capital or financial assets from the country. It can be triggered by various events, such as an economic or political crisis, currency devaluation, the introduction of capital controls, or macroeconomic development that leads to a major shift in investor sentiment. Although exporting countries often exaggerate the adverse consequences of capital flight, there are some legitimate concerns. Unlike capital movements from Texas to New York, rapid international capital flows can disrupt financial markets and raise interest rates by causing unexpected movements in exchange rates, especially in smaller countries. In addition, an unknown part of international money transfers is due to tax evasion or efforts to conceal illegal profits or the misappropriation of public funds.
The foreign possessions of the Philippine Marcos family fall into this category. The use of offshore banks and Swiss accounts for tax evasion and money laundering affects all international capital flows to some extent. Argentina`s 2001 economic crisis was partly the result of a massive capital flight triggered by fears that Argentina would default on its external debt (the situation was exacerbated by the fact that Argentina had an artificially low fixed exchange rate and depended on large amounts of reserve currency). This was also seen in Venezuela in the early 1980s, when the entire export earnings of a year were subjected to illegal capital flight. There are 4 main effects of capital flight. They are:1. Lower investment2. Lower tax revenues3. Weakened currency4. Economic impact Many reasons can eventually lead to capital flight. Factors that can trigger capital outflows can generally be classified as economic or political. These include political turbulence, aggressive or discriminatory policies, a significant increase in taxes or a fall in interest rates.
Any event or combination thereof may encourage the withdrawal of significant capital. Since the Third World debt crisis in the eighties, the term « capital flight » has been applied more broadly to capital outflows from residents of developing countries. One of the reasons capital fled debtor countries is that domestic investors felt that their government would prioritize their external debt obligations, not their domestic obligations. This contrasts with previous experience with foreign direct investment, when domestically held assets were considered safe from expropriation, while foreign assets were threatened. An example of capital flight occurred in late 1997 and 1998, when Indonesia, Korea, Malaysia, the Philippines and Thailand recorded net capital outflows of more than $80 billion. Conversely, illegal capital flight usually occurs in the form of illicit financial flows (IFFS). Essentially, illicit financial flows disappear from records within a country and do not return to the country. Note that illegal capital outflows are mainly associated with countries that have strict capital control policies. The effects of capital flight on developing countries are much more pronounced because capital is scarce.
A $1 billion investment is much larger for countries like Vietnam than for the United States. So what we see as a result of capital flight are significant economic impacts that tend to have a greater impact on developing countries. High taxes on wealth and wealth can encourage wealthy investors to move their savings abroad to avoid taxes. This type of capital flight may or may not be legal. For example, the wealth tax in France resulted in an outflow of money to avoid tax. In the book Africa`s Odious Debt: Commentary Debt and Capital Flight Bled a Continent (Amalion 2013), Léonce Ndikumana and James K. Boyce argue that more than 65% of debt borrowed in Africa does not even end up in African countries, but remains in private bank accounts in tax havens around the world. [10] Ndikumana and Boyce estimate that capital flight from 33 sub-Saharan countries totalled $700 billion between 1970 and 2008. [11] Now, it may not seem so bad if these investments have already been made. For example, Company A can sell its factory in China and withdraw its capital.
The factory is still there, so the Chinese economy has already benefited. However, we must also keep in mind that capital flight also means that investors are just as reluctant to invest in the first place. If we look at the France, for example, President Hollande raised taxes on the rich in 2012. In return, nearly €53 billion of huge capital flight left the country in the first two months. There are two types of capital flight: legal or illegal. Legal capital flight usually takes the form of repatriation of capital invested by foreign investors. In this case, capital outflows must be duly reported in accordance with existing accounting standards and the laws of the country. The term « capital flight » encompasses a number of situations.
It can refer to an exodus of capital, either from an entire nation, region, or from a group of countries with similar fundamentals. It can be triggered by a country-specific event or by macroeconomic development that leads to a massive shift in investor preferences. It can also be short-lived or last for decades. Not surprisingly, episodes of capital flight are more frequent when exchange rates are unstable. In the twenties and thirties, the decline of the gold standard led to numerous speculative attacks against the French franc and the German mark. When the Bretton Woods system of fixed exchange rates began to disintegrate in the late sixties, the United States sought to defend the dollar with capital controls and reject requests from foreign banks to convert dollars into gold. (U.S. citizens were already banned from owning gold.) After the publication of exchange rates in 1973, the US dollar replaced gold as the aviation vehicle of choice.
Convertible into most currencies, dollars also earn interest in convenient offshore or Eurodollar accounts. When the capital leaves the country, there is less to invest in the domestic market. At the same time, this means that the level of foreign direct investment is also decreasing. Investors both look to other countries to invest and withdraw their capital. Capital flight is a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls. Capital flight can be legal, as is the case when foreign investors return capital to their home countries, or illegal, which happens in economies where capital controls restrict the transfer of assets out of the country. Capital flight can place a heavy burden on the poorest countries, as lack of capital hampers economic growth and can lead to lower living standards. Paradoxically, the most open economies are the least vulnerable to capital flight, as transparency and openness enhance investor confidence in the long-term prospects of these economies. Economists also suspect that countries whose economies depend primarily on natural resources are more likely to experience capital outflows. The reason for this is that natural resource prices are subject to a high degree of volatility, which can have a significant impact on the investment environment. Governments use several strategies to deal with the consequences of capital flight.
For example, they introduce capital controls that restrict the flow of their currency outside the country. However, this may not always be an optimal solution, as it could put more strain on the economy and lead to greater panic about the current situation. In addition, the development of supranational technological innovations such as Bitcoin can help circumvent these controls. In addition, the government`s plans to advance nationalization (i.e., seizing private assets and placing them under state control) is another trigger for capital outflows. Policies perceived as discriminatory by a national government can lead to capital and/or asset outflows. Economic or military aggression against another country can lead to sanctions imposed by other countries, followed by capital flight.
