Kenneth R. Szulczyk
and they rapidly cash out, causing a massive financial account outflow. A capital flight is similar
to a bank run, where all the depositors appear at their bank to withdraw money from their
accounts, but capital flight is a bank run on a whole nation. Unfortunately, capital flight causes
problems for a government because it could depreciate a currency rapidly. For example, the
Asian Financial Crisis started in Thailand in 1997. The Thai government no longer could
support the fixed exchange for the baht, and it devalued the baht. International investors
panicked and quickly withdrew their investments, sparking a crisis. Then the crisis sparked a
contagion. Investors questioned their investments in other countries, spreading the crisis to
Hong Kong, Indonesia, Laos, Malaysia, South Korea, and the Philippines as massive capital
flows left the countries. Other countries devastated by capital flight included Mexico in 1994-
1995, and Russia in 1998.
Causes of capital flight vary. Usually an event or government policy triggers the capital
outflow. For example, France imposed a new tax on the wealthy in 2006, causing the wealthy to
transfer their investments out of France. Although the French government collected $2.6 billion
per year in new taxes, it lost more than $125 billion in capital as the wealthy avoided the tax.
Illustrating another example, the Thai government devalued the baht that harmed investments
denominated in bahts. Thus, international investors panicked, started capital outflows from
Thailand that sparked the Asian Financial Crisis. Finally, a government nationalizing industries
could trigger capital flight as investors worry about governments seizing their investments.
International investors use several methods to cash out investments from a foreign country,
which include:
International investors transfer their cash out of the country via bank transfers. Once the
capital outflow becomes severe, then government may impose capital controls on the banks
to limit outflows. Investors could smuggle currency out of the country. Then they deposit it into banks in
their home country or to an offshore account. A government can tighten security at airports
and seaports, and customs can seize currency if they catch any traveler who carries too
much cash. Investors could convert their currency to precious metals, such as gold, silver, or platinum.
Then they smuggle the metals outside of the country. Investors could utilize money laundering that uses many techniques to structure cash
deposits into the banking system, hiding the investors’ activities. Investors could utilize false invoices if they deal with an importer. For example, an
investor could falsify invoices that over price imported items, or underprice the exported
items. Thus, they transfer more money out of the country by paying more for imports and
receiving less money from selling exports.