The Importance Of Capital Flights

Definition

Benu Schneider defines Capital flight part of the outflow of resident capital which is motivated by economic and political uncertainty. This definition takes into reality that not all outflow is motivated by the flight factors. Capital flight Capital flight can further be defined as the transfers of assets denominated in a national currency into assets denominated in a foreign currency, either at home or abroad, in ways which are not part of normal commercial transactions. It is the basically the transfer of assets abroad into foreign bank accounts or foreign securities which go beyond normal diversification behaviour.

Methods used to transfer assets under capital flight

1. The transfer of financial assets denominated in a foreign currency abroad.

2. The accumulation of financial assets denominated in a foreign currency abroad (particularly, by non-repatriation of profits); and

3. The

Capital flight reflects discrepancies between private and' social rates of return

3. Capital flight contributes to erosion of the domestic tax base "when capital leaves it never comes back"

4. Capital flight reduces domestic investment

5. Capital flight drives up the marginal costs of foreign borrowing

6. Capital flight erodes the legitimacy of mixed economic systems

Importance of capital flight

1. it can have significant social costs;

2. it can be a barometer of the sovereignty of government policy versus that of class privilege;

3. it relates to the impacts of important economic policies such as financial liberalization.

Social cost

The loss of scarce capital and foreign exchange potentially leads to a loss of investment in countries that are in great need of more infrastructure, plant and equipment, and human capital. Since capital is likely to be more scarce in developing countries than in developed ones, social returns to investment in many developing countries are likely to be higher at home than abroad. Relation with international