Volume 46 Number 181,
April-June 2015
Capital Flight in Mexico:
Analysis and Proposal for Measurement

Andrés Blancas*

Date received: February 10, 2014. Date accepted: January 30, 2015

This article will propose a methodology to measure capital flight in globalization. With the aid of social accounting analysis, a set of single equation error correction models and cointegration tests, this work estimates capital flight and compares the results, including a discussion and principle contributions. Capital flight is a short-term effect. Efforts to measure and analyze this phenomenon have faced challenges and ambiguities, especially now, with the added complexities of foreign portfolio investment and new financial derivatives. There is evidence of capital flight in some countries starting with the Great Recession of 2008, while the error correction model was applied to Mexico for the time period 1980-1998, when capital flight led to economic and financial destabilization.

Keywords: Capital flight, foreign investment, economic globalization, single equation models, cointegration tests.


This document aims to respond to the following question: How can we measure capital flight with a clearer and less ambiguous method than what has been used to date? To do so, this study uses social accounting, a set of single equation error correction models and cointegration tests to estimate and compare the various outcomes that have been obtained up until now. Mexico is shown to be a typical example of an underdeveloped economy, a member of the so-called emerging markets group, which have been the main destinations of major international capital flows and where capital flight has destabilized the economies and led to the greatest financial crises. In an environment of increasing economic and financial globalization, hot money has come back on the scene with a starring role, first in Latin America, later in Asia and then in the United States and Europe, especially in the PIGS countries (Portugal, Italy, Greece and Spain). However, this time, it is disguised by financial derivatives, making it even more difficult to identify, quantify and analyze.

The financial and economic crisis that began in 2008 has forced analysts and economic policymakers to once again turn their attention to capital flight as a topic of debate and the economic policy strategy agenda to avoid another “Great Recession.” When capital flight occurs, it is immediately reflected in the balance of payments, destabilizing the price system and financial and economic activity.

The first section of this paper addresses the issue by reviewing the stylized facts surrounding this topic and its significance in financial crises. The second section briefly summarizes principal measurement methods and how they are related to the definition of capital flight. The third section offers critical reflections on traditional ways of measuring capital flight, while the fourth section develops the idea of capital flight as a short-term phenomenon. Finally, the fifth section uses a series of error correction models and cointegration tests to estimate capital flight and compare the different methods used for the case of Mexico. The last section provides some conclusions.


In the age of economic globalization, capital flows on the global stage are even more important when they shift in unexpected directions, quantities and time periods. These movements of capital flows – either foreign direct investment or portfolio investments – are capable of producing periods of economic prosperity in the regions to which they are destined, as well as financial bubbles, panic and crises in the countries from which they suddenly and uncontrollably flow out.

The value of capital flows regularly appears in accounting records in the balance of payments. However, with the advent of financial innovation and other novel forms of financial transactions, capital flows have been accompanied by a significant boom in foreign portfolio investment with new financial derivative instruments, such as forwards, futures, commodities, options and swaps, which, besides having reduced the costs and increased the speed of transactions, have permitted changes not only between fixed and variable income, but have also displaced risk and brought exchange rates into the mix. These derivatives are known for how easy it is to evade accounting oversight and control from officials. But when there is capital flight, its effects are immediately perceptible in the balance of payments, the financial system and the overall economy.

Statistics institutions frequently record capital inflows, but accounting records are less clear with respect to capital outflows. The amount of financial resources and the speed at which they move from one place to another, whether locally or internationally, could make the difference between the financial stability and instability of an economy, an economic region or the global economy. One of the most common ways in which capital flight destabilizes an economy takes place when the owners of capital located in a region or country suddenly decide to change the location or investment of that capital; this might be in search of higher profitability, in response to a risk, either political or financial, to avoid taxes or simply for speculative reasons. It could also mean an abrupt change in expectations for the profitability of a capital investment, or better expectations of profit in another place in the financial world.

