This paper explains the simultaneous occurrence of large external debts, private capital outflows and low domestic capital formation. We consider a general equilibrium model in which two government types with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates capital flight and small domestic investment, and induces the government to overaccumulate external debt. The model also predicts that left-wing governments are more inclined to restrict capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium and how debt repudiation may occur after a regime change.; Economics
This paper analyzes the joint behavior
of international capital flows by foreign and domestic
agents -- gross capital flows -- over the business cycle and
during financial crises. The authors show that gross capital
flows are very large and volatile, especially relative to
net capital flows. When foreigners invest in a country,
domestic agents tend to invest abroad, and vice versa. Gross
capital flows are also pro-cyclical, with foreigners
investing more in the country and domestic agents investing
more abroad during expansions. During crises, especially
during severe ones, there is retrenchment, that is, a
reduction in both capital inflows by foreigners and capital
outflows by domestic agents. This evidence sheds light on
the nature of shocks driving capital flows and helps
discriminate among existing theories. The findings seem
consistent with shocks that affect foreign and domestic
agents asymmetrically, such as sovereign risk and asymmetric information.
Can a brain drain be good for
development? Many studies have established the theoretical
possibility of such a brain gain. Yet it is only recently
that the relaxation of data constraints has allowed for
sound empirical assessments. In utilizing the dramatic
policy change that accompanied European Union accession as a
natural experiment, this paper is able to assuage fears of
reverse causality between migration and human capital
formation. The results highlight a significant impact of
European Union accession on human capital formation
indicating that the prospect of migration can indeed fuel
skill formation even in the context of middle-income
economies. And, if accompanied by policies to promote return
migration, as well as a functioning credit market to enable
private investment, international labor mobility could
represent a powerful tool for growth.
Despite the recent increase in capital
flows to Sub-Saharan Africa, the region remains largely
marginalized in financial globalization and chronically
dependent on official development aid. And with the
potential decline in the level of official development
assistance in a context of global financial crisis, the need
to increase domestic resources mobilization as well as
non-debt generating external resources is critical now more
than ever before. However, the debate on resource
mobilization has overlooked an important untapped source of
funds consisting of the massive stocks of private wealth
stashed in Western financial centers, a substantial part of
which left the region in the form of capital flight. This
paper argues that the repatriation of flight capital should
take a more prominent place in this debate from a moral
standpoint and for clear economic reasons. On the moral
side, the argument is that a large proportion of the capital
flight legitimately belongs to the Africans and therefore
must be restituted to the legitimate claimants. The economic
argument is that repatriation of flight capital will propel
the sub-continent on a higher sustainable growth path while
preserving its financial stability and without mortgaging
the welfare of its future generations through external
borrowing. The analysis in the paper demonstrates
quantitatively that the gains from repatriation are large
and dominate the expected benefits from other sources such
as debt relief. It is estimated that if only a quarter of
the stock of capital flight was repatriated to Sub-Saharan
Over the past few decades, the foreign
liabilities of the majority of countries in Sub-Saharan
Africa have grown dramatically, propelling most nations into
the status of Highly Indebted Poor Countries, when these
liabilities reached unsustainable levels in the 1990s. At
the same time, increases in capital flight from the region
followed a parallel trend, leading scholars to draw on
"revolving door" models to explain the apparent
positive covariation of external debt and capital flight in
the region. This paper investigates the causality between
external debt and capital flight in a cross-section of
Sub-Saharan African countries using co-integration and
error-correction models. Although dual causality, which is
consistent with the revolving door hypothesis, cannot be
rejected for the majority of countries, empirical evidence
highlights the lead of external debt over capital flight.
The significance of error-correction terms points to a
long-run co-integrating relationship between external debt
and capital flight in a large number of countries.
