Measuring capital flight: estimates and interpretations.

Abstract

Capital flight is a phenomenon which, though unobservable, is assumed to be widely prevalent in developing countries. While this is probably true the approaches proposed by economists to quantify it may not necessarily capture what we seek to measure: namely the flight of capital as a response to economic and political instability. Each method differs conceptually as to what defines capital flight based on distinctions between \"normal flows\" and \"capital flight\", \"short term\" and \"long term\" and between \"legal\" and \"illegal transactions\". Consequently estimates of capital flight vary. This paper makes a critical evaluation of estimation methods used in the literature and applies them to a sample of 116 countries for the period 1971-98. The paper makes the case that the most widely prevalent measure of capital flight can at best be treated as a resident capital flow, which captures not only capital flight, but other influences as well. The estimates can be used in conjunction with explanatory variables and country-specific information to determine the type of capital flow one seeks to explain. The estimates reveal that irrespective of definition and the corresponding estimation method, estimated resident capital flows based on these methods are high for some countries and regions even in the 1990s and that it occurs in economies both with and without wholly or partially liberalised capital controls. The estimated capital flow is unevenly distributed across countries, both in absolute numbers and as a percentage of GDP. In recent years the outflows have been high from East Asia, Europe, Central Asia and Latin America. Although subject to data problems and corresponding errors in magnitudes. The Mexican and the East Asian crisis and the impact of other events are discernible from the estimated resident capital outflows. Contrary to a widely held belief that outflows from sub-Saharan Africa are high, the estimates show that since 1992 resident capital outflows from the region were repatriated with a small outflow in 1995. East Asia and Latin America show a rising trend in the 1990s compared to the 1970 and 1980s. Loss of capital through misinvoicing of trade documents is high for some countries. As a region, they are the highest for East Asia and the Pacific especially during the crisis period. In Latin America, the Mexican crisis episode is clearly seen in this estimated series. Individual country experiences vary, because besides the flight motive, capital movements through this channel can also reflect tariff-jumping, subsidies to exports or even smuggling. Hot money flows reflect the smallest measure of capital movement in developing countries. In spite of the data problems and problems of interpretation, estimates for East Asia do capture the crisis period. The study provides a database on estimated resident outflows of capital for further research on capital flight, capital movements and financial integration.

Citation

DFID, London, UK, 147 pp.

Measuring capital flight: estimates and interpretations.

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