When capital flight takes place, it can influence investor decisions and set off a stampede that immediately affects the amount of foreign currency available and exchange rates, which is reflected in negative balances in the balance of payments, public balance sheets and price levels. This causes a chain reaction that impacts investment decisions in both the financial and productive sectors, leading to problems related to unemployment and productive stagnation. In the midst of this financial panic, the change in price levels frequently leads to economic stagflation, which initially affects just one country but can quickly spread to the rest of the global economy through international commercial and financial circuits; it will first infect the financial system and then productive structures.

In the era of globalization, capital flight happens in different ways, ranging from cash withdrawals to more sophisticated transactions through new technologies and communication media. The majority of resources that move from one country to another can evade official records, which is further eased by the institutional nature of some governments and local economies that allow unrestricted capital flight with no institutional oversight or major penalties. It is a fact that the free mobility of financial flows and capital flight are the result of the conditions put in place by the neoliberal policies promoted by the Washington Consensus.

It is important to know the amounts involved in capital flight to, one the one hand, promote and implement measures that would facilitate capital controls and, on the other, to prevent the perverse effects of strategies to finance development due to the swift change in the amount and direction of capital flight. In light of the fact that financial crises have become more frequent and the speed at which they spread, due to the effect of capital flight, among other factors, international financial institutions such as the International Monetary Fund (IMF) have proposed so-called Early Warning Systems (EWS) (Mulder, 2002: 8-9).

Capital flight has spurred a variety of reactions, ranging from trying to record transactions to even establishing specific forms of control: a tax on foreign capital, quantitative limits and limits on the location and destination of foreign capital. Many countries that have been prime destinations of portfolio investment in recent years, including Brazil1 and South Korea, have implemented control measures such as taxes on transactions in foreign currency or the Tobin tax2 and the principal of residency for investors, aiming to put the brakes on financial speculation, “mitigating exchange rate fluctuations” to stimulate production. This has implied rejecting and abandoning the neoliberal recommendations proposed by the IMF regarding free markets and financial deregulation.

International capital flows have also played a fundamental role in determining the levels and features of investment, as well as its dynamics and composition. As a result, economic growth and employment, particularly in emerging economies, depends on the features and dynamics of these international financial flows. The level of total savings in an economy changes significantly when we take into account international capital flows. In addition, capital flight brings with it savings flight (Kumar, 2002: 93).

Various studies have presented data on capital flight. For example, Crystal (1994: 131-132) calculated that between 1973 and 1985, capital flight in Latin America amounted to 151 billion dollars. Myrvin and Hughes (1992: 540-547), meanwhile, published a comparative study estimating capital flight in five highly indebted and underdeveloped countries in the time period 1976-1988, with methodologies conducted by Dooley (1988: 427-433), the World Bank (1985: 64-74) and Cuddington (1986: 2-9, 17-32). For Mexico, Dooley’s methodology estimated 26.6 million dollars of capital flight for the time period 1976-1987. The measurement methods of the World Bank and Cuddington suggested that capital flight amounted to 69.2 million and 43.8 million dollars in the same time period, respectively. Using a different concept, but also related to capital flight, Kar and LeBlanc (2013: iii, 21) estimated that the outflow of illicit financial flows (capital flight includes outflows that are both licit and illicit) of underdeveloped countries in 2011 was 947 billion dollars, with accumulated illicit financial outflows of 5.9 trillion dollars in the time period 2002-2011.

