Capital flight and violent conflict : a review of the literature

This paper reviews the literature on capital flight and violent conflict to attempt to answer the following questions. What happens to capital flight before, during, and after violent conflict? What are the implications for economic recovery from conflict? Broadly speaking, capital flight refers to outflows of private capital from developing countries. However, while economists generally agree that capital flight could be deleterious to economic development, they do not agree on the definition of the phenomenon. The lack of consensus stems in part from the fact that capital flight is unobservable and has to be estimated. A wide range of approaches to estimating capital flight have been proposed. Many measures estimate capital flight as the residual between an economy's sources and uses of foreign exchange. Differences arise as to what constitutes sources and uses of foreign exchange. Violent conflict enters the portfolio-choice framework directly as a factor that could increase the riskiness of the domestic environment, reducing risk-adjusted expected return, and thereby inducing capital flight. The effect of conflict on capital flight is likely to depend on a number of factors such as the nature, intensity and duration of the conflict.