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Flight capital as a portfolio choice

  • Collier, Paul
  • Hoeffler, Anke
  • Pattillo, Catherine

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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  1. Assaf Razin & Efraim Sadka, 1989. "Optimal Incentives to Domestic Investment in the Presence of Capital Flight," NBER Working Papers 3080, National Bureau of Economic Research, Inc.
  2. 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.
  3. Alesina, Alberto F & Tabellini, Guido, 1988. "External Debt, Capital Flight and Political Risk," CEPR Discussion Papers 253, C.E.P.R. Discussion Papers.
  4. Jonathan Eaton, 1987. "Public Debt Guarantees and Private Capital Flight," NBER Working Papers 2172, National Bureau of Economic Research, Inc.
  5. King, Robert G. & Levine, Ross & DEC, 1994. "Capital fundamentalism, economic development, and economic growth," Policy Research Working Paper Series 1285, The World Bank.
  6. 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.).
  7. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc.
  8. Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank.
  9. 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.
  10. 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.
  11. 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.).
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