Estimates and Causes of Capital Flight from Central and East European Countries

Topics: Investment, Economics, Macroeconomics Pages: 30 (9816 words) Published: August 20, 2013
Estimates and Causes of Capital Flight from Central and East European Countries

Josef C. Brada
W. P. Carey School of Business, Arizona State University
Tempe, AZ 85287-3806 USA
josef.brada@asu.edu

Ali M. Kutan
Southern Illinois University at Edwardsville
Edwardsville, IL 62026-1102 USA
akutan@siue.edu
Goran Vukšić
Institute of Public Finance, Zagreb, Croatia
goran@ijf.hr

ABSTRACT

We estimate capital flight from twelve transition economies of Central and Eastern Europe (CEE) for the period 1995-2005 using the residual method. Capital flight from some of these transition economies, when adjusted for country size, is comparable to the more highly publicized capital outflows from Russia despite East Europe’s seemingly better transition and reform performance and greater political stability. We find that capital flight from CEE is mainly an economic phenomenon, driven by differences in interest rates and investors’ expectations about future macroeconomic conditions in their countries. Our empirical results are thus consistent with the mainstream explanations of capital flight and they mirror results obtained for other countries and time periods, suggesting that transition-related phenomena are not important factors in capital flight from CEE.

JEL Classification Numbers: E26, F31, F32, P33, P37
Key words: capital flight, external sector liberalization, money laundering, transition economies I. Introduction
A great deal of attention has been paid to measuring and explaining the causes of capital flight from Russia. For example, Abalkin and Whalley (1999) estimated capital flight from Russia at $56-70 billion for the period 1992-3 and at an annual rate of $17 billion from 1994 to 1997. Buiter and Szegvari (2002) offer somewhat higher estimates, as do Sarafanov (1995) and Loukine (1998) who show accelerating levels of capital flight, up to $50 billion per year, in the mid-2000 period. Tikhomirov (1997) estimated that the mispricing of Russian trade in the years 1990-95 alone resulted in capital flight that was six-fold the official Russian government estimates of $35-40 billion. Part of the reason for this widespread interest in the Russian experience with capital flight is the sheer magnitude of these flows and their implications for the Russian economy in terms of loss of government revenue and of foregone domestic investment. In part, the interest has also been driven by the perception that much of the capital flight is related to the process of economic transition in Russia. Many observers see it as being caused by Russian oligarchs and politicians who form an interlocking kleptocracy. Certainly Russia’s vast earnings from energy and mineral exports, the concentration of wealth and the uncertainty of the property rights of both Russian oligarchs and foreign investors provide incentives for moving assets offshore beyond the grasp of the Russian state. In contrast, comparatively little effort beyond the early work of Sheets (1995) has gone into estimating capital flight from the transition economies of Central and Eastern Europe (CEE), including the Baltic States, which, for the purposes of this paper, we simply call East Europe. Estimates of recent capital flight from CEE countries based on a consistent methodology and data sources are not available, and the estimates that are available cover only some countries, often only for a few years, and use a variety of methodologies making cross-country comparisons difficult. To address this lack of consistent data on capital flight from these transition economies, in this paper we present estimates of capital flight using the so-called World Bank or “residual method” for Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia for the years 1995 to 2005. In order to gain a better understanding of capital flight from these...


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