CAPITAL FLIGHT IN VIETNAM 1977-2011: A COUNTRY RISK ANALYSIS OF THE ROOT CAUSES OF EXPATRIATED SAVINGS

International Vision Review, n°13, December 2009, CFVG/ESCP, Thong KE Statistical Publishing House, Vietnam

Abstract

Until the late 1990s, the issue of capital flight attracted less attention than that of external capital inflows in emerging market countries, both in the academic and policy circles. A stronger focus emerged when it became clear that capital outflows played a catalytic role in financial crises. The reason for this limited attention seems evident: data, by definition, are scarce and of limited quality. However, expatriated savings widen the gap between domestic resources and investment. They are symptom of distrust in the country’s macroeconomic and socio-political stability. Capital flight reacts to, and sometimes anticipates, bad economic policies, including mismanagement of interest and exchange rates, excessive tax burden, inflation, budget deficit, and an excessive public sector borrowing requirement resulting in crowding out of the private sector.

This paper analyzes the evolution in Vietnam’s flow of private expatriated savings in international banksi. It aims at identifying the root causes of the ups and downs of capital flight, looking at both domestic and external variables, i.e., push and pull factors. Private capital outflows can be considered as foreign direct investment, from a domestic agent’s standpoint, hence illustrating rational portfolio choices by private residents who manage diversified portfolios of assets and who consider domestic and international alternative investment options based on risk/return relations. We assume that domestic residents rely on rational expectations to manage their portfolio and use all possible available information. Weak governance is likely to play a central role in these choices and it will feed capital leakages toward safer and more stable destinations. From a public policy’s standpoint, the larger the amount of capital flight, the larger the savings-investment gap, and the greater the need to rely on external indebtedness to finance national development objectives. Hence, one of the policy aims of a government should be minimizing capital flight and maximizing repatriation. Finally, we conclude by suggesting that capital flight can be used as a reliable early

warning signal of country risk in Vietnam and other EMCs.

La fuite des capitaux n’a retenu l’attention des économistes et des responsables d’institutions financières qu’à la fin des années 90. La difficulté d’obtenir des informations fiables en est une raison. Néanmoins, le problème de l’épargne expatriée est une des clés d’une politique de développement durable, pour au moins trois raisons. D’abord, la fuite des capitaux diminue les ressources disponibles pour l’investissement domestique et augmente donc les besoins de financement d’un pays. Ensuite, la fuite des capitaux pose un problème de hasard moral, si les fonds d’aide publique internationale et les prêts bancaires se trouvent recyclés hors du pays auxquels ils étaient destinés. Enfin, d’un point de vue stratégique, la fuite des capitaux peut être considérée comme un indicateur avancé de risque-pays, puisqu’il n’y a aucun rationalité pour un investisseur étranger de mobiliser des ressources dans un pays où les résidents préfèrent investir hors des frontières ! Notre papier analyse l’épargne expatriée du Vietnam sous la forme des dépôts des résidents privés non bancaires dans les banques internationales. Cette mesure à la fois sous-estime la fuite des capitaux puisqu’elle exclut tous les investissements réels (immobiliers, matières précieuses, argent liquide), mais elle inclut des placements bancaires « légitimes » d’entreprises. L’étude conclut que ces flux d’épargne expatriée sont corrélés à l’évolution de l’inflation, du taux d’intérêt réel, de l’expansion monétaire, et de l’augmentation de l’endettement du Vietnam.

Key words: Expatriated savings, capital flight, IFIs, socio-economic volatility, financial crisis, governance.

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