Developing Countries: an Introduction

This book concerns capital flight in developing countries: How big is it? What causes it? How are we to interpret it? What are its effects? What can be done about it? The core of the book consists of seven case studies of capital flight from developing countries Turkey and a set of Middle Eastern and North African countries) connected by a common methodology used to estimate capital flight. These case studies are sandwiched between several chapters, including one debunking the myth that capital account liberalization is necessarily good for economic growth and income distribution, and several chapters at the end that offer some solutions to the problem of capital flight that affects so much of the developing world. This chapter briefly introduces the book. First, however, is the matter of definition. When people hear the term 'capital flight' they think of money running away from one country to a money 'haven' abroad, in the process doing harm to the home economy and society. People probably have the idea that money runs away for any of a number of reasons: to avoid taxation; to avoid confiscation; in search of better treatment, or of higher returns somewhere else. In any event, people have a sense that capital flight is in someway illicit, in someway bad for the home country, unless, of course, capital is fleeing unfair discrimination, as in the case of the Nazi persecution. These commonsense ideas are also roughly what we mean by capital flight. It turns out, however, that it is quite difficult to transform this commonsense meaning into rigorous, economic definitions, data and analysis. (See Beja, Chapter 3, for an extensive discussion of this issue.) There will be much discussion in what follows about the proper definition of capital flight, and, indeed, whether the term can be usefully defined at all. For now, though, we will define capital flight this way: 1 capital flight is the transfer of assets abroad in order to reduce loss of principal, loss of return, or loss of control over one's financial wealth due to government-sanctioned activities. Fears of wealth confiscation, increases in taxes on wealth or the