ABSTRACT
In the wake of the debt crisis the literature on capital flight from developing countries has been growing rapidly. Estimates of capital flight are widely used in lending decisions by international banks and also in macro policy decisions in the source country. Increase in gross capital outflows is interpreted as a decline in domestic investment. In principle, defining capital flight as a response to asymmetric risk is superior to other definitions of capital flight because it distinguishes between normal flows and flight induced flows by measuring capital flight due to tax evasion. The case of India illustrated that a change in currency composition of assets and liabilities could change the sign of the capital flight estimates. Frequent changes in government regimes also lead to capital flight. Capital controls are only a short-term solution to the problem. Looking at the history of capital controls in India, for instance, the mechanisms to evade them are fairly well developed.