Despite the substantial recent increase in capital flows to sub-Saharan Africa (SSA), the sub-continent remains largely marginalized in financial globalization and chronically dependent on official development aid. The current debate on resource mobilization for development financing in Africa has overlooked the problem of capital flight, which constitutes an important untapped source of funds. This paper argues that repatriation of flight capital deserves more attention on economic as well as moral grounds. On the moral side, the argument is that a large proportion of the capital flight legitimately belongs to the African people and therefore must be restituted to the legitimate claimants. The economic argument is that repatriation of flight capital will contribute to propelling the sub-continent on a higher sustainable growth path while preserving its financial stability and independence and without mortgaging the welfare of its future generations through external borrowing. The anticipated gains from capital repatriation are large. In particular, this paper estimates that if only a quarter of the stock of capital flight was repatriated to SSA, the sub-continent would go from trailing to leading other developing regions in terms of domestic investment. The paper proposes some strategies for inducing capital flight repatriation...
The author provides empirical evidence
on the effects of inflation on post-war capital flight
flows. He tests the hypothesis that inflation has a positive
additional impact on capital flight flows after war. He uses
a new panel dataset of 77 developing countries, of which 35
experienced at least one episode of war between 1971 and
2000. The author uses a range of estimation methods and four
capital flight measures-Cline, World Bank Residual, Morgan
Guarantee, and Dooley. The results consistently support the
research hypothesis: Post-war inflation increases annual
capital flight flows by about 0.005 to 0.01 percentage
points of GDP. This effect is substantial in total at high
inflation rates. The implication is that low inflation helps
to curb capital flight in post-conflict economies.
Malaysian authorities implemented
controls on international capital flows late in the Asian
crisis, when most of the portfolio outflows had already
occurred. The exchange rate had depreciated sharply and was
fixed at an undervalued level, making further capital flight
unlikely. The turnaround in the stock market, the return of
positive GDP growth, the building of reserves, and the
relaxation of interest rates all coincided with the
imposition of controls. But the same changes took place in
other crisis countries that did not follow the same control
policies. However, the controls provided insurance against
the consequences of possible further disturbances. They
created a breathing space for making needed reforms, and the
authorities made good use of this time, stabilizing the
financial system and pushing ahead with regulatory and
supervisory reform for the financial sector and capital
markets - a prerequisite for fully liberalizing the capital
account. Malaysia incurred a cost: an additional 300 basis
point spread paid on floating rate debt for a period after
the controls were instituted. But the exit strategy has so
far not resulted in lasting flight of portfolio capital.
Foreign direct investment remains below precrisis levels...
Private inspection of international
shipments has been used over the last half-century for a
variety of purposes. These include prevention of capital
flight and improvement of import duty collection, among
others. The existing literature has failed to find much
impact of these inspection programs on collected tariff
revenue or corruption at the border. This paper explores the
"facilitation" effect of private inspection
programs on trade. The results indicate that private
inspection has a positive and significant trade-facilitation
effect. These programs raise import volumes for countries
using them by approximately 2 to 10 percent. The findings
here also suggest that the benefit of private inspection of
imports may be associated with reforms and best practices
applied by private inspection firms. Private firms'
inspection of cargo may promote faster clearance times and
process reliability, rather than improved tax collection.
Indonesia's recovery was already
slowing several months before the events of September 11.
Political instability had raised social tensions and slowed
reforms--fueling capital flight, alarming investors, and
delaying official external finance for development. Progress
on bank restructuring had slowed and the debt of financially
strapped corporations remained largely unresolved.
Corruption flourished, unchecked by a justice system that
itself was corroded. Regional tensions increased even as the
country embarked upon an ambitious decentralization program.
And, if real wages are any indication, progress on poverty
reduction--encouraging in 1999 and 2000-ground to a halt.
Although markets initially welcomed President Megawati
Soekarnoputri into office, the new administration has made
little progress on structural and governnance reforms in her
first one hundred days in office, thus renewing nervousness
in markets and worrying external donors and creditors. The
events of September 11 have emphatically underscored the
urgency of Indonesia's reform priorities. but donors
need to be realistic about what is feasible...
