Why is Private Capital Fleeing from Pakistan? An Econometric Investigation

Pakistan, like other highly indebted developing countries, experienced massive private capital outflows during the 1970s and 1980s. The estimates of capital flight during 1970-88 totaled about 7 billion US dollars. This paper provides an econometric investigation of the causes of capital flight from Pakistan. The factors that contributed significantly to the private capital outflows are net long-term foreign borrowing, the real interest rate differential, anticipated exchange rate depreciation, deterioration in the terms of trade, an expected increase in income and corporate taxes, nationalization measures and political instability. In a nutshell, the empirical evidence suggests that stable domestic macroeconomic policies with political stability and international cooperation may be helpful in reducing further capital outflows and bringing back the existing capital held abroad by nationals.