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Flight capital as a portfolio choice

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Author Info
Collier, Paul
Hoeffler, Anke
Pattillo, Catherine

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Abstract

The authors examine flight capital in the context of portfolio choice. They estimate the stock of flight capital held abroad and compare it with the stock of real (nonfinancial) capital held within each country. For 51 countries they construct estimates (as of 1990) of private domestic capital and flight capital - which combined add up to domestic wealth. There are large regional differences in the proportion of private wealth that is held abroad, ranging from 3 percent in South Asia to 39 percent in Africa. They explain differences in portfolio choice in terms of the capital to labor ratio, indebtedness, exchange rate distortions, and risk ratings - all proxies for differences in the risk-adjusted rate of return on capital. They then apply the results to four policy questions in which private portfolio choices are potentially important: the effect of the East Asian crisis on domestic capital outflows; spillovers; the effect of HIPC debt relief on capital repatriation; and why Africa has so much of its private wealth outside the continent. Their conclusions: 1) The four most severely affected East Asian countries will eventually lose about $250 billion in domestic wealth as a result of the deterioration in risk between March 1997 and September 1998. 2) They found some support for a spillover model. 3) The effect of the HIPC debt relief initiative on capital repatriation will vary massively between HIPC-eligible countries. 4) Africa has by far the lowest capital per worker, which makes massive capital flight from Africa all the more distinctive. Three variables explain capital flight in Africa: exchange rate overvaluation, adverse investor risk ratings, and high indebtedness.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2066.

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Date of creation: 28 Feb 1999
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Handle: RePEc:wbk:wbrwps:2066

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Related research
Keywords: Capital Markets and Capital Flows; Economic Theory&Research; International Terrorism&Counterterrorism; Fiscal&Monetary Policy; Banks&Banking Reform; International Terrorism&Counterterrorism; Banks&Banking Reform; Settlement of Investment Disputes; Banking Law; Economic Theory&Research;

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References listed on IDEAS
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  1. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, Oxford University Press, vol. 1(3), pages 377-95, May.
    Other versions:
  2. King, Robert G. & Levine, Ross & DEC, 1994. "Capital fundamentalism, economic development, and economic growth," Policy Research Working Paper Series 1285, The World Bank. [Downloadable!]
    Other versions:
  3. Simeon Inidayo Ajayi, 1997. "An Analysis of External Debt and Capital Flight in the Severely Indebted Low Income Countries in Sub-Saharan Africa," IMF Working Papers 97/68, International Monetary Fund.
  4. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Lisa M. Schineller, 1997. "An econometric model of capital flight from developing countries," International Finance Discussion Papers 579, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November. [Downloadable!] (restricted)
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  7. Boyce, James K., 1992. "The revolving door? External debt and capital flight: A Philippine case study," World Development, Elsevier, vol. 20(3), pages 335-349, March. [Downloadable!] (restricted)
  8. Nathan Sheets, 1995. "Capital flight from the countries in transition: some theory and empirical evidence," International Finance Discussion Papers 514, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank. [Downloadable!]
  10. Assaf Razin & Efraim Sadka, 1991. "Optimal Incentives to Domestic Investment in the Presence of Capital Flight," NBER Working Papers 3080, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christopher J. Green & Victor Murinde, 2003. "Flow of funds: implications for research on financial sector development and the real economy," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(8), pages 1015-1036. [Downloadable!]
  2. Ian Goldin & Kenneth Reinert, 2005. "Global capital flows and development: A Survey," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 14(4), pages 453-481, December. [Downloadable!] (restricted)
  3. Zhang, Xiaobo, 2004. "Security Is Like Oxygen: Evidence From Uganda," 2004 Annual meeting, August 1-4, Denver, CO 20384, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  4. Léonce Ndikumana, 2002. "Public Debts and Private Assets:Explaining Capital Flight from Sub-Saharan African Countries," Working Papers wp32, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
    Other versions:
  5. Marcella Mulino, 2002. "On the determinants of capital flight from Russia," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(2), pages 148-169, June. [Downloadable!] (restricted)
  6. Bodil O. Hansen & Hans Keiding, 2004. "Financial Intermediation, Moral Hazard, And Pareto Inferior Trade," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 5(2), pages 189-219. [Downloadable!]
  7. Floribert Ngaruko, 2003. "Agricultural Export Performance in Africa: Elements of comparison with Asia," Working Papers 03-09, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA). [Downloadable!]
  8. Stefan Dercon (QEH), . "Globalization and Marginalization in Africa: Poverty, Risk and Vulnerability in rural Ethiopia," QEH Working Papers qehwps147, Queen Elizabeth House, University of Oxford. [Downloadable!]
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  9. Léonce Ndikumana, 2001. "Financial Markets and Economic Development in Africa," Working Papers wp17, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  10. Maswana, Jean-Claude, 2006. "Economic Development Patterns and Outcomes in Africa and Asia," MPRA Paper 5551, University Library of Munich, Germany. [Downloadable!]
  11. Zhang, Xiaobo, 2004. "Security is like oxygen," DSGD discussion papers 6, International Food Policy Research Institute (IFPRI). [Downloadable!]
  12. Pasricha, Gurnain Kaur, 2008. "Imperfect Competition in Financial Markets and Capital Controls: A Model and a Test," MPRA Paper 12125, University Library of Munich, Germany. [Downloadable!]
  13. Ratha, Dilip & Mohapatra, Sanket & Plaza, Sonia, 2008. "Beyond aid : new sources and innovative mechanisms for financing development in Sub-Saharan Africa," Policy Research Working Paper Series 4609, The World Bank. [Downloadable!]
  14. Andrew Powell & Dilip Ratha & Sanket Mohapatra, 2002. "Capital Inflows and Capital Outflows: Measurement, Determinants, Consequences," Business School Working Papers veinticinco, Universidad Torcuato Di Tella. [Downloadable!]
  15. Alemayehu Geda, 2006. "Openness, Inequality and Poverty in Africa," Working Papers 25, United Nations, Department of Economics and Social Affairs. [Downloadable!]
  16. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2007. "Stock market development under globalization : whither the gains from reforms ?," Policy Research Working Paper Series 4184, The World Bank. [Downloadable!]
    Other versions:
  17. Léonce Ndikumana, 2003. "Capital Flows, Capital Account Regimes, and Foreign Exchange Rate Regimes in Africa," Working Papers wp55, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  18. Hansen, Bodil Olai & Keiding, Hans, 2006. "Financial Intermediation, Moral Hazard, And Pareto Inferior Trade," Working Papers 07-2004, Copenhagen Business School, Department of Economics. [Downloadable!]
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