In a memo dated February 5, 2011, Banco de México warned, without offering specific figures, that in light of the financial problems in Europe, Mexican financial markets could be affected by a “reversal of capital flows.” In addition, the Center for Studies of Public Finance (CEFP 2009, 2011) has published some data regarding “capital outflows” that match up with the annual variation in components of foreign portfolio investment, particular with “government securities in the hands of foreigners.” According to the center, in 2009, capital outflows amounted to 2.188 billion dollars, a figure which became 1.882 billion dollars in November 2011. Meanwhile, Kar and LeBlanc (2013: 13, 26) have signaled that annual average cumulative illicit outflows in Mexico were 462 billion dollars in the time period 2002-2011. Capital flight is considered as a cost when measured as a proportion of the Gross Domestic Product (GDP); López (1996: 67) estimated that in the time period 1973-1988, capital flight in Mexico amounted to between 0.4% and 0.9% of the cumulative GDP for the period 1973-1991 and that capital flight from 1982 to 1988 reached 19 billion dollars, representing between 0.6% and 1.7% of the GDP. However, in underdeveloped countries, it has been estimated that the annual average of illicit financial outflows, as a proportion of GDP, was 4% between 2002 and 2011 (Kar and LeBlanc, 2013: 10).

Recently, Smith (2010) wrote that multimillionaire investors in Greece “may have withdrawn” from their country nearly 10 billion euros (13 billion dollars) since the onset of financial turbulence in Greece in November 2009, as a result of financial panic among investors and the austerity measures that the European Economic Community has pressured the government of Greece to implement. This is therefore the degree of uncertainty that economists face when trying to examine the issue of capital flight, which makes finding an answer to the question proposed regarding how to measure capital flight even more relevant to economic policy strategies and decision-making.

Spain saw a record high net capital outflow of 247 billion euros in the first eight months of 2012, according to the news channel RT (2012). The reason for this flight was expressed thus: “Foreign and local investors are urgently fleeing the Spanish market to ensure their capital against potential collapses,” commented a representative of the British bank HSBC, quoted by the agency Itar-Tass. This data on capital flight was obtained from the balance of payments: the sum of current accounts plus the balance of capital accounts.

What is certain is that when capital flight takes place, investors and owners of wealth allow fear to overtake rationality. Irrational exuberance permeates the behavior of the holders of wealth, who prefer to follow the behavior of others who initiated the stampede, which leads them to reinvest capital in relatively more safe and profitable locations. But the damage is already done once the hot money has left.

Throughout the Great Recession, which began in 2008, capital flight has incurred major costs for economies where the financial crisis was felt most strongly. For example, the immediate effect of capital flight in the Eurozone was bank insolvency, as banking and international reserves dried up once the stampede began due to the growing demand for currency. This intensified the economic recession, which, together with austerity measures, has led to an even greater economic recession and more widespread unemployment. The hot money coming out of the danger zone of countries in crisis flows into economies with fewer problems, such as Germany, Switzerland and the United Kingdom, or other tax havens, where high profits are practically a guarantee. North American companies earned 650 billion dollars in profits in 2013 from tax havens such as Holland, Bermuda, Luxembourg, Ireland, Singapore and Switzerland, accounting for 55% of total earnings from abroad. This high level of profits from tax havens is especially remarkable given that many North American companies no longer maintained activities abroad following the financial crisis. During the crisis, earnings derived from tax havens were bolstered even as local earnings collapsed (Zucman, 2014: 129-130). Zucman (2013: 1321) also estimated that nearly 8% of the global financial wealth of households is held in tax havens, three-fourths of which is not registered.


Capital flight tends to be defined through how it is measured and based on certain accounting and economic criteria. These differences have distorted how it is evaluated and measured. Techniques to measure capital flight vary as much as the concept itself, which has produced disparate results with respect to absolute value.

a) Principles in Measuring Capital Flight

The phenomenon of capital flight is still somewhat murky. There are as many definitions in circulation as there are criteria for measurement. The definition of capital flight may take into account regulatory, ethical and, of course, economic factors. However, for purposes of this text, capital flight shall be defined as the sudden, unexpected and uncontrollable outflow of financial resources, which, when it reaches high amounts, can dry up the international reserves of central banks, making exchange rates unstable and producing immediate imbalances in the balance of payments. For example, because the interest generated by foreign capital in Mexico is discounted, these resources are simply a payment to the capital factor and following that line of thinking, if these earnings are not reinvested, they cannot be considered capital flight, because there is no economic responsibility to maintain that capital in the country. Any profit earned in Mexico by a foreign agent does not imply any legal, moral or economic commitment to stay in the country.

