External Debt and Capital Flight in India, 1971-1989: A Theoretical and Empirical Investigation
Posted: 10 Apr 1997
Date Written: January 1996
Abstract
The accumulation of external assets via "capital flight" by private residents of many developing countries has been associated with the simultaneous existence of external indebtedness in these countries. This paper explores the complex association between capital flight and external debt from a theoretical standpoint as well as an empirical perspective. The paper utilizes Granger methodology to examine the direction and pattern of causality between capital flight and external debt in India using annual data over the period 1971-1989. Econometric analysis suggests the existence of unidirectional causality--i.e., from external debt to capital flight. The policy implications of this finding are critically investigated. The evidence of uni- directional causality is also interpreted as being suggestive of a pragmatic policy approach that combines growth promotion and debt forgiveness to stem the outflow of future capital flight from the developing world.
JEL Classification: F21, F32, O16
Suggested Citation: Suggested Citation