Capital Flight

Definition of Capital Flight – When a large number of people in a country move capital and money from one country to another to avoid an economic catastrophe

Causes of Capital Flight

  • Threat of hyperinflation which could wipe out the value of assets.
  • The threat of compulsory privatisation
  • Fear of rising income and capital gains tax
  • Uncertainty and fears over the future of the economy.
  • Devaluation of the currency – which makes it more attractive to hold foreign currencies which are holding their value.
  • Balance of Payments crisis – a large current account deficit can cause a depreciation in the exchange rate and create motive for capital flight
  • Loss of confidence in the economy.
  • Fall in price of an important commodity. If an economy relies on oil exports for export revenue and tax revenue. If oil prices fall, then the economy could suffer and prices fall significantly.

Capital flight can create a bandwagon effect. If influential people start removing their capital, the economic crisis is often exacerbated and so it encourages others to withdraw capital.

Capital flight often involves a certain sector of society. Many of the poorer members do not have the means to withdraw their capital.

asian-currencies 1997-98

Examples of Capital Flight

 

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