What is the drain of capital?

Capital drain is a term used to describe the flow of domestic assets from the nation and to other countries. Generally, this term is not used to describe the exports of different types of goods and services, because this type of business is a certain expected return. When draining capital, these sources leave the country without any type of just return, which will effectively remove these assets from use in the domestic economy. This type of activity can lead to economic or political unrest that has long -term effects.

There are a number of reasons why capital may result. One of the most common is the concern for the development of political conditions in the nation. If the investor believes that his assets will either significantly reduce the value, or otherwise will be in some way threatened, there is a great chance that these assets will be moved outside the country. This means that the currency held in domestic banks may be moved offshore banking institutions can close business operations and reopen in anothernation or sells assets and revenues invested in real estate outside the country. In any case, the domestic economy no longer benefits from the presence of these assets and is adversely affected by the loss of this capital.

In order to minimize the potential for capital outflow, many countries have adopted laws that are sometimes referred to as capital controls . The idea of ​​these laws is to slow down the occurrence of a capital flight, which allows the economy more time to adapt to the loss of asset. At the same time, laws create a block of time for legislators and economists to identify the basic causes of capital outflow and take steps to remedy these problems. It is assumed that if the basic reasons for downloading assets are solved and excluded, the drainage of capital will be reduced and the economy will stabilize.

One of the disadvantages of these capital controls is that they may have a negative impact on the tailor -tide. Due to tOmu that the enactment of these types of laws tends to broadcast a clear signal that something with the economy is in order, foreign investors and businesses can start limiting their investment in this particular country. This is particularly disturbing if the economy relies on the inflow of foreign enterprises to remain stable. For this reason, it should be taken to ensure that the nature of the limitation of capital outflow does not cause concern among those who give the influx of capital, a balance that can sometimes be very difficult to achieve.