Estimates and Causes of Capital Flight from Central and East European Countries

Estimates and Causes of Capital Flight from Central and East European Countries

Josef C. Brada
W. P. Carey School of Business, Arizona State University
Tempe, AZ 85287-3806 USA [e-mail] Ali M. Kutan
Southern Illinois University at Edwardsville
Edwardsville, IL 62026-1102 USA [e-mail] Goran Vukšić
Institute of Public Finance, Zagreb, Croatia [e-mail] ABSTRACT

We estimate capital flight from twelve transition economies of Central and Eastern Europe (CEE) for the period 1995-2005 using the residual method. Capital flight from some of these transition economies, when adjusted for country size, is comparable to the more highly publicized capital outflows from Russia despite East Europe’s seemingly better transition and reform performance and greater political stability. We find that capital flight from CEE is mainly an economic phenomenon, driven by differences in interest rates and investors’ expectations about future macroeconomic conditions in their countries. Our empirical results are thus consistent with the mainstream explanations of capital flight and they mirror results obtained for other countries and time periods, suggesting that transition-related phenomena are not important factors in capital flight from CEE.

JEL Classification Numbers: E26, F31, F32, P33, P37 Key words: capital flight, external sector liberalization, money laundering, transition economies I. Introduction A great deal of attention has been paid to measuring and explaining the causes of capital flight from Russia. For example, Abalkin and Whalley (1999) estimated capital flight from Russia at $56-70 billion for the period 1992-3 and at an annual rate of $17 billion from 1994 to 1997. Buiter and Szegvari (2002) offer somewhat higher estimates, as do Sarafanov (1995) and Loukine (1998) who show accelerating levels of capital flight, up to $50 billion per year, in the mid-2000 period.

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