Benu Varman-Schneider - Capital Flight From Developing Countries

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Capital Flight from Developing Countries

Capital Flight from Developing Countries

Benu Varman-Schneider

First published 1991 by Westview Press, Inc.

Published 2018 by Routledge
52 Vanderbilt Avenue, New York, NY 10017
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright 1991 Taylor & Francis

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Notice:
Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

Library of Congress Cataloging-in-Publication Data
Varman-Schneider. Benu.
Capital flight from developing countries / Benu Varman-Schneider.
p. cm.
ISBN 0-8133-8272-6
1. Capital movementsDeveloping countries. I. Title.
HG3891.V37 1991
332.042dc20 91-9817
CIP

ISBN 13: 978-0-367-01639-5 (hbk)

in
memory of my dear husband, Wolfgang Schneider

Contents

Guide

1. l25

I take this opportunity to express my gratitude and thanks to Prof. Dr. Horst Herberg, whose confidence in the study and critical comments are responsible for bringing the work to its present form. My thanks are also due to Prof. Dr. Gerd Hansen for his valuable suggestions.

Special thanks are due to my late husband, Dr. Wolfgang Schneider, who is not here to see this work in its present form. His constant support and interest in the study led us to work for some time on the subject together. Our article, "Measuring Capital FlightA Time Varying Regression Analysis," first appeared in ASEAN Economic Bulletin, Vol. 7, No. 1 (July 1990). The main results of this article are incorporated into this book with the kind permission of the publisher. Institute of Southeast Asian Studies. Singapore.

Thanks to Martin Williamson. Prof. Dr. Dieter Duwendag, Prof. Dr. Ingo Walter Dr. Wolfgang Kohn, and Dr. Emil Antonio, who discussed with me the various issues related to this study, enabling me to clear up many conceptual and technical problems.

The moral support provided by the two secretaries in the faculty, Ms. Gabriele Buenz and Brigitte Scholz, is unforgettable. Thanks are also due to Dr. Elizabeth Harrison, who read through the manuscript, and Ms. Marion Bielawa and Mr. Til Roquette for typesetting the manuscript.

A work of this kind would have been impossible without the support of the library at the Institute of World Economics in Kiel for material and data.

My gratitude goes to all my friends and relatives, especially to my parents and daughter, who made everything possible.

Thanks are due to Verlag Weltarchiv, HWWA-Institut fuer Wirtschaftsforschung. Hamburg, which published and kindly permitted me to use the material for present publication.

Last, but not the least, I would like to thank the Deutscher Akademischer Austauschdienst (DAAD) for financial support.

Benu Varman-Schneider

1
Introduction

Traditionally capital flows between industrialized and developing countries were analyzed with the basic assumption that developing countries generally face scarcity of capital. This assumption is discussed in the framework of the two-gap approach of development. The critical conclusion of this type of approach is that a developing country is likely to face two structural constraints of enormous significance, namely

1. a minimum requirement of imports to sustain a given rate of GNP growth and
2. an actual or potential ceiling on export earnings which is insufficient to finance the required imports.

The foreign exchange gap (the difference between the minimum required imports and total exports) shows that developing countries should be net borrowers in the development process. Thus, foreign capital flows into developing countries supplement domestic savings to finance desirable growth paths.

Although this literature explains the overall borrowing decisions of developing countries, it cannot provide insights into a paradoxical phenomenon that received attention in the wake of the debt crisis in the early 1980s. While the external debt of developing countries reached peak levels in the late 1970s and early 1980s, significant amounts of capital flowed out of these countries as private residents in developing countries were building up foreign assets. In some cases, even after external flows tapered down, residents continued to export capital abroad. New theoretical and empirical questions emerged with the changing realities of the situation. This study does not aim to provide explanations for all the complexities of the new situation, but it attempts a modest beginning by defining, measuring, and explaining the phenomenon.

As a rule, studies on capital flight are not based on a consistent definition of the term. Although it is clear that capital flight is a response to political and economic uncertainty, there is no unanimity on a precise definition of the term. The definition is often implicit rather than explicit. The magnitude of capital flight varies with the definition employed and ranges from all outflows of capital to outflows of capital which are a sub-set of gross capital outflows being treated as capital flight. These various definitions and the definition developed in this study will be discussed in . For our present purposes, we begin with a discussion of the distinction between true capital flight and intermediate capital flight. This distinction is crucial when discussing definitional divergencies.

True capital flight is defined as a one-way flow of capital out of a country, while intermediated capital flight is characterized as two-way flows of capital, both into as well as out of a country. Although the determinants of international capital flows provide an explanation for both one-way and two-way flows, the question remains as to how these normal flows are distinguishable from flight motivated flows.

classifies the factors which give rise to international capital flows. The upper left-hand quadrant identifies the factors that explain normal one-way aggregate capital movements on the basis of the classic determinants of international capital flows i.e., the differences in risk-adjusted returns across countries. The upper right-hand quadrant explains the factors that give rise to normal two-way flows. Economic returns are the basis of two-way flows which include differences in risk preferences and the ability to diversify particular risks across national

Factors Explaining International Capital Flows

One-way flows	Two-way flows
Economic risks and returns	Natural resource endowments	Differences in absolute riskiness of economies
Terms of trade
Technological changes	Low correlation of risky outcomes across countries
Demographic shifts	Differences in investor risk preferences
General economic management

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