What is Capital flight definition/concept

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

Why does it happen?

The main reason is the economic instability of a country. This instability causes some fear in relation to bank reliability. This happened in the last ones in Argentina with the phenomenon of “corralito”, as well as in countries that are in deep crisis like Cyprus and Greece.

How do you make a movement of this type and what does it involve?

In the past, this operation was done directly, for example, putting the physical money in a suitcase and taking it to a bank in another country to be deposited. Currently, this procedure is not unique, since the banking system allows sending money through a transfer from a national bank to another foreign one. Thus, the movement of capital can be done as long as it takes place within the law.

In those cases where the money sent outside national borders is related to tax evasion, the informal economy or some crime, capital flight must be done through the classic suitcase, since bank transfers leave traces and Illegal activity is easily detected.

Obviously, the natural destination of capital flight is a tax haven, that is, a country that does not record income and values ​​banking secrecy, thus, the arrival of foreign money is encouraged. For the process of capital flight to have legal coverage in tax havens, there are so-called offshore, a mechanism that allows for the evasion of money without the need to use the briefcase system.

Finally, 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. Its consequences are diverse: it directly affects the national GDP, it reduces capital reserves in the banking system, there is a rise in interest rates and a decline in domestic investment. These negative effects on a country’s economy create the need to combat capital flight.

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