Capital Outflow
Encyclopedia
Capital outflow is an economic
term describing capital
flowing out of (or leaving) a particular economy. Outflowing capital can be caused by any number of economic or political reasons but can often originate from instability in either sphere.
Regardless of cause, capital outflowing is generally perceived as always undesirable and many countries create laws to restrict the movement of capital out of the nations' borders (called capital controls). While this can aid in temporary growth, it often causes more economic problems than it helps.
Argentina
experienced rampant and sudden capital outflows in the 1990s after its currency
underwent dramatic pressure to adjust in light of the fixed exchange rate
, leading to a recession
. Modern macro-economists often cite the country as a classic example of the difficulties of developing fledgling economies.
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
term describing capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
flowing out of (or leaving) a particular economy. Outflowing capital can be caused by any number of economic or political reasons but can often originate from instability in either sphere.
Regardless of cause, capital outflowing is generally perceived as always undesirable and many countries create laws to restrict the movement of capital out of the nations' borders (called capital controls). While this can aid in temporary growth, it often causes more economic problems than it helps.
- Massive capital outflow is usually a sign of a greater problem, not the problem itself.
- Countries with outflow restrictions can find it harder to attract capital inflows because firms know if an opportunity goes sour they won't be able to recover much more of their investment.
- Governments that institute capital controls inevitably send a signal to its citizens that something might be wrong with the economy, even if the laws are merely a precautionary measure.
Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
experienced rampant and sudden capital outflows in the 1990s after its currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
underwent dramatic pressure to adjust in light of the fixed exchange rate
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
, leading to a recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
. Modern macro-economists often cite the country as a classic example of the difficulties of developing fledgling economies.