Definition:
Capital flight is the movement of financial assets out of a country, often in response to economic instability, political uncertainty, or currency devaluation. Investors may move their funds to other countries perceived as safer or more profitable.
Key characteristics of capital flight:
- Movement of funds: Capital flight involves the movement of financial assets, such as money, investments, and securities, out of a country.
- Economic instability: Capital flight is often triggered by economic instability, such as high inflation, political unrest, or currency devaluation.
- Currency depreciation: Capital flight can lead to currency depreciation, as investors sell their local currency to acquire foreign currency.
- Negative economic impact: Capital flight can have a negative impact on the economy of the country experiencing it, as it can lead to a decline in investment, economic growth, and currency value.
Why does capital flight occur?
- Economic instability: Investors may seek to move their funds to safer, more stable economies.
- Political uncertainty: Political instability or uncertainty can also lead to capital flight.
- Currency devaluation: If a country’s currency is expected to depreciate, investors may move their funds to other currencies to avoid losses.
How to prevent capital flight:
- Economic stability: Governments can implement policies to promote economic stability and attract foreign investment.
- Political stability: Ensuring political stability and security can help to prevent capital flight.
- Currency appreciation: Policies that promote currency appreciation can help to discourage capital flight.
In essence, capital flight is the movement of financial assets out of a country, often in response to economic instability or political uncertainty. It can have a negative impact on the economy of the country experiencing it.
