Capital Flight

Abstract

Today’s world economy is characterized by large movements of capital across countries and regions. Cross-border financial movements include legal transactions that are duly recorded in national accounts as well as the illicit smuggling of capital referred to as capital flight. Capital flight is the residual difference between capital inflows and recorded foreign-exchange outflows. Capital inflows consist of net external borrowing plus net foreign direct investment. Recorded foreign-exchange outflows comprise the current account deficit and net additions to reserves and related items. The difference between the two constitutes the measure of capital flight (Erbe 1985).