South African Capital Flows and Capital Flight over the 1960-95 period

Emerging economies are usually net foreign borrowers during their developmental process. By supplementing domestic savings with external resources, a more desirable growth path can be attained. Often, however, residents of these countries place their wealth abroad simultaneously with their search for external finance. This pattern of behaviour is a concern for policy makers. Capital flight largely escapes domestic taxation, and is therefore an impediment to the country’s ability to make future debt repayments. Moreover, capital flight imposes a constraint on economic growth by exacerbating the unavailability of domestic sources of investment financing. Effectively capital flight means that foreign borrowing contributes less to domestic resources than initially anticipated1. Given its possible disruptive effects on domestic investment, the foreign exchange market and public finances, capital flight thus becomes a serious policy concern. Considering the magnitude and causes of flight provides a basis for choosing the appropriate policy response.