Debt and capital flight

Many developing countries have experienced large-scale capital flight at the same time as they were borrowing from external creditors. The dual phenomena of external debt and capital flight raise important questions. Why does capital flee developing countries even as foreign creditors continue to lend to them? Is there a link between inflows of borrowed money and outflows of capital flight? If so, what is the connection? Simultaneous external borrowing and capital flight reflect perverse incentive structures on both sides of the transactions that foster behaviour that is harmful from the standpoint of the borrowing country and, if the borrower ultimately cannot repay, from the standpoint of creditor institutions as well. Strategies to address the problem of capital flight must include mechanisms to curtail corruption, recover stolen assets, relieve the burdens of external debts, and promote transparency and due diligence in banks and other financial institutions. If well designed and rigorously implemented, such initiatives can curtail malfeasance, improve incentive structures, and contribute to a more efficient and equitable international financial architecture.