Capital Flight
Introduction
In our everyday living, we cannot deny that we are not sometimes aware of the national money that we can get out of our pocket. We are also unaware of the resources that we are taken out of us. We only treasured its value as it was gone same thing with capital flight which most of us has no sufficient knowledge about its real definition and importance. It had been known that most of us do not necessarily understand the relevance to our life.
The word capital flight is part of our everyday life though we cannot feel it or some of us do not know what it is. Other people say that the capital flight is the money that runs away in the certain country going abroad. This can cause be harmful to the home economy of the and to the society. There are also many reasons for this kind of incident as avoiding confiscation, avoiding taxation, higher return in somewhere, and the better treatment. In the case of the persecution of Nazi, the capital flight can be harmful if the capital is in fleeing of discrimination and it is illicit. These are the common definitions and ideas regarding the term capital flight. But, there are still many issues regarding this term in the field of the economics.[1]
Capital Flight
In the economic aspect, the capital flight is the asset transfer in abroad so that it can reduce the principal loss, the control cost, and the loss of return which are over the wealth financially because of the sanction of government activities. The wealth confiscation fears can increase the wealth in the taxes or the regulations imposition which has the limits on the privilege on the holders of wealth are some of the examples of kind of activities of government which are in the mind. Therefore, the capital flight has the international capital which flows in trying to go out in the controls of the government or the government policies’ government. Additionally, it is phenomenon of the political inherent which involve in the government role and to the way in foreign exchange. [2]
The capital is also connected to the in attempting the holders of wealth for the government policies avoidance. This can be avoided so that the unrecorded capital cash flow can also be avoided.[3]
The capital flight is mostly defined as the symptom and not the cause of crisis in financials. On the other hand, the devaluation rumors can be the signal for the start of the capital cash outflow. This can yield to be the devaluation expectation and can also transform to be the self-fulfilling when the reserves of central bank depletion is devalued. In the said scenario, the capital flight can be the source of the failing banks, and the financial instability.[4]
The occurrence of the capital had been made for the two possible reasons which are generally for the approach of long-term in managing the asset. The primary reason for experiencing the capital flight is trough change in the field of economic conditions inside the certain country. This is because those investors can shift its assets to the more stable environment as it sees to the incident of undesirable movement in the economic condition of the certain country. The other reason for the having the capital flight is the diversification in the investment type for making the financial portfolio. In this case, the investor chose to divert its assets to the opportunities in the other countries which are facing the probability of acquiring the high percentage of improvement in economy.[5]
Factors in Capital Flight
The emergence of the capital flight had been due to the investors’ confidence towards the domestic economy. The inflation is one of the factors of the economic conditions that have the results in choosing of the investors for the implementation of the capital flight. This varies when the unfavorable economic condition had still remain for the extend of the period of time and resulted to lost of interest of the investors and then move away to the international investment then suddenly went back to the domestic market.[6]
The investors also are facing risk in pursuing its plan to invest in the certain country. Includes in the factors that the investors are facing includes their capital risk, the risk in the country, the inflation, the return of their investment, the political risks, the risk or the return of trade-off , and the systematic risk.[7]
Capital Flight in Less Developed Countries
The less-developed countries are primarily two unique compositions of economies. The first composition is primarily based in the higher level of the foreign currency. These economies are primarily dependent or under to the rich countries. The other unique distinction taken from the less developed countries is the domestic currency. This is the economy of subsistence which is primarily involved in those of no access in the foreign currency and this is also consisting of the transactions being conducted through the first barter using the domestic currency.[8]
The overvaluation of the currencies can also attract the capital; this can also be an analogy to nectars of the flowers and attracting the bees. This can also be defined as overvaluing means that they are in demand vice versa. This can attract the other currencies while encouraging for savings. This had happened reversely for the undervalued currencies. These incidents had been experienced by most of the less-developed countries in their domestic savings which made to become the negative quantities when the incident of inflation rate had surpassed the interest rate. The larger investors prefer to invest their money in the conversion of the stronger currency and only meant that their savings are not available in the investment for domestic. This incident had been possible because of the phenomenon which is called the capital flight. This only means that it is greater than those of the illicit fund occasional dumping. According to William Darity, this phenomenon is still part of structure of economy of the less-developed countries which involves and connected to the expatriations of the savings in the stable returns and to the lower risks (Ibid).