Reviews the literature on what happens to capital flight before, during, and after violent conflict and its implications for post-conflict economic recovery since by the end of the conflict a considerable amount of capital could have accumulated abroad. Capital flight refers to outflows of private capital from developing countries and is viewed as 'hot money' fleeing political and financial crisis, heavier taxes, capital controls, currency devaluation, or hyperinflation. Issues concern how to measure capital flight with multiple measures proposed depending on whether the estimator deems it a flow or stock. Capital flight is often studied as a portfolio-choice decision relative to a risk-adjusted expected return, which violent conflict directly affects by increasing the riskiness of the domestic environment, reducing risk-adjusted expected return, and thereby inducing capital flight. Indirectly, violent conflict affects the portfolio-choice framework by its impact on inflation and public debt. For countries facing much higher wartime inflation rates, much bigger reductions in capital flight could be realized through larger cuts in inflation.
This article sets flight capital in the
context of portfolio choice, focusing on the proportion of
private wealth that is held abroad. There are large regional
differences in this proportion, ranging from 5 percent in
South Asia to 40 percent in Africa. The authors explain
cross-country differences in portfolio choice using
variables that proxy differences in the risk-adjusted rate
of return on capital. They apply the results to three policy
issues: how the East Asian crisis affected domestic capital
outflows; the effect of the International Monetary
Fund-World Bank debt relief initiative for heavily indebted
poor countries on capital repatriation; and why so much of
Africa's private wealth is held outside the continent.
The extent of bureaucracy varies
extensively across countries, but the quality of bureaucracy
within a country changes more slowly than economic policies.
The authors propose that the quality of bureaucracy may be
an important structural determinant of open economy
macroeconomic policies - especially the imposition or
removal of capital control. In their model, capital controls
are an instrument of financial repression. They entail
efficiency loss for the economy but also generate implicit
revenue for the government. The results show that
bureaucratic corruption translates into the
government's reduced ability to collect tax revenues.
Even if capital controls and financial repression are
otherwise inefficient, the government still has to rely on
them to raise revenues to provide public goods. Among the
countries for which the authors could get relevant data,
they find that the more corrupt ones are indeed more likely
to impose capital controls, a pattern consistent with the
model's prediction. To deal with possible reverse
The authors investigate the relationship
between weak growth performance and low investment rates in
Africa. The cross-country evidence suggests no direct
relationship. The positive and significant coefficient on
private investment appears to be driven by Botswana's
presence in the sample. Allowing for the endogeneity of
private investment, controlling for policy, and positing a
nonlinear relationship make no difference to the conclusion.
Higher investment in Africa would not by itself produce
faster GDP growth. Africa's low investment and growth
rates seem to be symptoms of underlying factors. To
investigate those factors and to correct for some of the
problems with cross-country analysis, the authors undertook
a case study of manufacturing investment in Tanzania. They
tried to identify why output per worker declined while
capital per worker increased. Some of the usual
suspects--such as shifts from high- to low-productivity
subsectors, the presence of state-owned enterprises, or poor
polices--did not play a significant role in this decline.
This Note briefly examines the dynamic
interaction that can develop between pension funds and
capital markets. Pension funds are not only a source of
long-term savings to support the development of bond and
equity markets. They can also be a positive force for
innovation, for corporate governance, and for privatization.
In turn, capital markets offer pension funds the opportunity
for better portfolio returns and risk management. This
interaction is a long, self-reinforcing process that builds
on sound macroeconomic policies, effective regulatory
reforms, as well as robust accounting, legal, and
information infrastructure. The key message for
policymakers is that pension reform should be part of a
broad reform program. It need not be delayed until capital
markets are well established. But, equally important, large
quantities of state assets should not be transferred to
newly formed private pension funds without first taking
steps to develop robust and well-regulated capital markets.
