What is capital flight?

Capital flight is a term that involves the departure of physical assets or money from a country due to economic events that have happened in that place. There are also other situations in which this can happen, such as increases in impuestos, or when a country cannot meet its debt obligations and loses credibility and trust.

It is a negative phenomenon that happens to the economy of a certain country due to certain factors. When this capital flight is suffered, it is usual that, in these countries, exchange rates or interest is controlled by the Government.

The negative effect of this phenomenon reaches even levels of loss of reserves in the country or loss of confidence of investors, even depreciating the existing currency. For this reason, and for the fear that the situation that causes the phenomenon will not be overcome, the inhabitants of the country are in a hurry to exchange the currency for a different one, to prevent it from devaluing and losing its current value.

El central bank The country may be the victim of a devaluation, causing it to not be able to capture all the requests that citizens require (as we have indicated about currency exchange, for example).

Broadly speaking, there could be a decrease in the level of wealth and a worsening of investment expectations, due to uncertainties and fear that the actions that are carried out have a future.

In order to resolve this crisis, it is necessary to create Incentives both citizens, companies and investors that investing in the country does not carry risks. But, for this, it is necessary to demonstrate that such risks do not really exist.

Leave a Comment