Handbook of International Banking
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Handbook of International Banking

Edited by Andrew W. Mullineux and Victor Murinde

The Handbook of International Banking provides a clearly accessible source of reference material, covering the main developments that reveal how the internationalization and globalization of banking have developed over recent decades to the present, and analyses the creation of a new global financial architecture.
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Chapter 18: Capital Flight: The Key Issues

Niels Hermes, Robert Lensink and Victor Murinde


18. Capital flight: the key issues Niels Hermes, Robert Lensink and Victor Murinde 1 INTRODUCTION The issue of capital flight has gained much attention in academic as well as policy circles since the early 1980s (see, for example, World Bank, 1985; Cuddington, 1986; Eaton, 1987; Deppler and Williamson, 1987; Dooley, 1988; Diwan, 1989; Mikkelsen, 1991; Hermes and Lensink, 1992; Claessens and Naudé, 1993; Murinde et al., 1996; and Lensink et al., 1998, 2000). Initially, research interest focused on Latin American economies, since the debt crisis that hit these countries stimulated massive outflows of capital.1 Capital flight from Latin America, in general, appeared to be voluminous in absolute terms; the sheer volume posed a threat to the viability of the domestic banking system, national solvency and economic stability. In addition, the flight of capital – the scarce resource in these economies – occurred at the same time that the countries were in desperate need of foreign exchange to amortize their outstanding debt to commercial banks in industrial countries. In the context of highly indebted countries coexisting with commercial banks ridden with bad loans, the capital flight problem indirectly also threatened the stability of the international financial system. From the end of the 1980s and early 1990s the debt crisis appeared to be contained and interest in the capital flight phenomenon waned. However, capital flight still remained a serious problem in a number of countries. In particular, several countries in Africa and Eastern Europe still experienced outflows. Yet, many countries in Asia...

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