Essentially, in terms of economic rationality, fixed-maturity commercial papers do not constitute flight, because the date on which they will be paid is known in advance and the fact that this money will eventually leave the country is taken into account. For that same reason, negative loans (which indicate a payment) are not flight. These are some of the differences between capital flight (CF) and capital outflows, because the latter is unforeseen, speculative, advantage-seeking and uncontrolled, which tends to destabilize the economy. Generally speaking, it has been accepted that capital flight denotes a preference for international financial assets over national. Various measurement methods highlight its role as a form of financing, how it arrives and where its entry or exit is registered.

b) Early Proposals for Measurement

In the mid-1980s, Cuddington (1986: 3) suggested measuring capital flight through errors and omissions (EO) for the first time, which records a significant portion of capital flight, although the errors and omissions section on the balance of payments also registers black market transactions and other transactions such as remittances sent by migrant workers. For this reasons, methods based on this idea have been discarded over the years. This includes a study by Álvarez and Guzmán (1988: 400-403) and Dooley (1988: 427), who, according to Myrvin and Hugues (1992: 540-547), offers a solution similar to that of Cuddington (1986: 44). In other news, Morgan Guaranty Trust Company (1986: 13-15) proposed a residual approximation, which includes not only EO, but also other indicators from the balance of payments such as foreign direct investment (FDI), the current account deficit (CAD), the increase in international reserves (IR) and the increase in loans made by domestic banks abroad.

Based on this residual approximation, other types of measurements were developed, such as techniques by Gurría and Fadl (1991: 1-15), Zedillo (1987: 174-185) and Lessard and Williamson (1987: 54-70), who added an adjustment for accrued interest, an adjustment for misinvoicing and the capital stock of residents abroad. Gurría and Zudillo subtract the changes in public assets sustained abroad, which overvalues capital flight. In addition, Lessard and Williamson (1987: 71) offer strict criteria to measure adjustments due to misinvoicing in exports and imports. Despite these observations, the main difference resides in the accounting of interest generated by capital stock; this must either by subtracted or added. Zedillo subtracts it, while Lessard and Williamson add it.

c) The Eggerstedt Measurement Method

In a capital flight study conducted in Mexico for the time period 1960-1990, Eggerstedt et al. (1993: 52) postulates that the interests of the capital stock are not capital flight, because they represent the payment of what is lent as debt, and this has already been considered: interest is foreseen, so the interest paid by deposits made by Mexicans should be subtracted from that interest. This method has helped resolve disputes regarding the measurement of capital flight and is considered a benchmark study.

The residual method assumes that capital inflows in the form of increases in external indebtedness and foreign direct investment should finance either the current account or reserve accumulation, in such a way that any shortfall in reported use can be attributed to capital flight. In addition, there are three adjustments: for variations of non-private assets, for undue invoicing in foreign trade and for earnings on private assets abroad. This data is used to calculate the residual with the following formula:

Capital flight = –a (FDI) – b (Dep. and Loans) + c (CAD) + d (IR).

The Eggerstedt method that changes the signs was not followed. Rather, a and b were subtracted because they are sources of financing and are allocated for certain uses with positive signs c and d. If the sources do not manage to finance the use we have a positive number. This amount is missing to satisfy the uses and should be financed by something, in this case by an inflow of capital or, better said, negative capital flight. When the residual is negative, it means that something is funded but it is neither c nor d, which means it constitutes capital flight.

The residual approaches the concept of capital flight, but we still must consider the interest on deposits made by Mexicans in foreign banks, which is a delayed stock, and the interest generated in Mexico by deposits of foreigners. In this way, a net foreign capital stock that generates interest is obtained. The rate is considered as a proportion of the North American bond rate and the Libor rate at 67% and 33%, respectively, considering trade with the United States and the rest of the world. Interest is a use. The arithmetic sum of uses and sources is capital flight.


a) The Role of Foreign Portfolio Investment

One defect of the Eggerstedt method (the most prestigious) is that it considers foreign portfolio investment (FPI) as capital flight (CF). As such, the same argument that in the past made this the most sophisticated method for estimating speculative capital outflows now renders it nearly obsolete.

