Capital Flight
AdvancedCapital flight is the rapid movement of large amounts of money out of a country by investors and residents, usually because of fears about economic or political instability, currency devaluation or government policies.
When investors lose confidence in a country, they may sell its assets, such as shares, bonds and property, convert the proceeds into foreign currencies and move them abroad. Residents may also move savings into foreign bank accounts or safer currencies.
Capital flight can be triggered by expectations of currency devaluation, high inflation, political turmoil, threats of asset seizures or new taxes, banking crises or capital controls.
For example, during a currency crisis, investors fearing a sharp fall in the currency rush to convert local money into US dollars, putting further pressure on the currency and draining the central bank's foreign reserves.
Capital flight can become self-reinforcing, deepening the crisis it responds to. It can weaken the currency, push up interest rates, reduce investment and slow economic growth. Governments sometimes respond with capital controls, but these can damage long-term confidence. Rebuilding trust through credible policies is usually needed to reverse it.
For worked examples and full lessons, visit notesbysara.org.