What is Capital Outflow?

Capital outflow is a term that is used to describe the flow of domestic assets out of a nation and into other countries. In general, the term is not used to describe the export of various types of goods and services, since there is some anticipated return from that type of trading activity. With capital outflow, those resources leave the country without any type of equitable return generated, effectively removing those assets from use in the domestic economy. This type of activity can lead to economic or political unrest that has long-term effects.

There are a number of reasons why capital outflow may take place. One of the most common is concern for developing political conditions within a given nation. Should an investor believe that his or her assets will either significantly decrease in value or otherwise be compromised in some manner, there is a good chance those assets will be moved outside the country. This means that currency held in domestic banks may be moved to offshore banking institutions, business operations may shut down and reopen in another nation, or property is sold and the proceeds invested in real estate outside the country. In any event, the domestic economy no longer benefits from the presence of those assets, and is adversely affected by the loss of that capital.

In order to minimize the potential for capital outflow, many countries have enacted laws that are sometimes referred to as capital controls. The idea behind these laws is to slow the incidence of capital flight, allowing the economy more time to adjust to the loss of assets. At the same time, the laws create a block of time for lawmakers and economists to identify the underlying causes for the capital outflow and take actions to correct those issues. The assumption is that if the underlying reasons for the withdrawal of assets are addressed and eliminated, the outflow of capital will decrease and the economy will stabilize.

One of the drawbacks to these capital controls is that they can have a negative impact on the rate of capital inflow. Since the enacting of these types of laws tend to send a clear signal that something is amiss with the economy, foreign investors and businesses may begin to limit their investment in that particular country. This is particularly distressing if the economy relies on an influx of assets from foreign businesses to remain stable. For this reason, care must be taken to make sure the nature of an capital outflow restrictions do not cause concern among those who supply capital inflow, a balance that can sometimes be very difficult to achieve.