Capital Flight

The phenomenon of capital flight refers to the movement of money—as capital—across national boundaries. This can be money leaving one country to be invested in financial assets in another country, or it can be foreign direct investment, whereby a company invests directly into a foreign country's domestic structures, equipment, and organizations (nonfinancial assets). What makes capital movement “flight” is either the magnitude of the movement or the reason for the movement; that is, that the capital is “fleeing” something. However, no consensus exists on either what this magnitude or these reasons must be for capital movements to constitute flight. Thus, in general, any cross-national movement of capital may be considered capital flight.

When capital moves between countries, opposite economic impacts occur in the two affected countries. There are primarily positive effects for the country that is receiving the invested capital. For them, money is pouring into their economy, pumping it up and expanding economic activity. If the capital is invested only in financial assets, however, the money may just get lost in a speculative bubble of some sort, with no real net benefit for the economy. For the country from which capital is leaving, on the other hand, there are mainly negative effects. Falling investment will tend to retard economic growth, reducing the demand for labor and increasing unemployment. The money flowing to another country is that much money that cannot be used to expand the economy.

A striking example of capital flight is the East Asian financial crisis of 1997. This world region was greatly expanding for a generation leading up to this debacle, with capital pouring in from the rest of the world. At some point, however, investors became wary and started to pull out, trying to jump from what they perceived as a sinking ship. For the five countries of South Korea, Indonesia, Malaysia, Thailand, and the Philippines, the net private capital flow for 1996 was +$93 billion, and in 1997 it dropped to −$12 billion, which represented a 1-year turnaround of $105 billion in capital flowing out of these countries—in other words, capital flight. The economic consequences for these countries were severe. Indonesia's economy, for example, grew 4.9 percent in 1997 and contracted 13.7 percent in 1998, while Malaysia's growth rate fell from +7.8 percent in 1997 to −6.8 percent in 1998. Reversals of growth of these magnitudes can only be devastating for an economy. In addition, for these five countries, real wages dropped, unemployment increased significantly, and poverty rates rose dramatically; in Indonesia the poverty rate nearly tripled from 1997 to 1998.

The threat of capital mobility can be used as a tool of capitalists both to keep labor in line and to keep environmental costs in check. If workers demand higher wages and benefits, or better working conditions, the owners of capital can respond by threatening to move to a more congenial location, preferably one with lower wages and more docile workers. Given the extremely unequal distributions of income and wealth in the world, this threat is more than credible. For example, a U.S. worker making $20 per hour is effectively competing against a Chinese worker who makes perhaps 50 cents per hour. If that U.S. worker fights for a wage increase, the Chinese worker may become irresistible to the U.S. manufacturer—50 cents an hour can offset all sorts of financial obstacles to relocating abroad.

...