Capital flight

From Wikipedia, the free encyclopedia

Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event 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. This leads to a disappearance of wealth and is usually accompanied by a sharp drop in the exchange rate of the affected country (devaluation).

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 of faith 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.

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. 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 has an artificially low fixed exchange rate and was dependent on large levels of reserve currency). This was also seen in Venezuela in the early 1980's with one year's total export income leaving through illegal capital flight.

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. Johannesburg in particular has been abandoned by business moving to northern suburbs. The 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.