It is equally incorrect to ascertain that FPI is capital flight as to declare that it is not. The total amount of flows in the form of inflows are registered in this category. However, the outflows are accounted for in FPI and another substantial portion in the errors and omissions section. The problem here is the breakdown, and as is evident, the balance of payment data offered by Banco de México does not provide a satisfactory solution to these questions. In this way, the balance of payments methodology does not allow us to identify where capital flows with the greatest propensity for flight appear.

Capital flight as a residual element of the balance of payments that considers capital flows in the form of external indebtedness (EI) and FDI, are the sources of external financing, while the uses of the financing are: the accumulation of international reserves (AIR) and the current account deficit (CAD). The measurement of the difference between uses and sources can be attributed to capital flight. In addition, there were other adjustments, taking into account interest, altered invoicing and even public assets. This study revealed that CF was primarily recorded in the following items:

EI + FDI – AIR – CAD = CF or

FPI + Assets Abroad (AA) + (EO) – Adjustments (A) = CF

For the aforementioned reasons, FPI deserves thorough analysis. We must consider that positive signs indicate sources of financing; negative signs indicate either payment outflow (PO) or capital flight (CF). In other words, we must consider, across the various items that identify and define the sources, the uses, and whether these uses reflect payment outflow or capital flight.

FPI can take place in the stock market, money markets or in securities issued abroad, whether public or private. The stock market (SM) presents only positive signs from 1990 to 1997, which shows that it is a source of financing. However, the reality of the Mexican economy and the volatile nature of the stock market indicate that a good portion of CF takes place through these instruments. It is clear that in 1994 and 1995, there was a speculative outflow of capital that was not recorded in this item, but rather in the errors and omissions section. The money market (MM) contains by definition fixed-term instruments with maturities under one year, so it is logical to think that this reflects payment outflows when there are negative signs. But the stock purchase mechanism may vary. Although a foreign investor could buy Treasury Certificates with dollars through a broker that exchanges the currency and finalizes the operation until the maturity of the instrument, only at the moment of payment is it an outflow for payment. The investor may also resort to the secondary market before the maturity of the Treasury Certificates, sell them and withdraw the money in the form of dollars. This latter transaction is considered capital flight. Thus another difficulty we face: How much is considered PO? And how much is CF? Similarly, we must not rule out the possibility that some portion of the CF is recorded in the errors and omissions item. Securities issued abroad (SIA) presents the same problems as the money market, except there are fewer statistics in this regard.

b) Measuring Potential Capital Flight in the Stock Market

Highly volatile stock market (HVSM) capital and money market capital sold on the secondary market (MMSM) accounts for a significant share of capital flight of FPI (if not all of it). This is an alternative way of measuring CF, to which we would only have to add the assets maintained abroad to obtain a very similar measurement. It is notable that this is capital that is only highly likely to flow out, so it cannot be considered CF as such, but rather it is called potential capital flight (PCF): HVSM + MMSM = PCF.

This estimate no longer includes the residual system and it is easier to make because no adjustments are required for interest, altered invoicing, the black market, etc., which are features of balance of payments-based studies. Moreover, this measurement allows for the identification of periods in which there is a higher probability of CF, whether it took place and to what extent.

Using the amounts of highly volatile stocks (measured through the eponymous index), we can obtain investments likely to flow out. This item therefore has the adjustments needed to identify speculative outflows with respect to the original measurement proposed. It should be noted that this only contemplates a specific sector of high-risk capital, as the statistics made available by the Mexican Stock Market include investments by foreign agents in a very specific market. Furthermore, there is no data regarding the secondary bond market considered here, and capital flight generated by Mexican agents is also excluded.

