capital flight

Capital flight

Capital flight, in economics, occurs when assets ormoney rapidly flow out of a country, due to an event ofeconomic consequence. Such events could be an increasein taxes on capital or capital holders or the government ofthe country defaulting on its debt that disturbs investorsand causes them to lower their valuation of the assets inthat country, or otherwise to lose confidence in its eco-nomic strength.This leads to a disappearance of wealth, and is usuallyaccompanied by a sharp drop in the exchange rate of theaffected country - depreciation in a variable exchange rateregime, or a forced devaluation in a fixed exchange rateregime.This fall is particularly damaging when the capital belongsto the people of the affected country, because not onlyare the citizens now burdened by the loss of faith in theeconomy and devaluation of their currency, but probablyalso their assets have lost much of their nominal value.This leads to dramatic decreases in the purchasing powerof the country’s assets andmakes it increasingly expensiveto import goods.

1 Discussion

1.1 Legality

Capital flight may be legal or illegal under domestic law.Legal capital flight is recorded on the books of the entityor individual making the transfer, and earnings from in-terest, dividends, and realized capital gains normally re-turn to the country of origin. Illegal capital flight, alsoknown as illicit financial flows, is intended to disappearfrom any record in the country of origin and earnings onthe stock of illegal capital flight outside of a country gen-erally do not return to the country of origin.

1.2 Capital flight within a country

Capital flight is also sometimes used to refer to the re-moval of wealth and assets from a city or region withina country. Post-apartheid South African cities are proba-bly themost visible example of this phenomenon. Nigeriain particular has been abandoned by business moving tonorthern suburbs. The flight of capital from central citiesto the suburbs that ring them was also common through-out the second half of the twentieth century in the UnitedStates.

2 Examples

Ratio of German assets in tax havens to German GDP.[1] The“Big 7” shown are Hong Kong, Ireland, Lebanon, Liberia,Panama, Singapore, and Switzerland.

In 1995, the International Monetary Fund (IMF) esti-mated that capital flight amounted to roughly half of theoutstanding foreign debt of the most heavily indebtedcountries of the world.Capital flight was seen in some Asian and Latin Ameri-can markets in the 1990s. The Argentine economic crisisof 2001 was in part the result of massive capital flight, in-duced by fears that Argentina would default on its externaldebt (the situation was made worse by the fact that Ar-gentina had an artificially low fixed exchange rate and wasdependent on large levels of reserve currency). This wasalso seen in Venezuela in the early 1980s with one year’stotal export income leaving through illegal capital flight.In the last quarter of the 20th century, capital flight wasobserved from countries that offer low or negative realinterest rate (like Russia and Argentina) to countries thatoffer higher real interest rate (like the People’s Republicof China).A 2006 article in The Washington Post gave several ex-amples of private capital leaving France in response tothe country’s wealth tax. The article also stated, “EricPinchet, author of a French tax guide, estimates thewealth tax earns the government about $2.6 billion a yearbut has cost the country more than $125 billion in capitalflight since 1998.”[2]

A 2008 paper published by Global Financial Integrity es-timated capital flight, also called illicit financial flows tobe “out of developing countries are some $850 billion to$1 trillion a year.”[3]

A 2009 article in The Times reported that hundreds ofwealthy financiers and entrepreneurs had recently fledthe United Kingdom in response to recent tax increases,and had relocated in low tax destinations such as Jersey,

1

2 5 EXTERNAL LINKS

Guernsey, the Isle of Man, and the British Virgin Is-lands.[4]

In May 2012 the scale of Greek capital flight in the wakeof the first “undecided” legislative election was estimatedat €4 billion a week[5] and later that month the SpanishCentral Bank revealed €97 billion in capital flight fromthe Spanish economy for the first quarter of 2012.[6]

3 See also• Sudden stop (economics)

• Human capital flight (brain drain)

• Tax exporting

• Capital strike

• Illicit financial flows

4 References[1] Shafik Hebous (2011) “Money at the Docks of Tax

Havens: A Guide”, CESifo Working Paper Series No.3587, p. 9

[2] Moore, Molly; “Old Money, NewMoney Flee France andIts Wealth Tax"; Washington Post Foreign Service; July16, 2006; Page A12

[3] Illicit Financial Flows From Developing Countries: 2002-2006, Dev Kar and Devon Cartwright-Smith, 2008

[4] Hundreds of bosses flee UK over 50% tax, The Times,December 13, 2009

[5] Greek Euro exit looms closer as banks crumble

[6] €100 billion in Spanish capital flight and ECB inertia

5 External links• Capital flight after revolution Anarchist view of cap-ital flight

• McLeod, Darryl (2002). “Capital Flight”. In DavidR. Henderson (ed.). Concise Encyclopedia of Eco-nomics (1st ed.). Library of Economics and Liberty.OCLC 317650570, 50016270 and 163149563

• European Network on Debt and Development re-ports, news and links on capital flight.

• Global Financial Integrity: Studies andworks to cur-tail illicit capital flight from developing countries.

3

6 Text and image sources, contributors, and licenses

6.1 Text• Capital flight Source: https://en.wikipedia.org/wiki/Capital_flight?oldid=668106356 Contributors: Roadrunner, Lightning~enwiki, Rob-bot, Goodralph, Pablo-flores, Ich, Bender235, Maurreen, Jerryseinfeld, Bobrayner, Scjessey, Nightscream, Ksyrie, Passdoubt, Anwar saa-dat, Tazmaniacs, IronGargoyle, Catquas, Eastlaw, King of the North East, Djstreet, Cydebot, R'n'B, Funandtrvl, Ravensfire, Grundle2600,Rinconsoleao, The Thing That Should Not Be, Dthomsen8, Cowan50, Realdoors44, MrOllie, Lightbot, Luckas-bot, Yobot, AnomieBOT,Eurodad Brussels, Xqbot, Srich32977, AnnH36, Howsa12, Operdyne7, Surv1v4l1st, Weetoddid, Dinamik-bot, Beyond My Ken, Ocaasi,Erianna, EdoBot, ClueBot NG, KLBot2, PhnomPencil, Onepebble, Frosty, Cupco, Manybytes, Okramprasantasingh and Anonymous: 29

6.2 Images• File:German_GDP_in_tax_havens.png Source: https://upload.wikimedia.org/wikipedia/commons/a/af/German_GDP_in_tax_havens.png License: Public domain Contributors: “Money at the Docks of Tax Havens: A Guide”, CESifo Working Paper Series No. 3587, p. 9Original artist: Shafik Hebous, Goethe University Frankfurt, Faculty of Economics and Business Administration

6.3 Content license• Creative Commons Attribution-Share Alike 3.0