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Measuring capital flight: A case study of Mexico

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  • Eggerstedt, Harald
  • Hall, Rebecca Brideau
  • Van Wijnbergen, Sweder

Abstract

The authors show how the various methods commonly used to measure capital flight produce vastly different estimates (with a 100 percent difference between the lowest and the highest, in Mexico's case). They emphasize the importance of the conceptual approach to its measurement. First of all, they did not try to separate normal capital flows from capital flight. A capital shift outward because of expected taxation is as much a response to anticipated developments in rate of return as is a shift out in response to lower interest rates at home. Nor is it satisfactory to directly measure capital flight by taking short-term asset changes and the balance of errors and omissions from the balance of payments. Neither is necessarily related to the unreported private accumulation of foreign assets. They chose the residual approach, which assumes that capital inflows in the form of increases in external indebtedness and foreign direct investment should finance either the current account or reserve accumulation; any shortfall in reported use can be attributed to capital flight. Implementing the residual approach requires careful data selection and several adjustments. The authors contend that: introducing debt stock data into the analysis - instead of the changes in debt recorded directly in the balance of payments - requires many difficult adjustments and should be avoided; foreign asset changes of public corporations must be subtracted; rather than eliminate interest received on foreign assets from the current account, as some have done, earnings on private assets held abroad should be considered part of the flight capital that might have been repatriated, given different incentives and macroeconomic conditions; and the effect on capital flight of the faking of trade invoices should be assessed, since import overinvoicing and export underinvoicing can be used to channel capital abroad. They demonstrate the empirical importance of these choices with a new set of capital flight
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Suggested Citation

  • Eggerstedt, Harald & Hall, Rebecca Brideau & Van Wijnbergen, Sweder, 1995. "Measuring capital flight: A case study of Mexico," World Development, Elsevier, vol. 23(2), pages 211-232, February.
  • Handle: RePEc:eee:wdevel:v:23:y:1995:i:2:p:211-232
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    References listed on IDEAS

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    1. Michael P. Dooley, 1988. "Capital Flight: A Response to Differences in Financial Risks," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 422-436, September.
    2. Arslan, Ismail & van Wijnbergen, Sweder, 1993. "Export Incentives, Exchange Rate Policy and Export Growth in Turkey," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 128-133, February.
    3. David Barkin, 1988. "Fuga internacional de capitales, contrabando y financiamiento del desarrollo," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 3(2), pages 205-230.
    4. David B. Gordon & Ross Levine, 1988. "The capital flight "problem."," International Finance Discussion Papers 320, Board of Governors of the Federal Reserve System (U.S.).
    5. Mohsin S. Khan & Nadeem Ul Haque, 1985. "Foreign Borrowing and Capital Flight: A Formal Analysis (Emprunt extérieur et évasion de capitaux: analyse mathématique) (Endeudamiento externo y fuga de capitales: Un análisis formal)," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 606-628, December.
    6. Pastor, Manuel Jr., 1990. "Capital flight from Latin America," World Development, Elsevier, vol. 18(1), pages 1-18, January.
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    Cited by:

    1. Ning, Ye & Wang, Yiming & Yang, Zhenyu & Geng, Yan, 2017. "Measurement and multifractal properties of short-term international capital flows in China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 468(C), pages 714-721.
    2. Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
    3. Rodolfo Cermeño & Bernardo D. Roth & F. Alejandro Villagómez, 2008. "Fiscal Policy and National Saving in Mexico, 1980-2006," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 23(2), pages 281-312.
    4. Alejandro Diaz-Bautista & Cesar Alfredo Olivas Andrade, 2005. "Un Análisis de cointegración con corrección de errores de las Fugas de Capital y la Inestabilidad Política en México , An econometric model of capital flight in Mexico," International Finance 0511004, EconWPA.
    5. Melike Altinkemer, 1996. "Capital Flows : The Turkish Case," Discussion Papers 9601, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    6. Hermes, Niels & Lensink, Robert & Murinde, Victor, 2002. "Flight Capital and its Reversal for Development Financing," WIDER Working Paper Series 099, World Institute for Development Economic Research (UNU-WIDER).
    7. Sadik, Ali T. & Bolbol, Ali A., 2003. "Arab External Investments: Relation to National Wealth, Estimation, and Consequences," World Development, Elsevier, vol. 31(11), pages 1771-1792, November.
    8. repec:rss:jnljee:v3i1p2 is not listed on IDEAS
    9. Beja Jr, Edsel, 2010. "Balance of Payments-consistent unreported flows," MPRA Paper 21699, University Library of Munich, Germany.
    10. Andrew Powell & Dilip Ratha & Sanket Mohapatra, 2002. "Capital Inflows and Capital Outflows: Measurement, Determinants, Consequences," Business School Working Papers veinticinco, Universidad Torcuato Di Tella.
    11. Goran Vuksic, 2010. "Unrecorded capital flows and accumulation of foreign assets: the case of Croatia," Financial Theory and Practice, Institute of Public Finance, vol. 34(1), pages 1-23.
    12. Sandrine Mesplé-Somps & Charlotte Guénard, 2006. "Measuring Inequalities: Do The Surveys Give The Real Picture? Study Of Two Surveys In Cote D’Ivoire And Madagascar," Working Papers 18, ECINEQ, Society for the Study of Economic Inequality.
    13. Brada, Josef C. & Kutan, Ali M. & Vukšić, Goran, 2013. "Capital Flight in the Presence of Domestic Borrowing: Evidence from Eastern European Economies," World Development, Elsevier, vol. 51(C), pages 32-46.
    14. Josef Brada & Ali Kutan & Goran Vukšić, 2011. "The costs of moving money across borders and the volume of capital flight: the case of Russia and other CIS countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(4), pages 717-744, November.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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