Global Capital Flight: How, Why and Where?

Dear Colleagues,

While research on capital flight did not draw the academic attention it warranted, it has a long history, associated with socio-economic and political crises in countries. Beginning in the 1980s, Latin American countries, Mexico, Argentina and Brazil, experienced protracted economic challenges originating from the burden of the foreign debt servicing crisis, rooted mostly in capital flight. Its devastating impact led academicians/policymakers to take a fresh look, beginning in the 1980s, as the World Bank, IMF and others started looking into it. Although globalization integrated global financial markets and enabled access to investment funds by countries, some policies were blamed for destabilizing others, e.g., Mexican debt-crisis, 1982, and others, compounded by the collapsed Soviet empire. The latter made the Russian Federation go on a borrowing binge in the 1990s, rekindling a renewed interest in capital flight.

Conceptually, capital flight captures transactions outside “normal” channels. The literature offers two approaches to identify it: (i) transactions driven by currency-risk avoidance rather than specific business risk; and (ii) abnormal capital outflows, reducing domestic investment, emerging from financial panic even leading to massive selloffs of financial assets denominated in the national currency. A gradual outflow, called “capital leakage,” also describes the ongoing conversion of local-currency wealth into safer foreign assets; for operational purposes, both are synonymous. Normal profit-maximizing decisions within traditional investment do not constitute capital flight but unexpected, risk-driven or concealed foreign currency asset transfers are.

Measurement/data issues in defining capital flight impede the development of theories adding to challenges. Key questions remain on how to distinguish the London–Tokyo portfolio investment from Brasília–Miami capital flight; and why Western investment in Russia is “foreign investment,” while Russian outflows are “capital flight". Regardless, capital flight drains investment resources, so understanding its determinants appears crucial for policymaking primarily for economies, lacking adequate funds to import capital goods to contain poverty. Capital flight only exacerbates an already grim scenario.

This Special Issue encourages eminent scholars, academics and practitioners to share their considered views on capital flight and identify practical approaches to address it, theoretical or empirical. We expect authors to review the approaches used by nations to transfer assets, as part of capital-flight activity within the three modes: (i) transferring financial assets as foreign currency abroad; (ii) accumulating financial assets denominated in a foreign currency abroad (non-repatriation of profits); and (iii) transferring financial assets denominated in the local currency into financial assets denominated in a foreign currency (internal drain).

Prof. Dr. Faridul Islam
Guest Editor

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• capital flight
• panel data
• financial crisis
• balance of payment
• monetary policy