Some Remarks on the Definition and Magnitude of Recent Capital Flight from Developing Countries

Abstract

Some Remarks on the Definition and Magnitude of Recent Capital Flight from Developing Countries

The magnitude of capital flight flows suggest that they are a response to asymmetric risk. What many capital flight afflicted countries have really experienced is “round tripping” of flows. If these flows are being interpreted as a real transfer then the outflows should have occured over a considerably longer period of time. The argument that capital flight results in a loss to the economy in terms of investment is weak since outflows were matched by inflows of foreign borrowing. Recent years, however, witnessed a decline in international bank lending. Further research is needed to investigate the consequences of this on the type of capital flight taking place. An adequate estimating model needs to be developed to measure a resource transfer which might occur when inflows of capital taper down. If Method I is to be adopted then we have to develop a technique to separate commercial credits and normal portfolio diversification induced flows from the capital flight estimate. Policies to control and eradicate the problem need a clear understanding of the type of capital flight being transacted. An a priori choice of definition would cloud our understanding. The choice should depend upon the particular historical episode and country under investigation. A country could experience a one-way flow or two-way flows. The first entails an improvement in the overall investment climate brought about by macroeconomic adjustment. Bi-directional flows as analysed in the capital flight context require policies that root out the causes leading to discriminatory treatment of domestic capital. Solution to the problem will be greatly enhanced by an understanding of the phenomenon