The methodology used to obtain this specific high-risk capital was as follows: i) Select companies stock-issuing companies with degrees of volatility above 50%. ii) Take FDI from these same companies and calculate the total amount of these issuing companies. iii) The total amount was considered as high-risk capital (specific potential capital flight). In this way, it was concluded that in 1995 there was a greater share of companies (37 companies) than in all other years of the time period 1990-1997, with total amount of 9.9659 billion dollars. This demonstrates the period with the greatest likelihood of high-risk capital, right in the midst of the Mexican financial crisis.


a) Features of the Financial System and its Relationship to Capital Flight

The secondary bond market is a good measure of CF because these instruments are sold before they mature. The money market and market for securities issued abroad includes all entries and exits from the primary market, but only payment outflows are recorded. The known maturity of these papers excludes the chance for surprise. The fact that one is unprepared for this payment does not imply a profiteering attitude among investors.

The opposite is true of bonds sold on the secondary market. This can lead to capital flight, but because there are no accounting records of these transactions, since they are so complicated, they are included in errors and omissions. The assets of private agents held abroad are indeed considered capital flight.

In that sense, the stock market is speculative, with unforeseen inflows and outflows, and is more prone to capital flight. However, it is difficult to record over a long time period. Within one month the stock market can be both decapitalized and experience a strong inflow of capital, which makes it common for capital flight in this item to be neutralized. In the end, over a long period of time, net capital flows will always be positive. As such, there can be no doubt that capital flight is recorded in the following items: errors and omissions, private assets and the stock market.

The Eggerstedt method is an alternate way to measure, and it can be improved through the uses and sources that identify what is not capital flight based on a residual to which various adjustments are made. To be coherent, the study periods should be short, if we want to detect a greater impact on the stock market. After all, the measurement of capital flight is relative to the time and cost generated in an economy by this eventuality.

Other methodological conclusions of the study revolve around the following arguments: 1) Instruments in the securities sector issued abroad only consist of bonds issued by the foreign government abroad. 2) Shares abroad are located in the stock market; just like those traded on the Mexican Stock Exchange (BMV) and which constitute foreign investment. 3) The shares of the stock market are offered by the National Securities and Banking Commission (CNBV) and the BMV. 4) The secondary foreign investment market is not tracked. 5) Inflows and outflows are compensated over time. Capital outflows or capital flight is not recorded when it takes place, but the maturity of the bond is recorded. As such, outflows or flight are recorded later than their maturity in the errors and omissions and that is why in foreign portfolio investment only registers payment outflows but the errors item records capital flight. 6) The government’s assets are found in credits abroad and debt guarantees, but this also includes some private sector loans. 7) The measurement of public sector assets of the Secretary of the Treasury and Public Credit (SHCP) experiences exchange rate problems, which is why the figures with respect to the balance of payments tend to be underestimated. 8) Capital flight is a short-term phenomenon. In a single year there may be more capital flight but it can be compensated by capital inflows. In this way, the stock market may experience speculative outflows in one quarter that inflict enormous damage on the economy. But if a few quarters later the capital enters again, this effect is not recorded in the accounting. Even so, the damage is considerable, which is why the timing of capital flight measurements can be problematic. It does not take an entire year to decapitalize a country.

b) The Impossibility of Capturing Long-Term Capital Flight

When capital flight takes place in the secondary market, a negative value appears in errors and omissions, but at maturity, a positive sign appears for the same item, so we would expect:

Eq 0


This section introduces the formal arguments of the comparative proposal to measure capital flight. It compares the Eggerstedt and Cuddington methods, as well as three alternative methods, described as Blancas 1, Blancas 2 and Blancas 3.

a) Methods Chosen for 1960-1998

1. Eggerstedt Method

CF= Dep. and Loans (DL) + FDI + CAD + Credit Assets Abroad (CAA) + Current Debt Guarantees (CDG) – IR

2. Blancas Method 1

CF = Dep. And Loans – FPI – CAD + CAA + CDG – MM – Securities Issued Abroad (SIA)

