business

definition of capital flight

When a person or an entity decides to move their money out of their country, this phenomenon is popularly known as capital flight and it is a reality of the globalized world.

Why is it produced?

The main reason is the economic instability of a country. This instability generates a certain fear regarding bank reliability, as has happened in recent years in Argentina with the corralito phenomenon, and in countries such as Cyprus or Greece that have entered deep crisis.

How do you make such a move, and what does it entail?

Long ago this operation was done directly, for example by introducing the physical money in a briefcase and taking it to a bank in another country for deposit. Currently, this procedure is not the only one, since the banking system allows money to be sent through a transfer from a national bank to a foreign one. In this way, the movement of capital can be done as long as it is carried out within the framework of the law.

In those cases in which the money sent outside the national borders is related to tax evasion, to the underground economy or to some crime, the flight of capital must be done with the classic briefcase (bank transfers leave a trace and activity illegal would be easily detected).

As is logical, the natural destination of capital flight is a tax haven, that is, a country in which income is not taxed and bank secrecy is maintained and in this way the arrival of foreign money is encouraged. In order for the capital flight process to have legal coverage in tax havens there are so-called offshore companies, a mechanism that allows the evasion of money without the need to use the briefcase system.

Ultimately, there are two types of capital flight, legal and illegal.

Consequences of capital flight

Distrust in certain economies is the main cause of this phenomenon. As for the consequences that it produces, they are diverse: it directly affects the national GDP, it reduces the capital reserve in the banking system, a rise in interest rates and a decline in national investment.

These negative effects on a country's economy create the need to combat capital flight.

Photos: Fotolia - rudall30 / javieruiz

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