Foreigners stash money in `safe haven' nations
Boston — A newspaper editor from P^orto Alegre, on Brazil's southeast coast, remembers the offer. It was last year. The Brazilian cruzado was shaky and inflation was running wild. ``Somebody offered me a savings account in the United States,'' says Mar'ia Isabel Timm. ``He's somebody who travels a lot and he opens accounts in a person's name.''
She didn't take the offer, but some of her friends did. By changing cruzados for dollars and parking their money in American banks, they got security from inflation, currency devaluation - and political instability.
Now, a traveler schlepping a few paychecks to friendly American savings-and-loans wouldn't make much of a plot for ``Miami Vice.'' In most cases, there's no drug money or arms smuggling involved. Just spare money departing for safer climes.
But this constitutes capital flight - a lot of little bits of money (and some very large amounts, too) fleeing to ``safe haven'' nations instead of staying at home where the money might help finance economic development or chip away at the mountain of foreign debt.
Switzerland, with its tradition of secret banking, is always a popular safe haven, followed by Luxembourg, Panama (until recently), Britain, Japan, and the United States.
``Capital flight,'' says Steve Hanke, an economist at Johns Hopkins University in Baltimore, ``typically comes in big waves. It's not like a dripping faucet; you get a blast and then it's over.''
Waves of money washed out of central Europe before and after both world wars. During the past decade, the big waves have been from Latin America. Between 1974 and 1982, for example, an estimated $15 billion to $27 billion fled Argentina. During that same period, Argentina borrowed $32.6 billion. In other words, Argentines exported between half and four-fifths of the entire inflow of foreign capital.
The money left because of the country's economic and political instability.
``It's people within a country trying to hide their money for tax reasons, fear of expropriation, inflation, or risk in general,'' says Steven Plaut, an economist at the University of California, Berkeley.
``Foreign investment [in a country] can be just as unstable,'' he adds. Multinational corporations that have built factories or opened stores in a country can get cold feet and disinvest if the economic or political risks are too high.
Tracking capital flight is difficult, since it involves secret transactions and private hoarding. The International Monetary Fund last year estimated that as much as $300 billion had been stashed in the US and other safe havens between 1974 and '85. The Overseas Development Council in Washington, D.C., estimated that between '77 and '84 as much as $95 billion had been sent overseas from Mexico, Argentina, and Venezuela alone.
Curiously, foreign aid and lending to less developed countries (LDCs) might actually encourage capital flight. Economist Plaut says this is because aid and loans provide a ready source of Western currency that can be hoarded or hid in overseas investments. This aggravates the increase in foreign debt.
Other nations - especially the ``safe havens'' - bear some of the blame, too. A study prepared last year for the IMF criticized banks for soliciting money from poor countries and providing ``pouch services'' that enable people to ship money out of a country illegally.
How can the flight of capital to other countries be stemmed?
Trying to cut it off by government edict is probably the worst thing that can be done, Plaut says.
``If you tell people that it is illegal to move their money out of the country, there's a lot of motivation to move money out quickly,'' he says. What's more, overseas investors are very reluctant to put money into a country if they think they won't be able to get it out.
Professor Hanke of Johns Hopkins says that in Latin America only Chile has seen a significant reversal of capital flight in recent years.
``The main reason'' for this, he says, ``is that the internal economic environment is very attractive.''
Whatever else military-ruled Chile may be, it is economically stable. This appears to have attracted new capital and persuaded Chileans to keep their money at home.
Chile has an aggressive privatization program, property rights have been assured, and the Santiago stock market is at an all-time high.
``For there to be a repatriation of capital,'' Dr. Hanke says, ``the factors that motivated capital flight have to be reversed.''
This means an end to monetary instability, confiscatory taxes, war, and revolution. The next step, Hanke says, ``is to get the domestic economy generating high after-tax returns for investors.''