3. Cuddington Method

CF= EO + Other Accounts (OA)

4. Blancas Method 2

CF = EO – OA

5. Blancas Method 3

CF = EO – OA + SM

The statistical results of the various methodologies used are shown in Tables A and B (see Appendix).

b) Cointegration Tests

1. The study periods were generated: 1980-I to 1998-IV.

2. The variables that determine capital flight were selected (EO, FPI, SM, MM, SIA, IR).

3. Each of the series was checked for a trend; that is, if I(0), unit root tests were applied (Augmented Dickey-Fuller and Phillips-Perron). The KPSS test was used if there were discrepancies among the other tests.

Pursuant to Table 1, all of the variables were stationary in levels, with no direction or trend. As such, all of the variables related to capital flight proved to be suitable for the cointegration analysis, as they all have the same degree of integration, with the exception of foreign portfolio investment, which presented growing stationarity (first difference) for the augmented Dickey-Fuller, which is why the KPSS test was applied as confirmation.

4. The Johansen multivariate cointegration test (1988: 231-254) was conducted. To do so, an unrestricted VAR model was estimated for each measurement of capital flight and the six additional variables (EO, FPI, SM, MM, SIA, IR):3


Four optimal lags (p) were determined based on Akaike information criteria, as well as the final predictor error and the likelihood ratio (LR):





5. The unrestricted VAR model can be rewritten as a vector autoregression error correction model (VECM):



Π=α x β When the variables are cointegrated.

α Matrix of coefficients for adjustment towards the long-term equilibrium.

β Matrix of coefficients for the cointegration vectors.

Г i Matrix with parameters associated with short-term effects.

The error correction model in (2) indicates three lags (p-1) for the measurements of capital flight. Next, the specification was chosen for each model based on the minimization of the Schwarz criteria, which also indicated cointegration without trend and without intercept for all cases.

Finally, using the max eigenvalue range, three linear long-term combinations were determined for the Eggerstedt, Cuddington and Blancas 1 measurements, as well as four combinations for Blancas 3:4

Four optimal lags (p) were determined based on Akaike information criteria, as well as the final predictor error and the likelihood ratio (LR):



6. The long-term linear combinations were estimated with a single equation approach for capital flight:

The first long-term combination, considering capital flight as a dependent variable, indicated that this variable had a positive relationship with variations in reserves, securities issued abroad and the stock market, while it maintained a negative relationship with the money market (see Table 4).5



The second combination was made based on errors and omissions and was positively associated with variations in reserves, the variation of securities issued abroad and the stock market (the value of the “t” statistic was not significant in all cases), but negatively with the money market (see Table 5).



The third combination was done for foreign portfolio investment. In the long term, it had a positive relationship with the stock market – the relationship was stronger due to the “t” statistic in all cases. Finally, the rest of the associations did not have significant “t” statistics in any of the capital flight measurements (see Table 6).



In the fourth combination with normalization for the variation of reserves, and exclusively for the Blancas 3 measurement, the variable had a positive relationship with the stock market and the money market. The association was positive with the variation of securities issued abroad – although weaker in terms of the “t” statistic (see Table 7).



c) Long-Term Causality

Table 8 evaluates the long-term causality for capital flight in four measurements. According to the Eggerstedt and Blancas 1 measurements, capital flight responds in the long term to the determinants modeled in linear combinations 1 and 2. However, in the Cuddington and Blancas 3 measurements, capital flight was exogenously weak, such that it did not respond to long-term changes in the modeled variables. In summary, there was no evidence of consistent long-term causality across all capital flight measurements.



d) Short-Term Causality

Looking at short-term causality, stock market variations were a determinant in the short-term of capital flight – consistently – for the Eggerstedt and Cuddington measurements. For the Blancas 1 measurement, the determinants were errors and omissions, foreign portfolio investment and variations in securities issued abroad. There were no short-term determinants for Blancas 3.



