Munich Personal RePEc Archive

Economic Impact of Capital Flight from Russia and its Institutional Context: Why Capital Controls cannot be a Part of a Pro-Growth Policy (updated version).

Kadochnikov, Denis (2005): Economic Impact of Capital Flight from Russia and its Institutional Context: Why Capital Controls cannot be a Part of a Pro-Growth Policy (updated version).

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Abstract

The research presented in this paper is undertaken in response to the debate on capital flight from Russia. This debate usually involves discussion of its determinants but misses the question of its ultimate effects on the economy. Lack of understanding of the economic nature of capital flight and of its institutional context leads to numerous calls for a policy response, such as stricter capital controls, which are not grounded in any theory or empirical studies, but at the same time are not opposed on theoretical grounds, with only ideological or technical arguments employed at the very best. The purpose of the paper is to examine capital flight from Russia within the institutional environment in which it occurs and to establish whether this capital flight has detrimental effect on the economy. New Institutional Economics approach is adopted to argue that in Russia’s case capital flight might be considered not just a consequence, as some researchers have argued earlier, but also an optimal solution to the institutional deficiencies with its economic role being neutral. To support the validity of this claim modified Granger non-causality test is used to determine whether capital flight dynamics have a causal effect on that of the interest rate differential and vice versa, that is to test whether price mechanism is not working. Rethinking the nature and the economic impact of capital flight allows postulating that within the existing institutional context the observed capital flight is a normal economic process which per se does not require any policy response and restricting capital flight by imposing capital controls cannot be an element of a pro-growth policy, as it would instead lead to boom-burst sort of growth.

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