Chile's gradual approach to investment deregulation is
a good model for developing countries introducing mandatory
but decentralized pension systems.
The author presents evidence that balance sheet effects are critical determinants of both the likelihood of a crisis and of income losses following a crisis. She tests the validity of "insurance" and "liquidity" models of currency crisis. Both models predict that the occurrence of a balance of payments crisis is conditional on the health of the nation's accounts in relation to the rest of the world. Problems in the balance sheet either cause a financial crisis that develops into a run on the central bank, or generate a run on the central bank once contingent liabilities exceed reserves and the yield differential moves against domestic assets. Estimations of crisis likelihoods based on several specifications of single and simultaneous equation probit models confirm that output losses following the crisis are persistent and conditional on the balance sheet indicator, that is, the ratio of the stock of gross external liabilities to assets. Measures of contingent liabilities, capital flight, and financial depth perform well as crisis predictors, and the marginal effects on the probability of a crisis are of the expected sign. The panel data set covers the time period 1973 through 2003 for 90 countries.
O objetivo da dissertação é avaliar a mudança quantitativa e qualitativa no grau de vulnerabilidade externa do balanço de pagamentos do Brasil a crises de fuga de capital de 1990 a 2010, tendo em vista a maior facilidade de movimentação e transferência dos estoques de riqueza do país. Tal mudança está associada à forma de integração da economia ao mercado externo e às reformas neoliberais, que acarretaram em uma maior integração do Brasil no mercado financeiro internacional e nos fluxos de investimento direto. A maior mobilidade dos capitais, produtivos e financeiros, alterou o perfil e o comportamento do capital internacional, o que está refletido na maior volubilidade do passivo externo e, em alguma medida, do estoque interno de riqueza. Levando em consideração as profundas mudanças no capitalismo contemporâneo, o estudo passa pelas transformações estruturais da economia e pelas mudanças que alteraram seu grau de abertura financeira e, assim, elevaram o potencial de saída dos estoques de riqueza do país, com sérias consequências sobre a dependência financeira do país.; This dissertation aims to examine the quantitative and qualitative changes in the Brazilian balance of payments? vulnerability degree to capital flight crisis...
Many policy makers seem to prefer domestic alternatives to cross-broder mergers. Can such sentiments make sense? We contruct a model where cross-border mergers drive down union-set wages, where domestic mergers have larger non-labour cost synergies than international ones, and where policy evaluators care more about workers than capital owners. Apparently, the stage is set for national champion policies to be sensible. However, we also introduce the possibility of capital flight in the sense that a domestic firm can physically move its production out of the country. Restrictive cross-border merger policies can then seriously backfire, since they do not necessarily bring about a domestic merger - but capital flight instead.; NIPE – Núcleo de Investigação em Políticas Económicas – is supported by the Portuguese Foundation for Science and Technology through the Programa Operacional Ciência e Inovação 2010 (POCI 2010) of the III Quadro Comunitário de Apoio (QCA III), which is financed by FEDER and Portuguese funds.
Many policy makers seem to prefer domestic alternatives to cross-border mergers.Weconstruct
a model where cross-border mergers drive down union-set wages, domestic mergers have nonlabour
cost synergies and policy evaluators care more about workers than capital owners.
Apparently, the stage is set for “national champion” policies to be sensible. However, we also
introduce the possibility of capital flight by allowing a domestic firm to move production abroad.
Restrictive cross-border merger policies can then seriously backfire, since they do not
necessarily bring about a domestic merger — but capital flight instead.; Fundação para a Ciência e a Tecnologia (FCT)
This paper provides an updated assessment of capital flight from Papua New Guinea. It reviews methods of measuring capital flight and suggests that balance of payments data on capital flows give a more revealing picture than the residuals method used by most authors. A case study of the Lihir gold mining project, using recent data on equity flows, suggests that most apparent capital flight from Papua New Guinea is the result of the continuous depreciation of the kina since 1994.