Table 9 demonstrates that with the Eggerstedt and Blancas methods, the null hypothesis was rejected at 1% statistical significance, that is, we reject that the explanatory variables do not have a short-term influence on capital flight. It is important to note that with the Blancas method, foreign portfolio investment and the variation of securities issued abroad are two additional short-term determinants, while for the Eggerstedt and Cuddington methods, these variables do not appear as explanatory factors.

The results reveal that none of the variables affects capital flight in the long term: neither errors and omissions, nor foreign portfolio investment, nor the stock market generated capital flight during this time period. As such, capital flight appears to be a phenomenon fundamentally driven by the same variables in the short term. Said another way, capital flight must be analyzed on a quarterly basis or more frequently to prevent the effects of financial flows from being neutralized and also to measure economic costs.

e) Interpretation of Results

Capital flight as a phenomenon characterized the Mexican economy from 1981 to 1987. Flows that had favored Mexico up until 1980 stopped coming in and the subsequent decapitalization was inherent in the consequent repercussions on the product and employment. The trend was reversed in 1993 when net inflows were considerable.


At the end of 1994, the economic situation worsened and capital flight reached 6 billion in 1995 (see Table A, capital flight, Blancas 1 section).

Capital flight is a short-term phenomenon and major fluctuations can change from one moment to the next, depending on the relationship between the risk and profitability of an investment. As such, the stock market can experience massive speculative outflows in a single quarter that cause enormous damage to the economy, but if this capital enters again a few quarters later, the effects are not recorded in the accounting, despite the fact that the damage is considerable. It does not take an entire year to decapitalize a country. This issue of decapitalization through capital flight is a feature of economic and financial globalization that has affected not only underdeveloped countries like Mexico, but has also spread to other nations by means of the international financial crisis that began in 2008.

One alternative method to measure capital flight proposed in this work is Eggerstedt, a method improved through the uses and sources that identify what does not constitute capital flight based on a residual, to which various adjustments are made. To be coherent, the study periods should be short, if we want to detect a greater impact on the stock market. After all, the measurement of capital flight is relative to the time and cost generated for an economy.

The residual method assumes that capital inflows in the form of increases in external indebtedness and foreign direct investment should finance either the current account or reserve accumulation, in such a way that any shortfall in reported use can be attributed to capital flight.

The values obtained in the Johansen cointegration test serve to later obtain the residuals, which are used to generate the long-term relationships that can be combined with short-term variables (residual lagged for one period, long term and the rest of the variables that represent short-term relationships).

The results reveal that none of the variables affects capital flight in the long term: neither errors and omissions, nor foreign portfolio investment, nor the stock market generated capital flight during this time period. As such, capital flight appears to be a phenomenon fundamentally driven by the same variables in the short term. Said another way, capital flight must be analyzed on a quarterly basis or more frequently to, on the one hand, prevent the effects of financial flows from being neutralized and, on the other, to measure the economic costs of these flows.


I would like to thank Armando Zabaleta and Roger Alejandro Banegas for their collaboration in preparing this article and the estimates, respectively, as well as the comments of the anonymous reviewers of the journal. The observations herein are my responsibility.


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*Institute of Economic Research, UNAM, Mexico. E-mail address: neria@unam.mx

1 The Brazilian government established a 2% tax on foreign portfolio investment in 2009, while South Korea reinstated a 14% withholding tax for non-residents on the purchase of treasury bonds and monetary stabilization bonds (Baqir et al., 2011: 37).

2 In reality, this tax is a variation on what Tobin (1979: 155) proposed as a uniform international tax on transactions in foreign currencies proportional to the amount of the transaction.

3 When working with two variables, the Engle and Granger test is used. For more than two variables, the Johansen multivariate cointegration test is used.

4 Linear combinations were not estimated for Blancas 2, because in the period 1980-1989, the measurement of capital flight was equivalent to errors and omissions, and as such, a singular matrix would be obtained with no long-term solution.

5 The long-term linear combination is equal to zero and the normalized dependent variable is cleared away, making evident the long-term associations.

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