In short, for the less developed countries, the capital flight signifies different weak and strong currencies and not allowing having the economies of having weak currencies in the investment. It also cripples the production and the ownership which are already operating in the handicap of dominant cost while they are importing the credit and purchase for the purchases.[9]
In the time of the 1980s’ the domestic savings loss to the less-developed countries had been exceeded to the investment abroad and going to the economies. This have many factors to consider as the retention of the savings, the prevention to the debt, and debt service had been wrecked most by majority of the economies by the back-breaking debt. The less-developed countries are commonly required for the guarantee in the industrial bond that can be purchased in the bond internationally to the large market and most of the large brokers. In the formation of the investment in the region, the less developed-countries are primarily depends on the investment on the developed countries. As an example, the regional banks made to have loans that are of the accessible terms and to the more interest rate. This can also possible as it was controlled by the region and they imposed in the same measure of austerity as into the International Monetary Fund. The less-developed countries can only negotiate but it was to be imposed better prices in their raw materials by the developed countries. It includes the minimum wages for the education, the training, and the managerial workers and other are the requirements of the Multinational Corporations.[10]
Contributes to the Debt of Less Developed Countries (LDC)
According to Dornbush the origin of the debt problems in the Less Developed Countries or the LDC is cause by the deterioration and the domestic mismanagement in the economy of the world. In 1980s the result speculative caused by the foreign asset had the capital flight of more than billion. During the same time, the economic growth of the world soar real and slow interest rate resulted from the reduction of the exports that had been increase and earned in exporting for the interest in foreign debt cost. This had been resulted to the American and to the debtors of the LDC cannot have the external debt. The debt of the LDC cannot make an improvement starting from 1982 when it came to the point that the Mexico cannot meet its payment of foreign debt. This problem is then considered to be liquidity and insolvency. In this case most of the debtors of the LDC made to have a continued borrow and increase their debt without any idea and expectation of the interest they going to pay. Taking out the spending of the government as well as the other measures of austerity by the debtors of LDC, the worldwide problems regarding debt had made to be worst due to the American Banks, the International lending agency and the U.S. government made to have a policy to follow as quoted as “involuntary debt service” which can yield to the extra cost for the debtors as well as to the trading interest in the other countries creditors.[11]
In the year of 1980s, the value of the dollar begun to move upward from the loss of its lows four years before which was cause by the currency which not producing oils. This had been resulted in the movement of the debts which was schedule in 1982 by Mexico. As the incident of inclination of the dollar had been started, the LDC had started t experience as well the inflation which had been resulted to the acceleration of the exchange rate in the midst of the indebtedness and to the US dollar. This also added to the hardships of the LDC on the problems regarding debt due to the large sums of US. In short, in 1970s, the LDCs borrowed dollars that are worth considerable less than the dollars which they have to pay in return in the year 1980s. This is just a simple yet truthful that the LDCs has less ability to service their obligations regarding debt which will create the debt crisis in the world.[12]
Conclusion and Recommendation
As a conclusion, the supply theories of the Reagan administration had been resulted to budget deficit of the U.S. which drew the dollars of US out in the market globally which can be fund in the debt of US and majority of which can be used as the taken from the industrialized countries. In the 1980s the US dollar made to have the considerable value compared to the developed countries and of course to the LDCs which had been experience inflation in the given period. Rescheduling had been done immediately by the LDC worlds indebted.
To prevent the debt of the Less Developed Countries, it should have a new approach in solving for the problems of the LDC debt added to the review of the proposal which can contemplate in the reverse of the capital flight. This is possible due to the capital flight condition are still present in the LDC. The swaps n the equity of debt in the investors or in the banks which are LDC acquisition is the market changes as only secondary on the equity position debt in the certain company that had been sold by the government of LDC. It is also applicable to have a macroeconomics view regarding the debt problems which can best contribute for the stability of finances of the real economy evenly. It is also important to reduce the budget deficit of the government and it is particularly important in the alleviation of the stress financially. Additionally, the restriction relaxation on the expansion of products ad geographic can also be applicable.
Bibliography
Capital Flight 1993, Economics Library, McLeod, viewed 14 March, 2008,
http://www.econlib.org/library/Enc/CapitalFlight.html
Capital Flight 2003, Wise Geek, viewed 14 March, 2008,
http://www.wisegeek.com/what-is-capital-flight.htm
Capital Flight 2008, Investopedia, viewed 14 March, 2008, http://www.investopedia.com/terms/c/capitalflight.asp
Epstein, G 2005, Capital Flight and Capital Control in Developing Countries, Edward Elgar Publishing
Hanson, J 1996, The Next Cold War?: American Alternatives for the Twenty-First Century, Greenwoods Publishing Group
Higgins, B n.d., Symposium Overview: Debt, Financial Stability, and Public Policy
Rahnama-Moghadam et.al., Doing Business in Less Developed Countries:Financial Opportunities and Risks, Greenwood Publishing Group
[1] Epstein, G 2005, Capital Flight and Capital Control in Developing Countries, Edward Elgar Publishing
[2] Ibid
[3] Ibid
[4] Capital Flight 1993, Economic Library, http://www.econlib.org/library/Enc/CapitalFlight.html
[5] Capital Flight 2003, Wise Geek, http://www.wisegeek.com/what-is-capital-flight.htm.
[6] Ibid.
[7] Capital Flight 2008, Investopedia, http://www.investopedia.com/terms/c/capitalflight.asp.
[8] Hanson, J 1996, The Next Cold War? American Alternatives for the Twenty-First Century, Greenwoods Publishing Group
[9] Ibid.
[10] Ibid.
[11] Higgins, n.d.
[12] Rahnama-Moghadam et. al., Doing Business in Less Developed Countries: Financial Opportunities and Risks, Greenwoods Publishing Group.
Credit:ivythesis.typepad.com
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