ANALYSIS OF CAPITAL FLIGHT ABROAD AND FACTORS INFLUENCING IT

By. V. Tutalashvili

Capital flight is a special form of export, i.e. a way of investing capital in financial and other assets of currency resources abroad.

It is caused by acceleration of economic and political instability in the country and by fear of national currency devaluation. Capital flight is a variety of capital outflow in both legal and illegal channels. Decrease of financial-investment potential of the country reflected in the deterioration of external debt service and national investment programs is considered the sign of capital flight. The definition of capital flight phenomenon was first introduced in the modern scientific literature by Princeton University professor J. Kadinton, IMF expert M. Doppler and M. Williamson. As professor L. Abalkin thinks, capital flight differs from the usual forms of capital export. It is caused by long-term deviation in social economic and political spheres.
There is no reporting, registration and control system in post-soviet countries that would pass the bounds of national investments. This stands in the way of performing analytical activity. Lack of adequate reporting system obstructs the estimation of capital flight scale though it is quite possible to make approximate calculations. The sharp increase of balance sheet account – “pure mistakes and omissions” – indicates at the growth of funds that are hidden from governmental accounting. The usual value of this balance is considered statistic error.
The determinants of capital flight are:
1. Unfavourable economic and investment climate (instability of political and criminal situation, decrease of market volume, great budget deficit and non-development of financial market infrastructure);
2. Results of policy pursued in external economic environment (growth of tax burden, strict credit policy, non-purposeful and ineffective use of credit means);
3. High level of corruption;
4. Distrust of population towards banks and government banks;
5. Criminal background of capital. The matter does not so much concern “black money” laundering (incomes from narcotics trade and other forbidden activity), but rather capital investments abroad.
Capital outflow has to a certain degree slowed down the economic growth, made it dependent on foreign loans and created a great danger of critical growth of national debt service expenses, though at the same time it promoted integration into the world financial society. An investment reserve that was formed abroad might become repatriated in case of correct policy.
Capital flight is one of the most important issues in the sphere of external economic relations of Georgia. A great negative balance has lately been characteristic of the external trade of Georgia. The deficit exceeded 2584 million US dollars.
The table is based on the data of the National Bank of Georgia. Georgia had to take up large international loans in the conditions of negative foreign exchange balance, which will become a reason of excess dependence upon foreign creditors and investments, imported goods and capital.
It was very difficult to determine the magnitude of capital flight in 1992-1995 because reporting mechanism and analysis of money movement did not function well then.
As far as the years 1997-1999 are concerned, the analysis of payments balance in Georgia revealed that illegal capital flight in 1997 made up 27.798 thousand US dollars, in 1998 this figure amounted to 120.590 thousand US dollars and 151098 thousand US dollars in 1999. Thus, increasing growth rate is typical for the process of capital flight in Georgia. “Dollarization” of Georgian economy is a special problem of its structural degradation. Georgia is still far from the similar indices of financial crisis in Russia. Yet, the fact that signs of financial crisis are revealed on the basis of the analysis of these events is the most problematic one.
We think that in order to solve the problem it is necessary to implement a package of measures designed to adjust the process of capital outflow and to repatriate “fled” funds. There are a number of methods for limiting export registration and control of capital. These methods are in logical interrelation with each other and contribute a system of state control of capital outflow. The following measures are, mainly, designed to limit capital export: licensing of exported capital, prohibition of some investments, decrease in financing capital export, investment of currency funds in banking channels, liberalisation of fiscal policy, development of a number of preconditions that are, mainly, realised by means of administrative and currency control. We should point out to the fact that restrictions on international capital movement operations have existed in 126 member-countries of IMF since 1991.
Undoubtedly, criminal responsibility for a failure to return funds from abroad can be considered a positive amendment in the Criminal Code of Georgia. At the same time, it is necessary to liberalise Article 17 of the “Commercial Banks” law. Under this law commercial banks would send appropriate information to the taxation bodies in case of achieving the maximal limit of pre-determined currency payments, etc.
The experiences of developed countries showed that the most efficient measures for limiting the negative effect of capital export on payments balance are as follows:
– Technical and informational assistance of home investments (search of foreign partners, organisation of business missions, development of business plans, realisation of informational projects);
– Financing of private investments (participation in capital investment, tax benefits, crediting, etc.)
– Insurance of investments and provision of guarantees.
This measure must be used along with the stimulation of export goods and services and critically important import.
There are substandard schemes in the world practice that do not only make the repatriation of “fled” capital possible, but also make this process profitable for the state budget by means of simultaneously weakening external debt bondage. It would be useful to study this experience. We can do so by giving special tasks to economic research institutions.