Capital flight, ineconomics, is the rapid flow ofassets ormoney out of a country, due to an event of economic consequence or as the result of a political event such asregime change. Such events could be erratic or untrustworthy behavior by leadership, an increase intaxes oncapital or capital holders or the government of the countrydefaulting on its debt that disturbsinvestors 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 forceddevaluation 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 in the economy and devaluation of their currency but their assets have lost much of theirnominal value. This leads to dramatic decreases in thepurchasing power of the country's assets and makes it increasingly expensive to import goods and acquire any form of foreign facilities, e.g. medical facilities.
Countries withresource-based economies experience the largest capital flight.[1] A classical view on capital flight is that it is currencyspeculation that drives significant cross-border movements of private funds, enough to affectfinancial markets.[2] The presence of capital flight indicates the need forpolicy reform.[3]
In the bookLa dette odieuse de l'Afrique (Africa's Odious Debts),Léonce Ndikumana andJames K. Boyce argue that more than 65% of Africa's borrowed debts do not even get into countries in Africa, but remain in private bank accounts in tax havens all over the world.[4] Ndikumana and Boyce estimate that from 1970 to 2008, capital flight from 33sub-Saharan countries totalled $700 billion.[5] A 2008 paper published byGlobal Financial Integrity estimated capital flight, also calledillicit financial flows to be "out of developing countries are some $850 billion to $1 trillion a year."[6]
Capital flight also takes place in order to evade taxes. In such cases, the flow tends to go in the direction oftax havens.
Capital flight may be legal or illegal under domestic law. 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 asillicit 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. It is indicated as missing money from a nation'sbalance of payments.[8]
In 1995, theInternational 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.[citation needed]
Capital flight was seen in someAsian andLatin American markets in the 1990s. Perhaps the most consequential of these was the1997 Asian financial crisis that started inThailand and spread through much of East Asia beginning in July 1997, raising fears of a worldwide economic meltdown due tofinancial contagion.[citation needed]
In the last quarter of the 20th century, capital flight was observed from countries that offer low or negativereal interest rate (likeRussia and Argentina) to countries that offer higher real interest rate (like thePeople's Republic of China).[citation needed]
A 2006 article inThe Washington Post gave several examples of private capital leavingFrance in response to the country'swealth 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."[9]
A 2009 article inThe Times reported that hundreds of wealthy financiers and entrepreneurs had recently fled England, Wales and Scotland in response to recent tax increases, and had relocated in low tax destinations such asJersey,Guernsey, theIsle of Man, and theBritish Virgin Islands.[10]
In May 2012 the scale ofGreek capital flight in the wake of the first"undecided" legislative election was estimated at €4 billion a week[11] and later that month theSpanish Central Bank revealed €97 billion in capital flight from theSpanish economy for the first quarter of 2012.[citation needed]
In the run up to the British referendum on leaving the EU (Brexit) there was a netcapital outflow of £77 billion in the preceding two quarters, £65 billion in the quarter immediately before the referendum and £59 billion in March when the referendum campaign started. This corresponds to a figure of £2 billion in the equivalent six months in the preceding year.[12]
