1.1 Background To The Study

One of the crucial economic maladies that have confronted most developing countries since the early 1970's is the way capital flows from less developed nations to advanced nations of the world. This capital flow from less developed countries to the western world became noticeable from the early 1980's. Since then, these unusual flows have become a source of concern because of the macroeconomic challenges facing these countries and as a result of the paucity of much needed capital to develop and promote economic growth. These unusual flows of capital from poor countries are termed capital flight. Though there is no generally accepted definition of capital flight, it is generally believed that it is a running capital; that is, a capital that is running away. The consensus is that a capital that is running away from the domestic financial market and which is in conflict with the interest, goals and objectives of the domestic society is a capital flight. Hence, if a capital outflow does not conflict with the social objectives; such a capital outflow would not be described as a capital flight but simply normal capital outflow.

Correctly defined, capital flight therefore appears to consist of a subset of international asset redeployments or portfolio adjustments, undertaken in response to a significant perceived deterioration in risk return profiles associated with assets located in a particular country, that occur in the presence of conflict between the objectives of asset holders and government. It may or may not violate the law. It is always considered by the authorities to violate an implied social contract, Walter (1987). From the above definition by Walter, it shows that there is a distinction between capital flight and normal capital outflow. Some have suggested that all illegal capital outflows are capital flight while all legal capital outflows are normal (Lessard and Williamson, 1987). These suggestions can be said to be false because not all illegal transactions are done with the sole aim of avoiding the domestic financial market per say, and not all legal capital transactions are in line with social goals, e.g. false invoicing, which are illegal and have capital account dimensions, might have as their sole objectives the evasion of tariffs and quotas. So also, some legal capital outflows might be in conflict with social goals if tariffs and quotas are arbitrary and contrary to social interest.