Capital Flight: Causes and Consequences (A general perspective)
Betty E. S. Machangu (The Institute of Finance Management, Dar es Salaam)
Download Article | Published On 01/07/1998

Abstract

Overly expansionary monetary and fiscal policies, an incompatible exchange-rate policy and a repressive set of financial policies designed to divert resources toward the public sector "·ill clause widespread distortions and imbalances even in the short run. In this respect Capita/flights is1 important symptom of these policy- induced distortions. Capital flight is generally associated with the short-term outflows resulting from economic or political uncertainties in the home country. It involves ‘hot money’ that responds to political or financial crises, heavier taxes, a prospective tightening of capital controls or major devaluation of the domestic currency, or actual or excessive inflationary conditions. In other words, it is money that is fleeing from country rather than external investment guided by long term considerations, lacking protection against the possibility of a large loss.' Capital flow can typically refer to the short-term speculative capital outflow. While attacking these symptoms directly by imposing capital controls may be essential in a crisis, it hardly represents a long-term antidote for destabilizing exchange-rate, fiscal, and financial policies. Without capital controls, the threat of capital flight might impose much needed discipline on policy makers.

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