The relationship between the means of financing public debt and capital flight is an old subject that was not extensively studied. For the bigger part, the emphasis was on crowding out and crowding in effects. Capital flight out of a country due to fiscal and monetary policies that lead to a depreciation of the currency, or an expectation of its decline, such as public spending financed by deficits and expansion of external borrowing under a fixed exchange rate regime, or because of the exchange of currencies with low-interest rates in higher-yielding currencies, carry trade. In addition, of course, to the political situation in the country and the region in which it is located.
The detrimental effects of capital flight cause governments and policymakers to develop effective methods and strategies to prevent the occurrence of the phenomenon. One of the methods of preventing capital outflows is the introduction of capital control policies. However, the institution of such capital control policies is one of the things that can actually cause capital flight to occur.
In order to prevent both legal and illegal capital outflows, governments and policymakers must develop a more complex approach to the problem. It may include the establishment of well-functioning political and judicial institutions that will ensure the political stability within a country. Also, the government must implement steps to reduce the level of corruption that usually contributes to illegal capital outflows.
The detrimental effects of capital flight cause governments and policymakers to develop effective methods and strategies to prevent the occurrence of the phenomenon. One of the methods of preventing capital outflows is the introduction of capital control policies. However, the institution of such capital control policies is one of the things that can actually cause capital flight to occur.
In order to prevent both legal and illegal capital outflows, governments and policymakers must develop a more complex approach to the problem. It may include the establishment of well-functioning political and judicial institutions that will ensure the political stability within a country. Also, the government must implement steps to reduce the level of corruption that usually contributes to illegal capital outflows.
Current Account surplus A Net Foreign Direct Investment B Private short-term Capital Outflows C Portfolio Investment Abroad: Bonds+Equities D Banking System Foreign Assets E Change in Reserves F Errors and Omissions G Change In Debt H IMF Credit I Travel (Credit) J Reinvested FDI Income K Other Investment Income L Counterpart items M Capital Flight CF Broad Measure a) Erbe and the World Bank:: CF = H + B + A + F b) Morgan Guarantee Trust Company: CF = H + B + A + F + E Hot money measure e) Cuddington: i)CF = ( - G - C) ii) CF = ( - G - C - D)
Capital flight is due to citizens more than foreigners. The accessibility to local assets in local currency will enable such flight to take place. Political uncertainty and speculation about exchange rate depreciation, run-away inflation and loss of confidence are among the reasons for capital flight to take place.
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