REVIEW OF LITERATURE
Economic literature is well documented with causes and effects of capital flight and external debt. According to Walter (1986) and Kindleberger (1987), capital flight is a capital that flees. When these resources are being lost in form of capital flight, there are various long term effects. Owing to out flow of capital there exists a shortage of liquidity in the economy which leads to the exertion of upward pressure on the interest rates. Similarly, the shortage of liquidity can cause a depreciation of the domestic currency, ultimately leading to macroeconomic instability.
TABLE 2 : CAPITAL FLIGHT ESTIMATES
World Bank: A+B+F+H Erbe: A+B+F+H
Morgan: A+B+E+F+H Duwendag: A+B+F+G+H +I+M
Cline: (A+B+E+H)-(J+K+L)
Notions
A: Current Account Balance H: Changes in Debt
B: Net Foreign Direct Investment I: IMF Credit
C: Private Short Term Capital Outflows J: Travel Credit
D: Portfolio Investment K: Re Invested FDI in Income
E: Banking System Foreign Assets L: Other Investment Income
F: Changes in Reserves M: Counterpart Items
G: Errors and Omissions …show more content…
Brada et al. (2009) were of the view that capital flight can be triggered by illegal actions to hide money laundering activities such as drug distribution. Dornbusch (1984) explored sources of debt and debt difficulties for a group of Latin American countries using the data set of budget deficit, macroeconomic instability, and terms of trade deterioration from 1945-1983. The results revealed that the role of disequilibrium in exchange rates and budget deficit promotes external indebtness. Cumby and Richard (1987) argued on ambiguous situation of capital flight and suggested a new definition of capital flight, which requires a somewhat arbitrary distinction between normal capital flows and those representing capital
Economic literature is well documented with causes and effects of capital flight and external debt. According to Walter (1986) and Kindleberger (1987), capital flight is a capital that flees. When these resources are being lost in form of capital flight, there are various long term effects. Owing to out flow of capital there exists a shortage of liquidity in the economy which leads to the exertion of upward pressure on the interest rates. Similarly, the shortage of liquidity can cause a depreciation of the domestic currency, ultimately leading to macroeconomic instability.
TABLE 2 : CAPITAL FLIGHT ESTIMATES
World Bank: A+B+F+H Erbe: A+B+F+H
Morgan: A+B+E+F+H Duwendag: A+B+F+G+H +I+M
Cline: (A+B+E+H)-(J+K+L)
Notions
A: Current Account Balance H: Changes in Debt
B: Net Foreign Direct Investment I: IMF Credit
C: Private Short Term Capital Outflows J: Travel Credit
D: Portfolio Investment K: Re Invested FDI in Income
E: Banking System Foreign Assets L: Other Investment Income
F: Changes in Reserves M: Counterpart Items
G: Errors and Omissions …show more content…
Brada et al. (2009) were of the view that capital flight can be triggered by illegal actions to hide money laundering activities such as drug distribution. Dornbusch (1984) explored sources of debt and debt difficulties for a group of Latin American countries using the data set of budget deficit, macroeconomic instability, and terms of trade deterioration from 1945-1983. The results revealed that the role of disequilibrium in exchange rates and budget deficit promotes external indebtness. Cumby and Richard (1987) argued on ambiguous situation of capital flight and suggested a new definition of capital flight, which requires a somewhat arbitrary distinction between normal capital flows and those representing capital