Capital flight

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Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of economic globalization. Such events could be an increase in taxes on capital or capital holders or the government of the country defaulting on its debt 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.

Contents

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 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 and acquire any form of foreign facilities, e.g. medical facilities.

Discussion

Legality

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 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. It is indicated as missing money from a nation's balance of payments. [1]

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 as a result of high crime and violence rates in black majority cities, and 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 likewise as a result of crime and violence in inner cities.[ citation needed ]

Countries with resource-based economies experience the largest capital flight. [2] A classical view on capital flight is that it is currency speculation that drives significant cross-border movements of private funds, enough to affect financial markets. [3] The presence of capital flight indicates the need for policy reform. [4]

Examples

Ratio of German assets in tax havens to German GDP. The "Big 7" shown are Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, and Switzerland. German GDP in tax havens.png
Ratio of German assets in tax havens to German GDP. The "Big 7" shown are Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, and Switzerland.

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. Perhaps the most consequential of these was the 1997 Asian financial crisis that started in Thailand and spread through much of East Asia beginning in July 1997, raising fears of a worldwide economic meltdown due to financial contagion.

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 had 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 the 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 the People's Republic of 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." [6]

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." [7]

A 2009 article in The Times reported that hundreds of wealthy financiers and entrepreneurs had recently fled the United Kingdom in response to recent tax increases, and had relocated in low tax destinations such as Jersey, Guernsey, the Isle of Man, and the British Virgin Islands. [8]

In May 2012 the scale of Greek capital flight in the wake of the first "undecided" legislative election was estimated at €4 billion a week [9] and later that month the Spanish Central Bank revealed €97 billion in capital flight from the Spanish economy for the first quarter of 2012.

In the book La Dette Odieuse de l'Afrique: Comment l'endettement et la fuite des capitaux ont saigné un continent (Amalion 2013), Léonce Ndikumana and James 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. [10] Ndikumana and Boyce estimate that from 1970 to 2008, capital flight from 33 sub-Saharan countries totalled $700 billion. [11]

In the run up to the British referendum on leaving the EU there was a net capital 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]

See also

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Wealth abundance of value

Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating old English word weal, which is from an Indo-European word stem. The modern concept of wealth is of significance in all areas of economics, and clearly so for growth economics and development economics, yet the meaning of wealth is context-dependent. An individual possessing a substantial net worth is known as wealthy. Net worth is defined as the current value of one's assets less liabilities.

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets. In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after World War II improved exchange rate stability, fostering record growth in global finance.

Deficit spending Spending in excess of revenue

Deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending is a central point of controversy in economics, as discussed below.

Monetary reform

Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system.

An offshore bank is a bank regulated under international banking license, which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale, can be referred to as offshore financial centres. Since OFCs often also levy little or no tax corporate and/or personal income and offer, they are often referred to as tax havens.

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A wealth tax is a tax on an entity's holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts. Typically, liabilities are deducted from an individual's wealth, hence it is sometimes called a net wealth tax. This is in contrast to other tax plans such as an income tax, which is in use by countries like the United States. Wealth taxation plans are in use in many countries around the world and seek to reduce the accumulation of wealth by individuals.

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National accounts Accounting for nations

National accounts or national account systems (NAS) are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting. By design, such accounting makes the totals on both sides of an account equal even though they each measure different characteristics, for example production and the income from it. As a method, the subject is termed national accounting or, more generally, social accounting. Stated otherwise, national accounts as systems may be distinguished from the economic data associated with those systems. While sharing many common principles with business accounting, national accounts are based on economic concepts. One conceptual construct for representing flows of all economic transactions that take place in an economy is a social accounting matrix with accounts in each respective row-column entry.

A currency crisis is a situation in which serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate. The crisis is often accompanied by a speculative attack in the foreign exchange market. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency.

Eurodad organization

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Quantitative easing monetary policy

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Illicit financial flows, in economics, are a form of illegal capital flight that occurs when money is illegally earned, transferred, or spent. This money is intended to disappear from any record in the country of origin, and earnings on the stock of illicit financial flows outside a country generally do not return to the country of origin.

Raymond W. Baker is an American businessman, scholar, author, and "authority on financial crime." He is the founder and president of Global Financial Integrity, a research and advocacy organization in Washington, DC working to curtail illicit financial flows.

Offshore financial centre Corporate-focused tax havens

An Offshore Financial Centre or OFC is defined as a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy. "Offshore" does not refer to the location of the OFC, but to the fact that the largest users of the OFC are nonresident. The IMF lists OFCs as a third class of financial centre, with International Financial Centres (IFCs), and Regional Financial Centres (RFCs); there is overlap.

Amalion is a multilingual independent academic publishing house based in Dakar, Senegal.

Leonce Ndikumana researcher

Leonce Ndikumana of Burundian origin, is a Professor of Economics and specialist in African economy development, macroeconomics, external debt and capital flight.

References

  1. Ajayi, S. Ibi; Léonce Ndikumana (2015). Capital Flight from Africa: Causes, Effects, and Policy Issues. Oxford University Press. p. 3. ISBN   978-0198718550 . Retrieved 5 January 2017.
  2. Epstein, Gerald A. (2005). Capital Flight and Capital Controls in Developing Countries. Edward Elgar Publishing. p. 11. ISBN   9781781008058 . Retrieved 5 January 2017.
  3. McLeod, Darryl (2002). "Capital Flight". In David R. Henderson (ed.). Concise Encyclopedia of Economics (1st ed.). Library of Economics and Liberty. OCLC   317650570 , 50016270 , 163149563
  4. Ul Haque, Nadeem; Pakistan Institute of Development Economics (2009). Brain drain or human capital flight. Pakistan Institute of Development Economics. p. 3. ISBN   978-9694611303 . Retrieved 5 January 2017.
  5. Hebous, Shafik (27 September 2011). "Money at the Docks of Tax Havens: A Guide". CESifo Working Papers (3587): 27. SSRN   1934164 .
  6. Moore, Molly (16 July 2006). "Old Money, New Money Flee France and Its Wealth Tax". The Washington Post. Retrieved 21 September 2019.
  7. Kar, Dev; Cartwright-Smith, Devon (14 December 2008). "Illicit Financial Flows from Developing Countries: 2002-2006". Global Financial Integrity. Retrieved 21 September 2019.
  8. Watts, Robert; Chittenden, Maurice (13 December 2009). "Hundreds of bosses flee UK over 50% tax". The Times. Retrieved 21 September 2019.
  9. Evans-Pritchard, Ambrose (16 May 2012). "Debt crisis: Greek euro exit looms closer as banks crumble". The Telegraph. Retrieved 21 September 2019.
  10. Ndikumana, Léonce; Boyce, James K. (9 April 2013). La dette odieuse de l'Afrique : comment l'endettement et la fuite des capitaux ont saigné un continent (in French). Éd. Amalion. ISBN   978-2-35926-022-9.
  11. Stoddard, Ed (15 March 2012). "RPT-AFRICA MONEY-Should Africa challenge its "odious debts?"". Reuters. Retrieved 21 September 2019.
  12. Conway, Ed (7 June 2016). "EU: Osborne Warning Over Capital Flight Cost". Sky News. Retrieved 21 September 2019.